October, Wednesday 05, 2011

DOW + 131 = 10,939
SPX + 20 = 1,144
NAS + 55 = 2,460
10 YR YLD = 1.90%
OIL + .08 = 79.76
DEC GOLD + 4.50 = 1646.10
DEC SILVER + .17 = 30.52

Economic news:

The September ISM Non-manufacturing index was at 53.0%, down from 53.3% in August. The employment index decreased in September to 48.7%, down from 51.6% in August. Note: Above 50 indicates expansion, below 50 contraction. 

ADP reports private sector employment gained more than expected rising 91,000 in September. Economists had expected a gain of 75,000.

Meanwhile, Challenger, Gray & Christmas says the number of planned layoffs at U.S. firms in September jumped to 115,730 last month, the highest in more than two years. The figure was more than double August's total of 51,114.

The reports come ahead of Friday's monthly jobs report. The report might show a slight improvement as Verizon workers returned to their jobs, but otherwise, there is a strong chance the report will continue to disappoint.

Let’s look at today’s banking news: 

Three law firms are seeking participants in a class action law suit seeking damages from 13 lenders for alleged fraud against borrowers seeking Veterans Administration (VA) home loans.  The suit charges that the lenders charged fees for their loans which were unallowable under VA mortgage rules, an action that technically, according to the suit, invalidated the VA guarantee.

The premise for the suit rests on a VA rule that certain fees typical to a real estate transaction i.e. attorneys' fees or settlement closing fees are not allowed in closing a VA loan for the purpose of refinancing.  The defendants allegedly charged these fees but disguised them as allowable fee entries on HUD settlement statements.  For example, the lender might charge a settlement fee of $400, but rather than entering that amount on the line provided in the statement where it would be disallowed it might be bundled into the fee for a title search, increasing what would normally be an allowable $150 charge to $550.    

The plaintiff's attorneys charge that veterans don't know what the usual and customary charges for those allowable fees are, and the VA relied upon the banks to comply with VA regulations, rather than digging into every loan transaction.  "The banks took advantage of that reliance to cheat veterans and taxpayers."

According to the court papers, in the last ten years, more than 1.2 million of these refinanced loans have been made to veterans and their families and up to 90 percent of them may have been affected by the alleged fraud. 

Listed as defendants are Wells Fargo Bank, Bank of America, JPMorgan Chase Bank, GMAC Mortgage, CitiMortgage, Suntrust Mortgage, Washington Mutual Bank, PNC Bank (which acquired National City Mortgage Co.), Countrywide Home Loans, Mortgage Investors Corp., First Tennessee Bank (which acquired First Horizon Home Loan Corp.), Irwin Mortgage Corp. and New Freedom Mortgage Corp.

According to a Sept. 30 report from the Department of Housing and Urban Development’s inspector general, the agency is recommending pursuing legal remedies against Bank of America. HUD runs the Federal Housing Administration, and the FHA insures mortgages on loans to borrowers who can’t find traditional financing. Lenders can ask the FHA to cover losses if borrowers default. The agency has stepped up scrutiny of those claims. According to a recent HUD audit, bank of America should perform a full review of all mortgages that defaulted and could face fraud proceedings after its Countrywide unit submitted faulty data to back up claims for reimbursement on federally insured mortgages. BofA denies the allegations.

Meanwhile, Bank of America has been having problems with its website for the past six days. Customers are still experiencing delays and occasional problems with access.

Bank of New York Mellon (BK) was sued by New York federal and state prosecutors who accused the bank of cheating clients in foreign exchange transactions.

Meanwhile, the Federal Reserve Bank in San Francisco is conducting hearings on Capital One’s proposed $9 billion dollar takeover of ING Direct USA, the online banking unit of ING. consumer advocates claim Capital One is an aggressive credit card company that preys on low-income borrowers. And if Capital One takes over ING’s online banking unit in the United States, the combined banks will pose a systemic risk to the economy.

Under the Dodd-Frank financial regulatory overhaul, the Fed must examine whether major bank mergers would endanger the economy. When the risks outweigh the rewards, the Fed must block the deal.

Capital One says it offers the most consumer-friendly and transparent products in the industry. Capital One also admits that about one-third of its credit card portfolio carries the subprime label, and they are heavily involved in the subprime car loan business.

Subprime loans at usurious interest rates – Problem? What problem?

Speaking of transparency, the SEC has sent a letter of reprimand to Wells Fargo, telling them their risk-factor disclosures to investors “were too vague to be meaningful to investors”. The SEC says they have to actually say something in their disclosures. Just how vague was Wells Fargo? Try this:

“Our financial results and condition may be adversely affected by difficult and business economic conditions… 

Really – Wow!

Let me see if I got this right – difficult economic conditions might make it more difficult to make money.

Or how about this one:

“Our ability to grow revenue and earnings will suffer if we are unable to sell more products to our customers.”

Really? Wow! It might be difficult to grow revenue if you can’t sell things.

Seriously, they should teach this stuff in the business schools. I mean that is almost the very definition of revenue.

What’s next? Rain is wet. Phoenix might be hot in the summertime.

By the way, earnings reporting season for banks kicks off on October 13 with JPMorgan Chase. Earnings estimates for the financial sector have been ratcheted down from a month ago, from about 14% gains to just 4% gains. It might be nice to read disclosures that explain how business can deteriorate that much, that fast. It might be good to have relevance and transparency. But that’s not what the banks are about. About the only thing banks earn honestly is their notoriety.

And that’s just the news on banks today. And with all that negative news Almost all of the big banks share prices moved higher – Go figure.

And so, 19 days ago, a few hundred people camped out in lower Manhattan to protest the financial system. They made no demands. They did not affiliate themselves with a political party. The whole protest was somewhat vague. They were protesting Wall Street, and because of the proximity of the protests to the Federal Reserve building, it was a protest against the Fed. This was part of the beauty of the protest; as soon as they make a list of demands, then we can all disagree about the rightness or wrongness of the demands; as soon as they affiliate with one group or another then we can ding them for the relationship.

The protest have spread to L.A., and Washington DC, and Chicago, and Seattle, and Denver and Albuquerque. Unions and politicians and celebrities have joined in.

Also, on Monday I told you about Anonymous warning to erase the New York Stock Exchange from the Internet. I’m not sure what that actually means but maybe we’ll all find out next Monday. I just get the feeling that this whole Occupy Wall Street thing is about to take on a different tone. I would have loved to see a non- violent protest with no demands, no affiliations. The powers that be don’t know how to deal with a nebulous, non-descript opposition. There is no question the protests have struck a nerve but now the whole thing is going to be dissected, chewed up and spit out. Maybe the protests can survive, maybe some good will come out of it. Time will tell.

Meanwhile, in Greece, the protests long ago took on a different tone. The Greeks have basically shut down the country. A 24-hout strike shut central and local government operations including schools and courts. Hospitals and the national power utility were operating at reduced levels. Transportation came to a near complete stop – no trains, no trolleys, no bus service, no taxicabs. Protesters blocked access to several key government ministries.

Greece's government is rushing to meet the demands of its international creditors by enacting some $9 billion in further austerity measures to bring its budget back on track by the end of 2012.

A visiting delegation of international inspectors from the European Commission, the International Monetary Fund and the European Central Bank have demanded those measures in exchange for releasing the next tranche of aid.

Without that latest disbursement, which is part of a €110 billion-euro bailout package Greece received in May 2010, the government has said it will run out of money in a couple of weeks.

A spokesman for one of the striking Greek public sector unions said, "The government, submissive to the interests of the banks, big capital and speculators, is sweeping away the rights of the workers and of society. It is trying to frighten, threaten and blackmail us into submitting to its policies, and is even threatening us with not paying wages and pensions."

The Occupy Wall Street Protesters may look like a Ship of fools but the European leaders of finance have already booked all the berths on that ship. No one is at the helm, and the ship is headed for a rocky landing, and no one can change the course.

Bloomberg is now reporting that a French newspaper is reporting on a plan to nationalize a few banks. "France has been working for a number of days on a plan that would allow the state to take a stake in the country’s financial institutions if needed, Le Figaro reports, citing a source. The plan, the article continues, is being prepared “just in case” it’s needed and only 2 or 3 banks may be affected under plan." 

With European policymakers struggling to come up with a resolution to the Greek debt crisis and the threat of bank failures hovering over the market on both sides of the Atlantic, many investors are simply giving up on the stock market. The Murdoch Street Journal  reports:  "Across the country, investors are fleeing the stock market for the safety of cash."

So, what happens? Yesterday, the Dow rallies into the close; today the Dow posts a gain of 130.  It feels a lot like the sequel to the Lehman Brothers collapse but then many people say “ “no”, this is a different beast.

Corporate balance sheets remain strong and more than 700 companies in the S&P Composite 1500 Index have year-over-year revenue growth of 10% percent or more. During the bottom of the cycle in 2009, only 179 companies grew that fast. We’ve had a few semi-decent economic reports. Even if the Europeans can’t avert a Greek default, they might  recapitalize the banks, and the banks just love that FREE MONEY.  There’s heavy short interest in the market and so a quick bounce can’t be ruled out. According to the NYSE,short interest at the exchange soared to a whopping 15.7 billion shares as of September 15, the biggest since the March 2009 lows. On the other hand, we have been in a bear market since the beginning of August – that’s when the up-trend broke down.

So, what happens? Well, as our good friend Moe Ansari says, picking tops and bottoms can be hazardous to your wealth.

As I have said over the years, the closest thing to a holy grail for investors is – discipline. Make a plan, make sure it’s a good plan. Don’t get scared. Pay attention but don’t get scared. If your investment plan can’t handle volatility – both to the upside and the downside, then you probably don’t have as good a plan as you hope. If you need to improve your plan, great – just don’t do it out of fear.