January, Thursday 26, 2012

DOW – 22 = 12,734

SPX – 7 =1318
NAS – 13 = 2805
10 YR YLD -.08 = 1.93
OIL +.48 = 99.88
GOLD + 9.70 = 1721.50
SILV +.20 = 33.57
PLAT + 24.00 = 1614.00

Remember back before the holidays I told you the European Central Bank was following the Federal Reserve's playbook?  The ECB was going to loan the Euro-banks plenty of capital, which would allow the big Euro-banks to report adequate capital ratios when they file their annual reports – which is a way of saying the banks get a big bailout, and then the banks could buy sovereign bonds. And the bottom line is they were not going to allow a deflationary collapse in Europe.

And then yesterday, the Federal Reserve said they will keep interest rates at zero, and when you consider inflation, it really is less than zero, but the Fed said they aren't thinking about inflation; they set a target for inflation and they'll check back in a few years. The new Fed policy is negative real interest rates, but no new stimulus, no QE3 today.

 JP Morgan Chase CEO Jamie Dimon says Europe is not a problem:"The direct impact of a Greek default is almost zero. There's a teeny chance of a catastrophic outcome, which is why the muddle-through is the only good strategy. There is no other good strategy," Dimon believes the ECB's long term refinance operations took the liquidity problem off the table in Europe. Dimon did not address the difference between liquidity and solvency, which has not yet been addressed. I suppose even a dolt could muddle through by borrowing money at zero percent and then buying treasuries at 2 percent. Notice Dimon spoke as if a Greek default was a given, which is funny, because  last summer, Dimon was quoted as saying the European authorities and politicians will find a way to keep Greece from defaulting.

Euro-crats now say they are very close to a deal between Greece and the hedge funds and such that hold Greek bonds. The private sector bond holders will take a significant haircut, and then another haircut on the coupon rate; we still don't know what kind of haircut the European Central Bank will take – the ECB is the largest public holder of Greek debt, and they have not been forthcoming about renouncing any profits for the greater good. We'll probably get details in the next week or two, but whether it is orderly or disorderly, Greece is defaulting.

Most of these announcements seem to be coming from Davos, Switzerland where the World Economic Forum is holding another meeting. The Forum has mainly been a chance for hedge fund managers, bank CEOs and various politicians to complain about how they are misunderstood.  Remember last year at Davos, Jami Dimon complained that the constant refrain of blaming the bankers “it's just a really unproductive and unfair way of treating people,” he said. ''People should just stop doing that.'' There's something pathetic about a hedge fund manager whining that their life is too tough – in Davos Switzerland!

Here's the problem – it's not just Greece. Greece is just the starting point. Now that Greek debt is being restructured, the next step is to restructure Portuguese debt. And then you have to think about the cost of putting firewalls around Italy and Spain, and then you start hearing crazy numbers like $12 trillion dollars. And if that doesn't happen then Jamie Dimon will be wrong.., again.

So, anyway back to the Federal Reserve; they leave interest rates at zero and the inflation target at 2% and no immediate plans for additional asset purchases at this moment in time, but  we still have very high unemployment and we're working on the idea that the problems in Europe can be muddled through. So, the Federal Reserve will almost certainly be involved in Quantitative Easing Part 3. Which is another way of saying the Fed will follow their own playbook, which implies printing presses, lots of ink, helicopters, and free money for the banks.

The gold market likes the free-wheeling Fed playbook. At the moment everything points to even higher prices, given the strong risk appetite, the better mood among market players, the strong equity markets and the weak dollar. A quick reminder that nothing goes straight up, and we are looking at some fairly strong resistance. Gold will likely hit the ceiling at 1750, and then more resistance at 1800.  We saw a slight breakout for silver today, so we'll look for confirmation; then we have more resistance at 35.70, and even more resistance at 38.50.  So, don't get too happy, but still, if you bought the dips... you're welcome.

Elsewhere, The Arizona Attorney General's office says Bank of America is impeding an investigation of its loan modification practices by negotiating settlements with borrowers who must agree to keep them secret and not criticize the bank in exchange for cash payments and loan relief. Bloomberg reports that one 2011 accord involving a borrower facing foreclosure who defaulted on a $253,142 mortgage included a $5,000 payment, plus $7,500 for legal fees, and the defaulted payments were waived and the loan was modified to a 40-year term with a 2 percent interest rate. The terms of the original loan and the borrower’s complaint about the lender weren’t described in the court documents.

But here's the catch: The borrower had to agree to “remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites,” and not make any statements “that defame, disparage or in any way criticize” the bank’s reputation, practices or conduct.

So, BofA gave mortgage mods to some of the people who were going to complain to state officials, but the deal was they couldn't say anything bad about BofA. So, apparently the BofA defense was to bribe the victims and then use extortion, or (shall we say) a contractual threat, to keep the victims from talking to the authorities. 

 Bank of America, which holds assets equal to roughly one-seventh of the country’s gross domestic product, is too large and complex to manage or regulate properly, the petition said. Moreover, its financial condition is poor and could deteriorate rapidly. And so, a group called Public Citizen has sent a petition to the Federal Reserve and the Financial Stability Oversight Committee calling for the break up of Bank of America.