January, Tuesday 31, 2012

DOW – 20 = 12,632
SPX – 0.6 = 1312
NAS + 1 = 2813
10 YR YLD  -  .04 = 1.80%
OIL  -  .50 = 98.28
GOLD + 6.40 = 1737.70
SILV -.37 = 33.23
PLAT – 23.00 = 1591.00

Greece has worked out a debt swap agreement with private bondholders where the creditors will take a loss of about 70%, but they won't make an announcement until later in the week; there is still some unfinished business. The Greek technocrats must beat the local population into submission; the government will demand commitments on reforms, labor issues and the pension system. The Greek technocrats are very aware that further austerity measures would likely deepen the recession and impose additional hardships. And then there is the prospect of an election in April which could spell the end of the technocrats. And then there is the prospect of more protests in the streets, which tends to make governments nervous; just ask Hosni Mubarak.  Average, everyday Greeks on the street are more than miffed that the economists find it so easy to dispatch democracy to the dustbin when they are convinced they have the right technical answers.

But other than that, the Greeks have apparently cobbled together a deal; it's just not cobbled enough to show to anybody. Why? Well, one of the big stumbling blocks is that the European Central Bank holds Greek bonds, and while it might be fine for private bondholders to take a  70% haircut, the ECB is still hoping to make a profit.

Meanwhile, the rest of the European Union wrapped up another summit in Brussels by agreeing to adopt German style budget discipline. The German plan would impose sanctions on countries that breach deficit limits, and it would require countries to make balanced budget rules part of their national laws. Only the Brits and the Czechs refused to submit to German domination.

The whole Euro-mess seems contained; have no fear. The S&P 500 is up about 4% to start the New Year; the markets in France are up 4%; Italy is up 6%; Germany is up 10%.  Everything is fine, it's just that things are a little tight for the Euro-banks and so they'll need some extra money. The biggest Euro-banks are expected to double or triple their requests for funds from an ECB auction later this month. So, everything is fine, except the big banks have almost no liquidity.

So except for a bad dose of German discipline and a Greek bond deal that is still up in the air and illiquid or possibly insolvent banks, everything is copacetic in Euro-land; the problems are all contained.

As long as Portugal doesn't implode, it's all good, all contained.

But no worries for the USSA. We've been through an economic crisis. We weathered the storm and come out on the other side, almost; not quite.

The federal government will spend roughly $61 billion more in fiscal 2012 than it did in fiscal 2011 on its continuing emergency rescue fund instituted at the height of the 2008 financial crisis. The Congressional Budget Office said the government would record outgoings of $23 billion in fiscal 2012 on TARP, the Troubled Asset Relief Program; that compares to #37 billion in savings booked in 2011. 

This is largely due to declines in share prices of two companies in which the government still holds substantial shares: AIG and GM. The Treasury and the New york Fed still control a 77% stake in AIG. The firm received a total of $184 billion in loans and guarantees from the Treasury and Fed in 2008. The federal government owns a 32% stake in GM, after having helped the car maker through a managed bankruptcy. The company emerged from bankruptcy protection in June 2009, much sooner than expected, and had been on track to pay off the federal government sooner than anticipated. However, its shares have struggled over the 12 months. For the government to break even, the AIG share price needs to climb by about $5 per share; the GM shares need to more than double from around $24 to more than $53 per share. Don't worry, we're long term investors.

Most of the large financial firms that received infusions of Treasury funds during the crisis have since repaid the loans with interest. There are still several smaller financial companies that owe money to the federal government.

The CBO released its latest budget and economic forecasts this morning.

Here are the key points in the report:

1) Growth will slow to just 1.1% in 2013 because of tax increases, spending cuts, and other factors. CBO projects 2012 GDP to increase just 2%.

2) Unemployment rate will stay above 7% until 2015. It will increase to 8.9% at end of this year and hit 9.2% at the end of 2013.

3) Deficit will be $1.1 trillion in 2012, the fourth consecutive year above $1 trillion.

4) The deficit is projected to shrink next year, but how much it shrinks depends on tax and spending choices.

5) Revenues are projected to pick up markedly in future years. Total revenues to jump from $2.3 trillion in 2011 to $3.7 trillion in 2015. That’s the equivalent of going from 15.4% of GDP to 20.2% of GDP.

6) The Social Security Disability Insurance trust fund will be exhausted in 2016. The Medicare hospital insurance trust fund will be exhausted in 2022.

7) If spending cuts and tax increases are allowed to go into effect as required under current law, the deficit will contract sharply to $585 billion in 2013 and $345 billion in 2014.

8) Under current law, the debt will grow $3.1 trillion over the next 10 years. If spending cuts and tax increases are reversed, however, the debt would grow $11 trillion. That includes an additional $1.2 trillion in interest on the debt.

A couple of economic reports today; one on consumer confidence and one on home prices.

The confidence index fell to 61.1 in January from 64.8 in December. According to the Conference Board, one of the biggest factors to determining confidence is the price of gas, which increased by about 10 cents a gallon over the last month.

The S&P/Case-Shiller composite index of single-family home prices in 20 metropolitan areas declined 0.7 percent on a seasonally adjusted basis. Nineteen of the 20 cities reported lower prices, the exception was Phoenix, which showed price increases for the second straight month. Phoenix home prices are still down 3.7% for the past year. In a separate report, the Commerce Department says the rate of home-ownership dipped in the fourth quarter to 66.0 percent from 66.3 percent – the lowest levels since 1998.

Tomorrow, President Obama is expected to unveil more details about a new mortgage-refinance program.

In the State of the Union, Obama said he’s sending to Congress a plan that would give homeowners a chance to save roughly $3,000 a year on their mortgage by refinancing to historically low rates. The plan would be paid for by a fee on the largest financial institutions.

The new plan is expected to be an expansion of an existing White House program, the Home Affordable Refinance Program, or HARP, that seeks to help underwater borrowers, who have no equity in their homes, to refinance at lower interest rates.

The new proposal is expected to seek to help millions of underwater borrowers who have loans that are not owned by government-seized mortgage giants Fannie Mae and Freddie Mac. The existing program, HARP, which already has been expanded to what is being called HARP 2.0, helps underwater borrowers refinance as long as their mortgage is backed by Fannie Mae and Freddie Mac, the government-controlled housing giants. HARP 2.0 is scheduled to launch on March 19^th. This new proposal is in addition to HARP 2.0.

It appears that this new program that will be announced tomorrow will be focused on borrowers whose loans are not owned by [Fannie and Freddie]: principally those in private label securitizations and bank portfolios.

Including millions of homeowners who have mortgages not owned by Fannie and Freddie would require the approval of Congress. The bank tax Obama seeks to pay for the refinancing program also would need lawmaker approval. If the new plan gets approved by Congress, roughly 1.5 million borrowers would be eligible. Those borrowers would save cumulatively $5 billion to $6 billion annually. If the plan includes underwater, private label mortgages, the program could include and additional three million borrowers.

Anyway, I think we can expect to see a huge surge in refinance activity in March. Not a new policy - this was announced last October when the FHFA made changes to Home Affordable Refinance Program (HARP) to allow more homeowners with Fannie and Freddie loans and with negative  equity - and who are current on their mortgages - to refinance into lower interest rate loans.

Now, there are some political reasons why we are seeing HARP 2.0. This could be a huge economic stimulus. If you have a Fannie or Freddie mortgage and you refinance, you might very well end up with an extra $200 or $300 per month, and the thinking is that you will spend that money. But the real reason HARP 2.0 will be big is that it will be a big bailout for the banks. The key to this program - for the lenders - was that the lender was not responsible for any of the representations and warranties associated with the original loan (this is huge for the lenders). The elimination of Reps and warrants for the original loans applies to software called DU, or Desktop Underwriter, and that will not be updated until March.

Congress' low approval ratings have sparked a rare instance of bipartisanship, as both parties are rushing to pass a bill that would make it clear that insider trading laws apply to lawmakers.

The Senate voted 93-2 Monday to clear the way for consideration of amendments and possibly final passage later this week.The legislation would require disclosure of new stock transactions on the Internet within 30 days and explicitly prohibit members of Congress from initiating trades based on non-public information they acquired in their official capacity. The legislation, at least partly symbolic, is aimed at answering critics who say lawmakers profit from businesses where they have special knowledge.

The bill is titled the Stop Trading on Congressional Knowledge (STOCK) Act. President Barack Obama has endorsed it. The Senate bill would prohibit lawmakers from tipping off family members or others about non-public information that could influence a stock's price, in addition to the explicit ban itself. And it would direct the House and Senate ethics committees to write rules that would make insider trading violators subject to congressional punishment. House leaders are working on a more expansive bill that would include land deals and other non-stock transactions. Don't be fooled into believing that this will eliminate corruption in Congress; it won't. It might make it more difficult to profit from this specific form of corruption. It does nothing to eliminate campaign financing that is nothing more than bribery; it does nothing to stop the big financial players from otherwise greasing the wheels of power.

There's nothing wrong with the profit motive driving business. And there's nothing wrong with working hard and trying to make a lot of money. Those are honorable pursuits.

President Calvin Coolidge said: "The chief business of the American people is business." You've probably heard that line before, but do you remember what Coolidge said right after that in the same speech back in 1925? He went on to say: "Of course the accumulation of wealth cannot be justified as the chief end of existence."

And it should be obvious that the accumulation of personal wealth is not the primary civic duty of our elected officials. The mere fact that they have to put it into law, shows how deep the moral deficits run in Washington. The politicians are either taking care of the peoples' business or they are taking care of their own business; they can't serve two masters.