Friday, January 20, 2012

January, Thursday 19, 2012

DOW + 46 = 12,625
SPX + 6 = 1314
NAS + 18 = 2788
10 YR YLD +.07 = 1.97%
OIL -.28 = 100.30
GOLD – 2.20 = 1657.70
SILV + .12 = 30.74
PLAT – 3.00 = 1525.00

The robo-signing scandal, in which mortgage servicers, that is – the big banks, were accused of initiating foreclosures based on inaccurate and sometimes fraudulent documents, "exposed a whole slew of problems in servicing these mortgages that need to be fixed." Now, the Department of Housing says it's close to a $25 billion dollar settlement with servicers. Such a deal could result in principal reductions for up to one million homeowners and the settlement would provide cash payments to a smaller number of families who were directly harmed by the servicers' conduct. One of the big hold-ups to a settlement is that many of the state's that started out in the settlement talks have since bailed out on a settlement, because the settlement was turning into a sweetheart deal for the big banks.

More earnings reports today: Morgan Stanley reported a loss of $227 million, compared with a profit of $871 million a year earlier.  Bank of America posted a profit of $1.99 billion, or 15 cents on a per-share basis, compared to the prior-year loss of $1.24 billion, or 16 cents. The results were in line with estimates, however the results were full of asset sales and one-time charges and gains, and accounting prestidigitation so prodigious as to transmogrify transparency into something beyond the pale of obfuscation.

Allow me to explain. There is no explanation for the earnings reports. They make it up and create a name for whatever they want the numbers to be. Debt becomes earnings; trash becomes cash. There is no fundamental reason to own the banks. For all practical purposes the big banks are insolvent. They don't have the reserves to cover a big loss, like the kind of loss described by the World Bank yesterday. If we broke up the big banks and got back to traditional banking and got back to smaller, more competitive investment banking – it is possible the big banks would not be dragging down the economy. As is the economy is muddling along, showing some signs of life but not a strong recovery.

On the employment front, the number of people seeking unemployment benefits dropped by 50,000 last week to 352,000, the fewest since April 2008.  For all of 2011, the economy added 1.6 million jobs. That was up sharply from 940,000 in 2010. The consumer price index was flat in December for the second straight month.  Excluding food and energy costs, so-called "core" prices rose 0.1%. Core prices rose 2.2% in 2011.  Food prices rose 4.7%. A separate report showed that average hourly wages, adjusted for inflation, fell 0.9% last year.

But let's go back to the idea of a big settlement for the banksters. It remains to be seen if the banks could have one settlement and resolve all their problems, in part because they have so many problems, in so many different places. Massachusetts is suing; Nevada is suing; a new lawsuit has been filed in Central California – and this is separate from the multi-state Attorneys General deal - accuses JP Morgan Chase of widespread, systematic residential mortgage documentation fraud. The suit alleges procedural abuses as servicers and foreclosure mill lawyers tried to cover up for the fact that in many cases, mortgage notes were not transferred properly to securitization trusts. The case asserts that fabricating documents was very helpful to JP Morgan, enabling it to file successful proofs of claim and motions for relief of stay 95% of the time. And why did JP Morgan do this? The case asserts that it needed to do so to pretend that borrower promissory notes really had been transferred to mortgage securitizations, otherwise, JP Morgan would be stuck with liability.

The complaint states: “Rather than incur the cost of ‘proving up’ its own standing or the standing of its principal Mortgage Backed Security Trust, Chase systemically misrepresents Chase or a designated MBST to be a creditor in tens of thousands of bankruptcy cases by utilizing manufactured documents.”

Now, whether this case in California gains traction remains to be seen, but what it tells you is the banksters have real problems.

So, put on your thinking caps. I want you to stop for just a moment, and think – what is the implication? What does it mean?

Well, the Federal Reserve has been driving down long-term interest rates and the Fed has been buying up mortgage backed securities, and the recent uptick in economic growth is not real strong and might not be sustainable, and the Fed wants to show they still have monetary tools that can alter the economy, and with Europe on the edge of the roof, and with the World Bank warning that there might be a credit crunch and governments need to pre-finance to avoid the pain of a crunch, and the Fed just last week finally came out with a White Paper which finally acknowledged the housing problem five years too late, and they called for easing mortgage credit terms and conditions, and don't forget this is an election year, and what does it all mean?

Let's say it together: QE3. The White has has finally figured out that the economy is not going to get on track with the massive housing problems. They know the dysfunction in the mortgage market is a stumbling block for economic expansion. They know that the past sins of the banksters can't be patched up any more than you can make apples out of apple sauce, and so they will have to come out with fresh mortgages, a whole new crop. They will have to cut interest rates for a huge swath of homeowners who are underwater; They will have to reduce principal for a few homeowners who have been egregiously wronged. They will have to sop up the backlog of shadow inventory. They know that Congress would block anything and everything and they know the only way to get anything done is through the back door of monetary policy. And the only way to do all that is QE3.

The Fed has another FOMC meeting next week. They can't raise or lower the target for interest rates, and they might not make an official announcement about QE3, but it is a safe bet that Fed will start handing out somewhere between $750 billion to $1 trillion dollars to clean up the housing mess.

And if you're wondering why the stock market has been in a nice little uptrend despite the threat of financial Armageddon around every corner – the reason for the positive trend is QE3. Remember the stock market loves free money. So, the trend is up, but there are plenty of reasons to be cautious.

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