February, Thursday 16, 2012

DOW + 123 = 12,904
SPX + 14 = 1358
NAS + 44 = 2959
10 YR YLD +.06 = 1.99%
OIL +.55 = 102.35
GOLD +.70 = 1729.80
SILV +.02 = 33.62
PLAT – 10.00 = 1629.00

The number of people seeking unemployment benefits fell to the lowest point in almost four years last week, the latest signal that the job market is steadily improving. Weekly applications for unemployment benefits dropped 13,000 to a seasonally adjusted 348,000. It was the fourth drop in five weeks and the fewest number of claims since March 2008. The US economy is showing signs of strength.

New construction of houses rose 1.5% in January. Part of the increase can be attributed to unseasonably warm weather, however part of it is that the economy is showing signs of strength.

The Philly Fed Index of manufacturing hit a  four month high in February. US manufacturers just had their best month of growth in five years. As manufacturing has increased it has rippled through the economy, increasing demand in other industries, such as shipping and transportation. Part of the increase may be attributed to pent-up demand; individuals and businesses postponed purchases over the past three years. Now companies are investing in machinery and computers. Individuals are once again starting to make purchases of certain discretionary items, and even cars.

Two years after emerging from bankruptcy GM unveiled record profits of $7.6 billion for 2011. It's been a great year for GM. Although its European business is still in reverse and it is unlikely ever again to dominate the world as it once did, the car giant is clearly on the mend. Once more GM is the largest automaker in the world. Ford and Chrysler are still alive and kicking. Ford made a profit of $8.8 billion last year, the third year in a row profits had increased. Chrysler posted a $183 million profit earlier this month, its first full year of profit since 2005.In 2000 the US auto industry employed 1.13 million people. In July 2009 that number had fallen to 500,000. Now, employment is rebounding and the auto industry is expected to employ 750,000 within the next couple of years.The auto industry might never get back to 1 million jobs, but it is showing some strength, and as Lee Iacocca once said, “As GM goes, so goes the nation.”

And yet the forecast is not quite that simple, the scenario is far from rosy. The credit rating firm, Moody's is warning it may cut the ratings on more than 100 European financial institutions, and another 17 banks and securities firms. It might cut the long-term credit rating of UBS, Credit Suisse and Morgan Stanley by as much as three notches. Among the banks that might be downgraded by two notches are Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC Holdings, and Goldman Sachs. Bank of America and Nomura were included in those that might be downgraded by one notch.

Moody's cut the insurance financial strength ratings (IFSR) by one or two notches of several insurance companies, which it said related to their investment and operating exposures to Spain and Italy.

These included Unipol Assicurazioni SpA, Mapfre Global Risks, Assicurazioni Generali SpA and Allianz SpA. It affirmed the IFSR of Allianz SE, AXA SA, Aviva Plc and their subsidiaries, but cut the outlook on the rating to negative from stable.

So, in Europe, the situation is slightly less than sanguine. The latest word from Greece is that a deal to seal the $170 billion dollar bailout and avoid a disorderly default – the deal will be sealed on Monday. Which is what we heard last week, and what we heard last November. And even if there is a deal, there is still a huge question mark about the viability of Greece moving forward. So, the bailout deal is back on track – that's nice.

The news stories today said the markets moved higher because it looked like a deal was close on the the Greek debt problem. I've never been smart enough to figure that out. No one really understands what drives the daily swings of the stock market. J.P. Morgan perhaps summed it up best when he was asked what the market would do. He responded simply, “It will fluctuate.”

Sometimes it is easy to believe the financial system is unsustainable. Enter, former Vice President Al Gore; after inventing the internet and global warming, he is now focusing his attention on “sustainable capitalism”. Gore has teamed up with David Blood of Generation Investment Management and they have developed a blueprint for the financial industry to adopt to support lasting economic growth.

Gore said, "While we believe that capitalism is fundamentally superior to any other system for organizing economic activity, it is also clear that some of the ways in which it is now practiced do not incorporate sufficient regard for its impact on people, society and the planet."

David Blood said capitalism has been blighted with short-termism and an obsession with instant investment results, which had ramped up market volatility, widened the gap between rich and poor and deflected attention from the deepening climate crisis.

They are presenting ideas on cleaning up capitalism, including: ending quarterly earnings guidance from companies, which incentivize executives and investors to base decisions on short-term factors at the expense of longer-term objectives.

Companies have also been encouraged to integrate financial reporting with insight on environmental, social and governance policy so investors can clearly see how performance in the latter can contribute to the former.

Blood said, "Today the average mutual fund in the U.S. turns over its entire portfolio every 7 months; 20 years ago it was every 7 years. Something has fundamentally changed and the problem with that is it means we're not making good investing decisions... and not delivering proper and efficient wealth creation." And he brings up a good point; there is a difference between liquidity and churning. John Bogle, the founder of Vanguard and the S&P Index fund has been talking about this topic for years.

It is a difficult proposition to try to change the business climate. Innovation sounds good in business school but in the market place it usually means someone is getting axed. At the same time, we should be able to look at ways to improve business models, even the big model of capitalism. When we stop getting better, that's when you know capitalism is dead.

From today's copy of Institutional Risk Analytics, a fairly quick explanation of why the MERS system of electronically registering titles is a bad thing: "What none of the experts are analyzing (in specific terms) is the destructive effect that the MERS system will have on 400 years of recorded property rights in the United States. Most articles mention lost chain of title but stop short of explaining what this means, or how these problems will affect homeowners with or without mortgages in the MERS system. These problems deal with determining (1) property boundaries (senior and junior property rights) and (2) proof of ownership in order to obtain title insurance and financing. Because MERS is utilized for transferring title and these transfers are not publicly recorded (thereby imparting constructive notice), MERS does not comply with race (first in time) or (constructive or actual) notice statutes and therefore, senior/junior property rights cannot be determined when a discrepancy arises in property boundary lines."

 Yep, the past 400 year of property rights were tossed out. Good luck in getting those back.

MBIA has a breach-of-contract suit against Countrywide in the New York State Supreme Court. They have just asked for Countrywide to produce discovery on an internal fraud-tracking database "which MBIA had not previously known to exist." MBIA said it needs the discovery to prepare for upcoming depositions of former Countrywide employees who tried to expose its allegedly fraudulent mortgage underwriting practices.

In addition to records of the mortgage-fraud database, known as FACTS, MBIA wants Countrywide to turn over the employment files of "two former Countrywide loan officers whose fraudulent activities were initially covered up due to their profitability," and records of senior executive committee meetings that "should show that Countrywide deliberately passed on riskier loans to the secondary market while retaining safer loans for itself, again in violation of its representations and warranties."

Last week Bank of America agreed to pay $1 billion to resolve the Justice Department's claims that it defrauded the government by underwriting Federal Housing Administration mortgages to unqualified borrowers. We probably missed that story in the light of the big multi-state mortgage fraud settlement announcement last week.  MBIA is making similar mortgage-origination allegations about the loans underlying securities it agreed to insure. And in the process it's demanding discovery that could be of use to all the other monolines and investors clamoring for a pound of the bank's flesh. Can Bank of America really afford to let this case continue?

“Investors’ belief that the worst is over for the U.S. housing market is fueling renewed interest in once-toxic mortgage bonds that were at the heart of the financial crisis. Prices of some distressed bonds backed by subprime home loans—those issued before the crisis to borrowers with sketchy credit histories—have chalked up double-digit percentage gains this year, with one prominent market index rising 14%.

The rally has drawn investors back to a corner of the credit markets that was pummeled from 2007 to 2009 and has been volatile since . . .

The recent resurgence in battered mortgage bonds that were left for dead during the crisis reflects how investors’ appetite for risk is returning, even after many banks and hedge funds lost money last year on similar assets. But this time around, investors say many subprime bonds are looking attractive because their prices reflect a doomsday scenario that may not materialize, even though the housing sector remains in the doldrums.

Bonds that yielding 7% to 9% are attractive if you can buy them at a price that appropriately reflects the risk of loss.

And so we come back around to the idea that the economy is showing some strength, except where it is still weak, and except where it has been brutally gouged. We may gloss over the gaping wounds inflicted in the global meltdown, or we may try to address the underlying malinvestment. I bet a bunch of you guys were kind of giggling when I mentioned that Al Gore wants to reinvent capitalism, but the reality is that capitalism has already been reinvented. It was reinvented by the banks that decided 400 years of property rights didn't apply to them, they could fore-go the proper recording of a title to land. It was reinvented by the people who bundled up toxic mortgage bonds, it was reinvented by the people who figured out how to churn stocks with high frequency trades, it was reinvented by people who figured out they could rewrite the laws of states and the nation to legalize their previously illegal activities, it was reinvented by the bankers that revalued Greek debt in order to allow Greece entry into the EU, and it was reinvented by the technocrats that have now assumed super-economic powers in the Euro-zone. Maybe the end of the credit bubble should mean lower profits, more boring businesses, smaller bonuses on Wall Street, less influence peddling, and maybe even a little soul searching. Maybe the boom-bust-boom-bust of the markets is not really the best and most productive part of capitalism. Maybe there is a way to be profitable without skirting an ethical line. At the very least, isn't this something we should be thinking about?