Friday, February 10, 2012

February, Friday 10, 2012

DOW – 89 = 12, 801
SPX – 9 = 1342
NAS – 23 = 1903
10 YR YLD -.08 = 1.97%
OIL  -  .79 = 99.05
GOLD – 7.00 = 1723.10
SILV -  .31 = 33.69
PLAT – 4.00 =1662.00

We've been talking about the debt situation in Europe because it seems important, and Greece is the linchpin whose failure could send the wheel flying off the axle. Wednesday we told you Greece would have a deal on restructuring part of its debt; that deal was announced yesterday. Thursday we told you there would be social unrest in Greece. The strikes started today.

The Greeks have already been hit with 25% wage cuts; now they're being told they must accept additional 30% wage cuts in order to pay off bondholders who recognized weakness and forced them to roll over their debt at record high rates. The wage cuts are being pushed as a way to forestall bankruptcy, but they will still be deep in debt; even with the wage cuts they will still face debt of 120% of GDP in 2020, and that is the best case scenario; it is based on assumptions of some sort of growth. So the Greek people are being asked to sacrifice their own retirement and their childrens' futures rather than telling the Banksters to take a hike. So far, the Greeks have been volunteering for massive cuts to their retirement programs, their pensions, their healthcare, government services, and wages; they have been docile as their taxes have increased by 30%; they have been compliant as big chunks of Greek landmarks have been privatized; and they were nonplussed when a non-elected technocrat, a former economist for the Federal Reserve, a former VP for the ECB was appointed as Prime Minister; the Greeks didn't put up much fight when democracy was shot down in the birthplace of democracy.

Today, the remaining politicians in Greece are abandoning ship. At least five ministers of the coalition government have resigned.  Mr. Papademos plans to announce a new cabinet on Monday, which put in doubt a parliamentary vote on the new measures scheduled for Sunday. And if the vote does not approve the orderly default, there will be a disorderly default. Or maybe the protesters will give in and voluntarily accept a generation of indentured servitude.

Maybe the idea was to come up with a Greek bailout plan that was so terribly onerous that the Portuguese and the Italians and the Spaniards would not dare to restructure their debt. Either way, the playbook is being written and it calls for state revenues to be used first and foremost for debt service. Whatever money is left over could be used for other purposes, such as paying police salaries and purchasing hospital supplies. But, by all means necessary, the bankers get paid first.

Meanwhile, back in the USSA there is plenty of positive momentum in the economy. There are still a few concerns. Consumer sentiment fell to 72.5 in February down from 75 in January. I guess the credit card bills from December arrived. The federal deficit is not growing as fast as before. The monthly deficit was $27 billion in January, down $50 billion from January a year ago. The 2013 deficit is now projected to be just a little over $900 billion, down from $1.3 trillion. The $25 billion dollar mortgage fraud deal was approved yesterday; it won't add an immediate jolt to the economy but the Federal Reserve will likely step up buying mortgage backed securities, so you have to think somehing will spill into the broader economy. Happy days are here again, or something like that.

I was recently reading Jeff Greenblatt's newsletter and he posed a great question:

Did it occur to anyone that we could be in the early stages of a new secular bull market? That's right. With new highs lately that means the market is now up at least 35 months and if we consider the NDX we are at a grand total of 38.5 months. The Super Bears like to compare this rally to the Herbert Hoover Happy Days Are Here Again rally into 1930. That was a 5 month rally. If you think this comparison is absurd go ask the perma bears about it. Depending on the analogy you like 2009 is either 1932 or 1938. If you use the 32 analogy the market rallied for nearly 57 months. If you look to 1938 and the only reason you would is because the 30's had 2 severe recessions if that's what they should be called and in the 0's we had 2 market crashes. If we look to 1938, there was one retest of the bottom in 1942 which went marginally lower for a brief moment in time and then we were NEVER LOWER AGAIN. But 38 didn't have the calculation of 2008.

There's a reason we are looking back at all of this, just stay with me. But we are up a long time already. Too long to just chalk it up to a bear market rally. Bear market rallies don't last 3 years. They are quick and the reason they are quick is that hope rises slowly but fear drops like a rock. The disaster leg from July 2007 to March 09 was 20 months. The Internet bubble disaster was March 2000 to October 2002 was about 30 months. We are already up longer than both of those bear markets.

So, I throw that question out to you. Could we be in the early stages of a new secular bull market? As you know, I've been bullish since late September, early October, however I've been cautiously bullish. But are we in a new, long-term bull market? Have we turned a corner? Are we crazy or are we clever to imagine that Happy Days are here again?

Is it a bull market in stocks? What about housing? What about bonds? Are they offering risk-free returns or are they price to deliver return-free risk? Is it a new secular bull market? And what are the implications?

It's time for an update on MF Global. Louis Freeh, the trustee for the MF Global Holding company that filled for Chapter 11 bankruptcy protection says investigators have yet to find evidence of fraud. Apparently investigators are having a hard time finding anything. Remember a couple of weeks ago when they were saying the customers money had just vaporized, and the investigators said, no, no, they were hot on the trail of the money. And where is the money today? Well, apparently it just vaporized, again. And maybe you're wondering how it is possible to steal $1.2 billion from customers' accounts and there is no evidence of fraud and nobody gets arrested?

A former MF Global client has filed a motion in Federal Bankruptcy Court that asks the Court to treat MF Global Holdings, Ltd. as a "person" instead of a corporation.
The filing asserts that because the U.S. Supreme Court has ruled that a corporation such as MF Global Holdings is a "person", then MF Global, Inc. -- the subsidiary brokerage whose customers are still missing at least $1.2 billion in segregated funds -- is a "child" of the MF Global Holdings "parent company." The filing then cites specific statutes in the Bankruptcy Code that mandates that a child's support claims shall have super-priority status over all other unsecured creditors.
The Chapter 11 bankruptcy laws apply equally to corporations and individuals. If, instead of a corporation, the MF Global Brokerage is treated as the Child Person of the Parent Company Person, then the statute on priority status for unsecured creditors' claims is unambiguous. It's right there in U.S.C. Title 11, Section 507. Spousal and child support obligations come before all other creditors' claims. If corporations are persons, JP Morgan Chase and all other unsecured creditors will just have to get in line...the Child comes first.

BoE votes for more QE, brings asset purchase program up to 325b pounds. That brings us to our quote of the day: “Lenin is said to have declared that the best way to destroy the Capitalist System was to debaunch the currency. By continuing a process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…while the process impoverishes many, it actually enriches some…Lenin was certainly right…The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”  - John Maynard Keynes

Next up is our most stupid quote of the day; it comes from Governor Mitt Romney in his address to CPAC: “In business, if you’re not fiscally conservative, you’re bankrupt.”

Maybe it requires a conservative fiscal approach to maintain an established business. Nobody is expecting Wal-Mart to start acting wild and crazy. It wouldn't make sense for Coca-Cola to empty the corporate vaults and buy lottery tickets, but if you think a start up business or other small businesses are fiscally conservative, you're smoking something. Let's say you want to start your own business, and let's just imagine your father wasn't the former head of American Motors and the former governor of Michigan. If you aren't that guy, and you want to start a small business then you might expect to borrow heavily; maybe run up debt on your credit cards, maybe take out a second on the house, maybe personal loans from friends and family. You'll start without any customers but plenty of expenses. You'll work insane hours and may have to fore-go certain benefits like health care. And after you pay your rent, your employees, your accountant, your vendors, and your mother-in-law – then and only then do you get a chance to write yourself a check. And if you slip up in any way, you are looking at almost certain bankruptcy or maybe much worse. Maybe you max out the credit cards like the Crown Brothers at Insight Enterprises. Maybe you make  illegal black boxes that circumvent long distance tolls and you sell them out of the back of your car – like Steve Woz and Steve Jobs. Maybe you get your office painted and you pay the guy with stock because you don't have enough cash – you know like that guy Zuckerberg did with the Facebook stock that might be worth about $200 million right now. Yep, that's my definition of being fiscally conservative.  I think what Romney meant to say is that you've got to be crazy to start your own business.

I expect the number of borrowers with negative equity to decline fairly quickly over the next several years. This will be combination of modifications, foreclosures and refinancing programs.

It does appear the number of completed foreclosures will increase following this settlement - especially in some judicial states with large backlogs - so there will probably be more REOs  for sale. Some of the REO might be sold in bulk as rentals (REO-to-rental program), and the Fed will probably issue guidance to allow servicers to rent REO in heavily impacted areas. It isn't clear how many more REOs will be on the market, but I don't expect a flood of REO as happened in late 2008 and early 2009.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.