March, Tuesday 06, 2012

DOW – 203 = 12759
SPX – 20 = 1343
NAS – 40 = 2910
10YR YLD -.06 = 1.94%
OIL – 1.72 = 105.00
GOLD -31.80 = 1675.60
SILV – 1.05 = 33.05
PLAT – 50.00 = 1621.00

A less than Super Tuesday in most markets.

Today was the biggest drop for stocks in about 3 months. The CBOE Volatility Index, the VIX, jumped up about 18 percent. Complacency was fun while it lasted. Despite the decline, the S&P 500 is still up almost 7 percent for the year. If fourth-quarter gains are included, the index is still up almost 20 percent since September 30. A pull back was not unexpected, it was really just a matter of when it might hit. This is just a one day decline, and most likely not the pullback, more like a shot across the bow, to say the pullback is coming.

Throughout the world, the pullback is just getting started. China is slowing down;even Brazil isn't running as fast. Brazil reports 2011 GDP grew at a 2.7% pace – not exactly terrible but hardly thrilling. And in Europe, the recession has barely begun. They still can settle the problem in Greece and it is getting a bit scary. The problem is that the Greek government wants to default on its bonds but the European Central Bank doesn't want to call it a default because that would trigger payouts on Credit Default Swaps. In order for it to not be considered a default, 75% of private sector investors in Greek bonds must agree to the haircut, an exchange of old bonds for new bonds at a much much lower price. Not everybody is on board. Greek private creditors say a disorderly Greek default would cause more than a trillion euros ($1.3 trillion) of damage to the euro zone and could leave Italy and Spain dependent on outside help to stop contagion spreading.

So, the Greeks are applying some pressure, trying to force creditors to accept the plan. The Greek public debt management agency said in a statement that Athens “does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI”. The threat is aimed in particular at the 14 per cent of investors who own Greek bonds issued under international law.  And it looks like the threat is working. So, the deal is take a haircut or nothing at all.

Except that's not really the deal. Because if investors accept nothing at all, they can collect on the Credit Default Swaps, assuming they bought CDS and assuming the CDS actually has reserves to pay a claim. If you own protection on a credit, then, you’re very much in a world of caveat emptor. You can trade in and out of CDS and make a good living; these things are, first and foremost, trading vehicles. That’s why they’re more liquid than bonds. But if you have a strategy which involves actually getting paid out on your CDS in the event of default, then you should definitely worry that the payout might not happen, even if the event of default is clear and declared. What’s more, there’s really no good way to hedge that risk.

So far, the CDS market has managed to muddle through, when it comes to restructurings and bond exchanges. But it’s sure to blow up sooner or later.A lot (and here I mean tens to hundreds of trillions of dollars) of these CDSs were designed to net to zero; the issuing bank buys one risk, sells an allegedly identical risk, and pockets some profit (hopefully). There was a lot of risk slicing-and-dicing, but it was all supposed to net to zero and go away. The problem is that risks can behave asymmetrically; they don’t necessarily have to net to zero. The face values on these CDSs are so huge that even slight asymmetries could take down major banks.

As Lily Tomlin said, no matter how cynical I get I can never keep up.

And even if everything doesn't implode in the next couple of days, the recession in Europe is just getting started. The European Central banks has been handing out free money to the Euro-banks through a program called the Long Term Refinance Operation; and the Euro-banks have been taking the money and parking it with the ECB because the Euro-economy is so messed up that the banks don't know what else to do. Even the strong European countries are weak. France is stagnant. Germany's GDP contracted in the fourth quarter. And the weak European countries are just dreadful. Greece and Portugal are toast, and one of the bigger problems not yet dealt with is Spain. Spain has 23% unemployment and still rising, the banking system is under-capitalized and still has unknown exposure to the country’s housing market collapse. On top of that the rising unemployment rates is pushing up bad loans in the banking system to 7.4%, a 17-year high, and is still rising.

So, even if the multi-trillion dollar derivatives market doesn't collapse, Europe is still a basket case. The bigger concern is that Europe is contagious; even if they can avoid a meltdown, we are reasonably certain there will be economic slowdown and that will hurt China, and emerging markets, such as India and Brazil, and ultimately we get hit in the United States. Apparently, the geniuses on Wall Street figured this out today, and sold.

A Texas Republican congressman wants to revamp the Federal Reserve. And no, this time it's not Ron Paul. Rep. Kevin Brady plans to introduce a bill tomorrow that, if enacted, would strip the Fed of one of its key goals: getting the job market back on track. Instead, Brady and his Republican colleagues want the Fed to focus its efforts entirely on inflation.

The Fed is currently the only central bank in the world that has two goals, or a so-called "dual mandate" to maximize employment and keep prices stable. Other central banks focus on just the inflation side of the equation. Brady argues the Fed can't control the job market, and the proof is in the pudding. After all the Fed's emergency measures to boost the economy, inflation is currently north of its target of 2% per year, but the latest 8.3% unemployment rate is far above what the central bank considers normal.

In a speech, Brady said: "Ultimately, it is the president and the Congress, not the federal reserve, that control the budget, tax and regulatory policies that create the business climate that drives economic growth and job creation."  Which is true. Actually, there is no good reason for the Federal Reserve to have a single mandate; there's no good reason for having the Fed. Why the hell do we need a middleman anyway? Here's a thought, let's audit the Fed, and then we'll see just how bad the Fed has messed things up, and then we can revoke the Fed.

Three and a half years ago, Lehman Brothers filed for bankruptcy. Today, Lehman Brothers emerged from bankruptcy court protection with a a plan to redistribute roughly $65 billion to creditors before closing its doors for good. The $65 billion Lehman plans to redistribute is but a fraction of the estimated $613 billion in debts held by the bank in 2008.

A federal jury convicted Allan Stanford,  a Texas financier, on 13 out of 14 counts of fraud in connection with a worldwide scheme that lasted more than two decades and involved more than $7 billion in investments. Stanford was accused of running a Ponzi Scheme and defrauding 30,000 investors in 112 countries.

Six top computer hackers associated with groups such as Anonymous, LulzSec and AntiSec have been arrested and charged in New York in connection with a series of attacks on computers used by the entertainment industry, credit card companies, intelligence firms and even an Irish political party. The hackers are facing a combined seven counts and a maximum of 105 years of jail time, according to an indictment unsealed by a federal court. The group of hackers has seen arrests in the past, yet they have managed to continue hacking. The hacks have been impressive, everything from PBS to News Corp., and in an especially cheeky move they hacked the Department of Justice and the FBI.

President Obama announced today that the Federal Housing Administration will cut upfront fees for refinancing loans it already insures. The new fees are for borrowers whose FHA loans were issued before June 1, 2009. An estimated 2 to 3 million borrowers could take advantage of the savings, which could reduce mortgage payments for the typical FHA borrower by about a thousand dollars a year. We've been saying that one of the election year moves to stimulate the economy is to prop up housing. The new policy is in addition to the Home Affordable Refinance Program (HARP), which enables borrowers with mortgages backed by Fannie Mae or Freddie Mac to refinance even when they are deep underwater on their loans, owing far more than their homes are worth.

Also being provided with potential relief are servicemen wrongfully foreclosed on. Lenders and servicers will be required to review the cases of every service member foreclosed upon since 2006.  Under the plan, any service member wrongly foreclosed upon will receive compensation. There will also be a refund of any overcharges for those who were denied the opportunity to refinance, and relief for those who had to sell their homes at a loss because of a change in station.

A little good news: gasoline prices dropped. Last night the average national price dropped a penny per gallon; that follows 27 straight days of increases.

Whoopy!

The Associate Press periodically surveys economists, and the latest survey says: The economy is improving a little faster than previously thought. The economists think the unemployment rate will fall from its current 8.3 percent to 8 percent by Election Day. That's better than their 8.4 percent estimate when surveyed in late December. By the end of 2013, they predict unemployment will drop to 7.4 percent, down from their earlier estimate of 7.8 percent.

On Friday, the government will issue the jobs report for February. Economists expect it to show that employers added a net 210,000 jobs and that the unemployment rate remained 8.3 percent.

On other issues, the economists say: The economy has begun a self-sustaining period in which job growth is fueling more consumer spending, which should lead to further hiring. The economy will grow 2.5 percent this year, up from the economists' earlier forecast of 2.4 percent. In 2011, the economy grew 1.7 percent. European leaders will manage to defuse their continent's debt crisis and prevent a global recession. But the economists think Europe's economy will shrink for all of 2012. Americans will save gradually less and borrow more, reversing a shift toward frugality that followed the financial crisis and the start of the Great Recession.

And so, the important thing we learn from this survey is that guess is just as good and valid as the economists'.