Monday, February 6, 2012

February, Monday 06, 2012

DOW – 17 = 12,845
SPX -0.5 = 1344
NAS – 3 = 2901
10 YR YLD -.05 =1.90%
OIL - .93 = 96.91
GOLD – 6.00 = 1720.90
SILV +.01 = 33.78
PLAT -10.00 = 1629.00

Today was supposed to be a deadline for Greece to accept its punishment and fall into line. The Greeks were expected to strike a deal for an orderly debt default, which would secure a $170 billion dollar bailout for the Greeks, and avoid a disorderly meltdown of Credit Default Swaps, which could in turn cause a meltdown of the European shadow banking system, which could in turn cause a meltdown of the Euro-banks, which in turn could cause a meltdown of several Euro countries, and then ultimately the rest of Euro-land, and then the USSA, and then life as we know it would cease – or something like that.

The office of Prime Minister Lucas Papademos, a former central banker who heads an unelected government of politicians and technocrats, said that a meeting of leaders from the conservative, socialist and far-right parties due on Monday had been postponed to Tuesday.

German Chancellor Angela Merkel was saying all sorts of jibberish about how important it is for Greece to do the deal, and she gave every indication her patience is wearing thin. Merekel claims she wants “Greece to stay in the Euro,” and she says, “Something needs to happen quickly, and then she hammered the point that “A lot is at stake for the entire euro-zone.”

And the Greeks seem to be saying, they are in no hurry. And why should they be? There is a general feeling that Germany is getting a bit pushy. Germany is in a really difficult spot, austerity reins, losses from bond holdings face them, and the weak countries such as Greece need even more money to survive. If Germany lends and funds losses they can extend the game. If they do not the system comes unglued. If you look at the numbers you will see that Portugal is where Greece was last year and that Italy is where Portugal was last year. Thus, if little changes it could be that along with Spain they could fail one after another year by year and they probably will. That will allow the bankers to greatly string out their problems, which they are very adept at doing. There is a growing realization that whatever plan the technocrats devise, it will mean 25 to 50 years of austerity for the Greeks. They've already dealt with 5 years of a nasty recession, and they've felt the sting of a wave of austerity after the first bailout. And now they face more budget cuts and the unions are striking to protest another round of wage cuts and the loss of 15,000 more jobs this year.

And on the other side of the deal, the Credit Default Swap traders are trying to figure out how to default without defaulting. It's kind of like betting on the New York Giants and then learning that the bookie only pays off if he feels like it. This is the type of behavior that could bring down the shadow banking system in Europe. And then if there is a default, it could cause the Euro-zone to fall.

Since last September the Euro-banks have been demanding more and more money in Europe. They just received $1 trillion and they want $1 trillion more, which they will probably get. It's raining money, courtesy of the ECB, and the IMF, and the Federal Reserve is tossing money at the mess as well. This is a totally nationalized banking system. Money just falls out of the sky via the Fed and the ECB. It is inconceivable that banks would want a total bailout. Soon they'll demand $2 trillion more. They have no compunction about demanding the funds. They are trying to create a perpetual bailout.

So, when you think about it, the Greeks have more power today than at any time in the recent past and in the probable future. They really should take their time and try to strike a good, or at least a not-totally-onerous deal. Most likely, they'll take whatever scraps they're thrown and slither off to the corner, hoping to avoid the fate of their southern Mediterranean neighbors. We look at the events in the Euro-zone and forget that Greece is a closer neighbor to Libya than it is to Germany. Remember that about one year ago, the governments of the southern Mediterranean started experiencing upheaval. You can bet the Greeks haven't forgotten.

Another deadline is looming for another deal; this one between the big banks and various states attorneys general for a settlement on foreclosure abuses. The five biggest mortgage servicers, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — want to settle an investigation into abuses set off in 2010 by evidence that they foreclosed on borrowers with only a cursory examination of the relevant documents, a practice known as robo-signing. Four million families have lost their homes to foreclosure since the beginning of 2007. California backed away from the settlement because it seemed to lenient on the banksters. As it stands now the deal would pay for principal reductions and other relief for up to one million borrowers who are behind on their payments but owe more than their houses are currently worth. The deal would also provide checks for about $2,000 to roughly 750,000 who lost homes to foreclosure. It really is a sweetheart deal for the banksters. California had been trying to get a better deal for aggrieved homeowners. New York was hoping to preserve its ability to investigate the root causes of the financial collapse.    Last week we talked about a suit filed in New York that goes after MERS, the electronic mortgage registry. Now, California has suddenly jumped back into negotiations and it looks like a deal could happen in days or a week or so.

The Bank of America Plaza is the tallest building in Atlanta, the tallest in the southeast at 55 stories, and 1.25 million square feet. BofA sold the Plaza building in 2006 to BentleyForbes for $436 million. The tower recently appraised at $202 million. Tomorrow it will be auctioned off in a foreclosure proceeding. We don't know if Bentley Forbes can afford to pay or whether it is a strategic default.

I meant to mention this a couple of weeks ago, but nobody else said anything. Metrocenter in Phoenix, is a 1.4 million square foot mall, kind of old and run down, but in 2005, it sold for $163 million, or $309 per square foot. Carlyle Development Group has paid $12.2 million to buy Metrocenter Mall. The deal does not cover the spaces occupied by Sears, Dillard's and Macy's as well as two other empty big-box stores, but includes a connecting retail space spanning 525,000 square feet; which works out to about $22 per square foot.

We don't hear much about commercial real estate these days but it doesn't look like it's booming.

The S&P 500 Index’s best start in 25 years is doing little to restore Americans’ confidence in the stock market.
The S&P 500 is up 6.9 percent in 2012, the most since it rose 14 percent to begin 1987. It traded at an average of 14.1 times earnings since the start of 2011, the lowest annual valuation since 1989.

The response to this rally has been skepticism and pessimism. More than $469 billion has been pulled from U.S. equity mutual funds over five years and New York Stock Exchange volume slipped to the lowest since 1999.

Pessimism is taking a toll on the securities industry, where more than 200,000 jobs were lost last year, even as the rest of the economy seems to be adding net new jobs. Sentiment is the worst since the early 1980s, when 17 years of equity market stagnation gave way to the biggest rally in history.

Sentiment has deteriorated even as the S&P 500 rose 99 percent since March 9, 2009. Yep, we're looking at a home-run in less than 3 years.  The 106 percent expansion in U.S. earnings during the last nine quarters, the most since 1987, helped fuel the rally. For the most recent earnings reporting season, the period ended Dec. 31, 67 percent of companies in the S&P 500 beat analyst profit estimates as earnings advanced 3.3 percent.
What do investors do? They pull out. Investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, the longest streak in data going back to 1984. Withdrawals were $135 billion last year, the second-highest total after 2008.

The stock market has effectively doubled since the March ’09 low, and we’re still in redemption territory for equity funds. That’s never happened.
Money managers haven’t kept up with the S&P 500’s advance. Hedge funds declined 5 percent in 2011, the third year of losses since 1990. A total of 21 percent of 525 global fund categories tracked by Morningstar topped their benchmark indexes last year, the fewest since at least 1999.

Valuations have fallen even as the S&P 500 rallied 21 percent since the end of 2009 because profits increased five times as fast. The price-to-earnings ratio, or P/E, for S&P 500 Index has fallen to 14 times reported income, down from 24 at the end of 2009. The ratio slipped as low as 10.2 at the end of 2009, mainly because of the fall in prices rather than an increase in earnings. Now the S&P has doubled in price and earnings have grown even faster.

It was the severity and the quickness of the fall that freaked out most stock investors. Maybe it is a generational and demographic event as well; boomers looking for a little safety as they head into retirement.
Trading at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending Jan. 25 slowing to 838.4 million shares. The value of stock changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005. After a while, it becomes a self-fulfilling prophecy; the lack of volume means there is no conviction to the buying, right? Maybe, there's something wrong with the system. Maybe it just isn't functioning the way we all hoped.

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