January, Monday 23, 2012

DOW – 11 = 12,708
SPX + 0.6 = 1316 
NAS – 2 = 2784
10 YR YLD +.04 = 2.07%
OIL + 1.61 = 99.94
GOLD + 9.30 = 1677.30

SILV + .15 = 32.45
PLAT +25.00 = 1567.00

The stock market is off to its best start in a good 15 years. Stock market sectors leading the rally include:materials, homebuilders, semiconductors, and financials. The 50 worst performing stocks in 2011 are up over 10% so far this year; the 50 best are up a mere 2%. Bonds are off to their worst start since 2003 with the 10-year note yield back up to 2%. The S&P 500 is now up 20% from the early October low and just 3.5% away from the April 2011 recovery high (in euro terms, it has rallied 30% and at its best level since 2007).

Meanwhile, a new report from Bespoke Investment Group says stocks are trading at their cheapest levels since at least 1990, according to such commonly used valuations as price-to-earnings and price-to-book ratios as well as dividend yield. Also, the manufacturing sector has been a pocket of strength, while the employment picture is really beginning to show improvement. To start 2012, the S&P500 had an earnings multiple of 13, the lowest since 1990 and below the 80-year average of 15. It would take a move back to 1,484 to get the benchmark back to this long-term mean P/E. The price-to-book ratio is 2.05, below the average since the late 1970s of 2.43. To get back to that average P/B, the S&P would need to increase to 1,491.

The ECB has been throwing money at the Euro-banks, and they have been buying time. The insolvent countries have been bailing out the insolvent banks, and in return, the insolvent banks have been bailing out the insolvent countries. If you can just suspend logic for a while, it almost makes sense. What has happened is that the Eurozone has managed to avert a crash and they will likely throw more money into the EFSF, the European Fubar Slush Fund. And Italy and Spain held bond auctions and they had plenty of buyers, and do you remember that failed German bond auction from 2 months ago? Of course not – that's ancient history.

The labor picture has been improving. The unemployment rate is still dreadfully high and under-reported but it is getting better. The Federal Reserve will likely start throwing even more money at the economy in the form of QE3. You can argue that they are already doing this, but the new stimulus will probably be directed at the housing market and mortgage paper.  And already we've seen a little improvement in housing sales and starts (I won't go so far as to say “recovery”, but again, things are getting better).

The Fed is meeting again this week. The Fed's new mode of communicating by providing the median FOMC forecast of where the funds rate is heading is widely expected to show a sustained near-zero level through 2014. The Fed will introduce new communications policies on Wednesday. While the changes could make it easier for the Fed to move ahead with another round of asset purchases later this year, by helping to explain why the economy needs additional stimulus, officials have indicated that any such plans remain on the back burner. The mere fact that the Fed is paying attention to communications means they are not absorbed in crisis.

I've been cautiously bullish since September, and I must say all this good news is starting to scare me. Bernanke's plan is working; Americans are abandoning capital accumulation (savings) in favor of consumption or trying for a higher yield in risk assets such as stocks and real estate. Now the explicit policy of the nation’s private central bank (the Federal Reserve) and the federal government’s myriad housing and mortgage agencies is to punish saving with essentially negative returns in favor of blatant speculation with borrowed money. Official inflation is around 3% and savings accounts earn less than 0.1%, leaving savers with a net loss of about 3% every year. Even worse -- if that is possible -- these same agencies have extended housing lenders trillions of dollars in bailouts, backstops and guarantees, creating institutionalized moral hazard on an unprecedented scale.

Moral hazard means that the relationship between risk and return has been severed, so risk can be taken in near-infinite amounts with the assurance that if that risk blows up, the gains remain in the hands of the speculator. Another way of describing this policy of government bailouts is “profits are private but losses are socialized.” That is, any profits earned from risky speculation are the speculator’s to keep, while all the losses are transferred to the public.

While the housing bubble was most certainly based on a credit bubble enabled by lax oversight and fraudulent practices, the aftermath may be fairly summarized as institutionalizing moral hazard. Fed Board members suggest that the Fed’s stated policy of punishing savers with a zero-interest rate policy (ZIRP) is outwardly designed to lower the cost of refinancing mortgages and buying a house. The first is supposed to free up cash that households can then spend on consumption, thereby boosting the economy. With savings earning a negative yield, consuming more becomes a tangibly attractive alternative. (How keeping the factories in Asia humming will boost the American economy is left unstated.)

This near-complete destruction of investment income from household savings yields a rather poor return. Plausible estimates of the total gain that could be reaped by widespread refinancing hover around $40 billion a year, which is not much in a $15 trillion economy.

There are real-world limits on this policy as well. Since the Fed can’t actually force lenders to refinance underwater mortgages, millions of homeowners are unable to take advantage of lower rates. From the point of view of lenders, declining household incomes and mortgages that exceed the home value (so-called negative equity) have lowered the creditworthiness of many homeowners.

As a result, the stated Fed policy goal of lowering mortgage payments to boost consumer spending has met with limited success. Somewhat ironically, the mortgage industry’s well-known woes -- extended time-frames for involuntary foreclosure, lenders’ hesitancy to concede to short sales (where the house is sold for less than the mortgage and the lender absorbs a loss), and strategic/voluntary defaults -- may be putting an estimated $80 billion in “free cash” that once went to mortgages into defaulting consumer’s hands. Crazy but true: defaulting on a mortgage has done more to stimulate the economy than the Fed-backed refinancing plans to date.

So, the Fed will keep interest rates at around Zero for a couple more years. The Fed’s desire to boost home sales by any means available is transparent. By boosting home sales, it hopes to stem the decline of house valuations and thus stop the hemorrhaging of bank losses from writing down impaired loan portfolios, and also stabilize remaining home equity for households, which has shrunk to a meager 38% of housing value. The Fed’s strategy is to stabilize the housing market through subsidizing the cost of mortgage borrowing by shifting hundreds of billions of dollars out of savers’ earnings with ZIRP.

By some accounts, literally 99% of all mortgages in the U.S. are government-issued or -guaranteed. If any other sector was so completely owned by the federal government, most people would concede that it was a socialized industry.Yet we in the US maintain the fiction of a “free market” in mortgages and housing.

To establish a truly free and transparent market for mortgages and housing, we would have to end all federal subsidies and guarantees/backstops, and restore the market as sole arbiter of interest rates -- remove that control from the Federal Reserve.

But things are getting better. Bernanke has a plan for the Eurozone; he has a Zero Interest Rate Policy for America; he says he is 100% sure he can arrest any inflation he generates from getting out of control.

What could go wrong?

A draft settlement between the big 5 mortgage lenders and states' Attorneys General has been sent to state officials for review. President Obama wants to be able to point to the settlement in Tuesday's State of the Union as a measure of progress towards more Wall Street accountability. But the deal on the table is appalling, especially when compared to 2011 big bank bonuses.

Proposed total restitution for the millions of Americans who lost their home due to illegal foreclosure tactics:$20 billion. 2011 big bank bonuses:$144 billion. Something is very wrong with this picture.

$20 billion is only a fraction of what is needed to reduce principal balances on millions of underwater homes; Right now big banks are sitting on an unprecedented mountain of cash: over $1.6 trillion parked with the Federal Reserve. As part of the deal, about 1 million homeowners could also get the principal amount of their mortgages written down by an average of $20,000. One in four homeowners with a mortgage — or roughly 11 million people — owe more than their home is worth. These  "underwater" borrowers have little chance at refinancing. Those who lost their homes to foreclosure are unlikely to get their homes back or benefit much financially from the settlement.

A New Report Shows we Need to Spend more on Coffee (I read this at Time Mag)

A new report estimates that the average American worker drops nearly $1,100 annually on coffee. That’s not much less than what the average worker spends to commute to the job.

The Consumerist cites data indicating that the average worker in the U.S. currently coughs up over $20 a week on coffee, working out to a grand total of $1,092 annually. The average commute, meanwhile, reportedly runs $1,476 per year.

The costs for each individual, of course, are highly variable. And it goes without saying that statistics can be sliced and viewed in many different ways, yielding what appear to be very different results. A Mint.com post from last spring, for instance, estimates that the average consumer spends just $14.40 per month in coffee shops, or less than $175 annually. Mind you, that doesn’t include the costs of drinking coffee at home. But it makes the $1,100 figure seem pretty high.

A Bundle.com report from 2010, meanwhile, had it that the most expensive commutes around the nation still wound up costing under $700 or $800 for gas and auto expenses annually.

So, clearly, there are plenty of variables at work. In any event, it’s still fun to check out average spending data for all sorts of expenditures and see where you stack up. Here are a few more interesting figures:

Gasoline: In 2011, the average household spent $4,155 on gasoline. That’s an all-time high, as was the year’s average price for a gallon of regular: $3.53.

Overall Driving Costs: A 2011 AAA study estimates that, after accounting for insurance, gas, depreciation, and other expenses, the average car that’s driven 15,000 miles per year costs $8,776 annually.

Christmas: The average American shopper spent a bit over $700 on holiday gifts and purchases. The average rich American, mind you, dropped closer to $2,300 on gifts during the 2011 holidays.

Cell Phone: According to one recent estimate, the average cell phone costs $605.95 annually. That’s the total for recurring monthly charges, taxes, overages, and such, and that doesn’t include the cost of the phone itself. And that’s for an average cell phone, not a smartphone. The costs related to using an iPhone can easily top $1,900 per year.

Electricity: Partly due to the rise in gadget use, the average U.S. household paid $1,419 for electricity in 2010, up about $300 from five years prior.

Health Insurance Premiums: In 2011, the cost of the average U.S. family’s employer-arranged health insurance premium topped $15,000 for the first time: $15,073 per year, up from $13,770 in 2010.

(MORE: The Number of ‘Improving’ Housing Markets Nearly Doubles)

Pets: According to the American Pet Products Association, the average dog owner spends $1,542 annually, while the average cat owner spends $1,183.

Shoes: Estimates for what the average woman spends on shoes range from $370 per year ($16,410 over 67 years), up to $25,000 over a lifetime.

Watching Sports: The average pay TV subscriber chips in roughly $100 per year for sports programming, and they pay that much whether they watch sports a lot or not at all.

Beverages: The average U.S. Household $850 per year on soft drinks alone; that works out to a total of $65 billion annually. A total of $101 billion was spent on beer in 2010.

The total cost for a household to drive a car, enjoy Christmas, talk on a cell phone, feed the dog, wear shoes, keep the lights on, pay the health insurance premiums, and drink sodas, beer, and coffee comes to a grand total of $30,527. you'll note that the total doesn't include mortgage/rent, clothes, food, and a bunch of other things that most of us consider important.

They say the best things in life are free, with the exception of coffee.