Wednesday, February 22, 2012

February, Wednesday 22, 2012

DOW  - 27 = 12,938
SPX – 4 = 1357
NAS – 15 = 2933
10 YR YLD -.04 = 2.00%
OIL -.30 = 105.95
GOLD + 15.50 = 1776.80
SILV - .09 = 34.36
PLAT + 12.00 = 1727.00

So, the Euro-Union bailed out Greece and the thinking is that the lazy, shiftless, socialists in Greece can roll around in the cash. The reality is that Greece won't be getting any cash. The bailout money will go into an escrow account and most of the money will ultimately go to the European banks; the creditors have senior claims over any bailout cash. The Greek citizens will never see a penny of the bailout cash. All the money will be used to fund debt interest and maturity payments. Now anybody who has ever had a mortgage will probably remember that there are fees associated with establishing an escrow account. So, not only do the Greek citizens not get a single penny, they have to pay for the bailout. It's a negative bailout.

Remember a couple of months ago, I told you the Europeans were going to follow the Federal Reserve Playbook for dealing with debt crises. The playbook called for privatized profits and socialized losses. So, where is the bailout money going? The banks. The socialists are the banks.

And then let's put some salt on the wound. Fitch downgraded its credit rating on Greece to Triple-C. Which is just one step above default, and is basically very dangerous, very speculative junk status.

The Greek parliament still has to approve legislation that swaps out the old debt or new debt. Greeks are protesting in the streets of Athens. Maybe there will be a few politicians that will display a spine and the intestinal fortitude to say no to the bankers, but the deal will probably go through tomorrow. Still, the US Treasury is less than sanguine. Treasury officials say it is critical that Europe put up a convincing firewall against the risk of financial contagion. In other words, we'll believe it when we see it and we haven't seen it yet.

President Obama announced a corporate tax overhaul plan that would lower the corporate tax rate to 28 percent from the current 35% rate and it would also eliminate some loopholes and subsidies. The gaping question is why not just eliminate the loopholes? There is plenty of talk about corporations paying high taxes but the reality is that  corporate federal taxes paid last year dropped to 12.1 percent of profits earned from activities within the United States. That’s a gigantic drop from the 25.6 percent, on average, that corporations paid from 1987 to 2008; that's according to the Congressional Budget Office. Corporations don't pay as much as they used to, overall. In 1953, corporate taxes accounted for one-third of the total of federal revenues. Today, corporate taxes account for just 10% of the total.

Rick Santorum wants to cut the rate to 17.5 percent and eliminate corporate taxes for manufacturers. Newt Gingrich wants to cut the rate to 12.5% and let companies write off all capital investments immediately. Mitt Romney wants to reduce the corporate tax rate to 25% before eliminating loopholes. Romney also  proposed cutting individual income rates across the board by 20 percent, to lower the top tax rate to 28 percent from 35 percent. And of course, nothing is going to happen this year, no legislation will be passed.  So, it's just rhetoric and political posturing.  Tax cuts for everybody, and a chicken in every pot. The debate kick off tonight at 5:45 from Mesa, the last republican debate before  Super Tuesday.

It was just about two weeks ago that the $25 billion dollar multi-state mortgage abuse settlement was disclosed, and we are learning more with time. The purpose of the settlement was to resolve abuses of federal and state mortgage laws and help some of the borrowers and provide aid to some of the people who actually lost their homes because mortgage servicers working for the banks filed incomplete, and fraudulent foreclosure documents. However it is looking like the deal will not provide much relief for the borrowers but it should provide the big banks with loss mitigation.

The problem is that the program leaves it up to the banks to determine who gets the money and how the money is allocated. Further, it appears that the settlement's provisional agreement contained a clause which allows the banks to count loans made under the taxpayer-subsidized federal modification program toward compliance with the new settlement. If that provision is indeed part of the final settlement, it means that the banks would be eligible to receive taxpayer-financed incentives for making loan modifications under a settlement intended to resolve allegations that they broke federal and state laws. But that means the banks may receive financial incentives simply for agreeing to pay for their alleged wrongdoing.

Another part of the settlement requires "comprehensive reforms of the mortgage servicing industry," which includes the overhauling of servicing standards. One of the new servicing standards is that "information in foreclosure affidavits must be personally reviewed and based on competent evidence." Another: "Holders of loans and their legal standing to foreclose must be documented and disclosed to borrowers." Sounds great. But why wasn't this already standard operating procedure at these five banks? This might actually be a big problem for the banks moving forward because the just can't make apples out of applesauce.

At the Wealth protection Conference last April I talked about some of the large economic trends I thought might develop. One of those trends was an increase in farmland prices.  The Federal Reserve Banks of Kansas City and Chicago have come out with their 4th Quarter 2011 farmland price/credit conditions reports, and they reported the highest average gain in farmland prices since 1976, up a 19% inflation adjusted average for the year.

They attributed the rise to commodity gains, as follows, according to the USDA: Corn, soybean, and wheat prices averaged 57 percent, 26 percent, and 45 percent, respectively, higher in 2011 than in 2010. Milk, hog, and beef cattle prices rose 23 percent, 21 percent, and 21 percent, respectively, although producers faced costlier feed as well.

Net farm income in 2011 was up 24% over the previous year.

Meanwhile, resales of existing homes increased 4.3% in January; that's a 1 ½ year high, and that pushed inventory to the lowest level in almost 7 years.

And then there is the price of oil. The United Nations suspects Iran of building a nuclear weapon. Iran denies that, but the U.S. and the European Union insist that Iran prove it. They have frozen assets of Iran's central bank, and the EU will implement an oil embargo in August to force Iran to open its nuclear program for inspection. Refineries want to lock in supplies now. And the longer this standoff continues the greater the possibility of some sort of confrontation.

Maybe you've noticed the move in precious metals. Maybe this has something to do with the fact that the European Central Bank's balance sheet is increasing by about 20% thanks to the latest round of bailouts. Gold still has a way to go before it gets back to the record highs, but in the past year, the total central banks balance sheets have grown by more than $2 trillion dollars. And that is one of the reason s to own gold. The S&P 500 is up about 8% since the start of the year. Gold is up about 13%.

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