Tuesday, April 16, 2013 - Love That Dirty Water

Love That Dirty Water

by Sinclair Noe

DOW + 157 = 14,756
SPX + 22 = 1574
NAS + 48 = 3264
10 YR YLD + .02 = 1.72%
OIL + .20 = 89.90
GOLD + 16.70 = 1370.30
SILV + .65 = 23.44

If home is where the heart is, then Boston is everybody's hometown today. No significant developments to report. The death toll stands at 3, with 176 people reported as injured, some in very critical condition. Officials now say it was just two bombs; yesterday, there was speculation there were more. There is no indication that the bombing was part of a broader plot. We still don't know if it was one evil lunatic or a group of evil lunatics. We don't know if it was done by someone from this country or elsewhere. There have been no arrests, and it is a very intensive ongoing investigation. We should not speculate on some things. What we do know is that people responded by running toward the blast to help the victims. We do know that the medical personnel and others responded heroically. And we do know that the good, decent, and heroic people outnumber the evil lunatics; always have, always will.

Total housing starts in March were up 46.7% from the March 2012 pace, although some of that increase was due to a surge in multi-family starts in March. Single family starts were up 28.7%. Even with this significant increase, housing starts are still very low.

The consumer price index decreased 0.2% in March, led by lower energy and apparel costs. Energy prices decreased 2.6% in March, retracing half of the 5.4% rise in February. Gasoline prices fell 4.4% in the month. Electricity prices also declined. The only big gain came in prices for used cars and trucks.

In the past year, the CPI has risen 1.5%. So,today's report may actually add to concerns about deflationary pressure; at the very least, it leaves plenty of room for the Federal Reserve to continue QE.

Industrial production rose a seasonally adjusted 0.4% in March, and February’s growth was revised higher to 1.1% from the initially reported 0.8% advance. The March gain wasn’t necessarily a great sign for the economy; utilities output rose due to unusually cold weather, and manufacturing and mining output actually decreased. Still, the annualized 5% gain in output during the first quarter was the best since the first quarter of 2012, and came as consumer goods output shot up 6.2%, the best quarterly gain since the end of 1999. The auto industry was a major factor in the first quarter numbers. Strong demand for new cars pushed automotive product output up 2.6% higher in March and 13.2% for the quarter.

Coca-Cola reported first-quarter results above Wall Street's forecasts. Coke also said it struck a deal to start refranchising its business in the US, which will lower costs.

WW Grainger, which sells power tools and other industrial equipment, said its first-quarter net income climbed 13 percent.

Intel reported a widely expected drop in first-quarter earnings on Tuesday, though the final results were in line with diminished expectations. Intel reported net income of $2 billion, or 40 cents per share, compared with net income of $2.7 billion a year ago.

US Bancorp reported first-quarter earnings that fell short of analysts' expectations. The Minneapolis bank's net income rose 7 percent to $1.43 billion as it set aside less cash to cover soured loans. Goldman Sachs reported first-quarter profit of $2.2 billion, or $4.29 a share, driven by strength in its investment banking business as well as its investing and lending unit.

European lawmakers have voted to cap banker bonuses at the region’s largest institutions, as part of a major set of reforms designed to curb the financial industry’s risky behavior.

The legislation had faced major opposition from Britain, home to Europe’s largest financial center, but it was eventually outvoted by other European Union countries that wanted to rein in the excesses. It's not like the bankers will starve. Compensation limits will restrict bonus payments to one year’s base salary, though that figure can be doubled if a majority of shareholders approve. The legislation will apply to all banks active in Europe, as well as the international divisions of European firms like Barclays and UBS.

Meanwhile, Italian officials broadened their investigation into whether the Japanese investment bank Nomura helped hide losses at the troubled lender Monte dei Paschi di Siena, ordering the police to seize assets worth $2.35 billion and naming a former top Nomura executive as a suspect.

The unusual move to seize such a large sum, and go after prominent bankers, underlined the importance of the case in Italy and the euro zone, where people are still a little nervous about banks, following that little episode in Cyprus. Monte dei Pashci is the oldest bank in the world and the third largest in Italy, and it apparently has to do with some transaction that left the bank in need of a bailout for more than $5 billion by the Italian government.

For the past few years I've talked with you about the foreclosure frauds perpetrated by the banksters. Lots of things went wrong, including: fake documents, forged documents, robo-signing, illegal foreclosures, foreclosures on military families while they served overseas, foreclosures on homes with no mortgages, foreclosures on people who paid on time, foreclosures on people who were truly trying to work out some sort of reasonable deal, kickbacks, and in general a complete lack of accountability for these crimes and abuses.

But instead of giving voice to thousands upon thousands of victims of illegal foreclosures, instead of documenting the banks’ criminal practices, maybe what we all should have done is simply let the Office of Comptroller of the Currency – part of the Treasury Department — and the Federal Reserve construct their own settlement with the banks. Then, when it utterly unraveled — as it has over the past couple of months — the unimaginable fraud heaped upon homeowners would get more attention than ever before.

Indeed, despite OCC and the Fed’s best efforts to protect banks from harm, they’ve actually exposed them like never before. Two years ago,  the OCC, the primary regulator for the banks doing the lion’s share of the foreclosing, had to answer for their complete lack of oversight and enforcement. So they came up with a solution.

Instead of joining with other regulators and leveraging their authority to generate the biggest penalties possible, OCC would break off (the Federal Reserve would join them), and pursue its own settlement. Announcing that 14 mortgage servicers committed “violations of applicable state and federal law,” OCC would allow 4.2 million homeowners in foreclosure in 2009 and 2010 to petition for an “independent” review, and would mandate specific restitution for any foreclosure found to be improper. The real goal was to find as few irregularities as possible, to “prove” that the problem was contained to a few isolated cases of sloppy paperwork, and to undermine the other state and federal regulators’ investigations. It was the perfect plan, if your idea of a good plan is to downplay bank malfeasance and subvert justice.

This plan began to take water from the moment it began. The Independent Foreclosure Reviews weren’t independent: OCC and the Fed, in their infinite wisdom, decided to let the banks hire and pay for their own third-party reviewers. The predictable consequences included a windfall for the bank consultants hired for the job – they made a combined $2 billion off the reviews – and numerous cases of reviewers deliberately trying to make the banks look better, or even hiding evidence of bank malfeasance. The OCC faced a moment of truth: Power through with expensive and obviously flawed reviews, or pull the plug. They did the latter. Instead of completing the 500,000 reviews requested by individual borrowers, they would merely slot all 4.2 million, whether victims of foreclosure fraud or not, into several broad categories, and pay out a total of $3.6 billion. The regulators refused to release the methodology underlying that process, or any of the completed reviews from the third-party consultants.

This all spilled out in an ugly manner over the past week. The vast majority of aggrieved homeowners will get less than $300. The main stream media has picked up on the story. Politicians have picked up the story. The regulators are now stonewalling Congress. Where does this go from here? Hard to say, but the whole story has revealed a nasty mess that will be difficult to sweep under the rug.

Economic leaders gathering in Washington for the World Bank and International Monetary Fund  spring meetings this week. So, the IMF updated its economic forecast. The IMF now predicts global growth of about 3.3 percent this year and 4 percent in 2014. That is a reduction of 0.2 percentage point since its January estimate for 2013; it did not change its estimate for next year’s growth.

Still, the report underscored that financial conditions had improved markedly since last year, in no small part because of aggressive monetary easing undertaken by the Federal Reserve, the Bank of Japan and the European Central Bank. Recession continues to afflict Europe, and the world still struggles with high unemployment, but risks to the downside; in particular from the threat of a country’s leaving the euro zone and from fiscal policy uncertainty in the United States, have faded.

Kind of strange that they think things are getting better and they lower their growth estimates.

The fund lowered its estimate of United States growth this year to 1.9 percent, down 0.2 percentage point from its January forecast. But it said the United States was “in the lead” in seeing an acceleration of growth, in part because Washington policy makers were able to avoid the so-called fiscal cliff of tax increases and spending cuts at the turn of the year.

The I.M.F. also said that the United States had proved too aggressive in carrying out budget cuts, given its still-sluggish rates of growth and high unemployment levels. It said it anticipated that the across-the-board $85 billion in budget cuts known as sequestration would push down growth levels this year and beyond.

The report says: “The growth figure for the United States for 2013 may not seem very high, and indeed it is insufficient to make a large dent in the still-high unemployment rate. But it will be achieved in the face of a very strong, indeed overly strong, fiscal consolidation of about 1.8 percent of G.D.P. Underlying private demand is actually strong, spurred in part by the anticipation of low policy rates under the Federal Reserve’s ‘forward guidance’ and by pent-up demand for housing and durables.”

There are some positive developments for the Inland Empire but there are still some big challenges. San Bernardino is still facing a scarcity of good news as the city's financial consultant presented a proposed budget to the City Council last night. One significant improvement is that - as long as a large chunk of the city's debts continue to be deferred - the city won't be in danger of not making payroll as it was in the weeks leading up to several pay days in 2012. The budget proposes to resume payments to the California Public Employees' Retirement System, but defers more than $16 million in other funds. The most positive developments might not have anything to do with repairing broken municipalities, but with a new wave of businesses washing into the Inland Empire.

An article in the LA Times this past weekend identified the Inland Empire as the fastest growing industrial region in the country and the most desirable industrial real estate market. Among the many merchants running large-scale operations now are such household names as Amazon.com, Kohl's, Skechers., Mattel, and Stater Bros. Markets.

They come for warehouses; really big warehouses; some are bigger than 30 football fields under one roof; really, really big warehouses where they can store, process and ship merchandise such as clothes, books and toys to ever more online shoppers and handle the rising flood of goods passing through the ports of Los Angeles and Long Beach.

The demand for these big buildings is so intense in San Bernardino and Riverside counties that developers are erecting more than 16 million square feet of warehouses on speculation, meaning they are gambling that buyers or renters will rush forward to claim the buildings by the time they are complete.

Although the Inland Empire was hard hit by the recession and earned a reputation for mortgage foreclosures, evictions and high unemployment rates during the downturn, the industrial property business has remained a bright spot. And it is now picking up speed.

Southern California has long been a vital hub for major retailers and manufacturers; the region features major seaports, and an enormous population base, but with Los Angeles and Orange counties essentially full, the Inland Empire with its wide-open spaces is now where the big new buildings are flying up.

Los Angeles County's industrial vacancy is 2.5%, the lowest in the country, and some of the priciest industrial property in the country is around LAX. Orange County is the second-tightest market in the U.S., with 3.5% vacancy. The two counties and the Inland Empire have a combined total of more than 1.65 billion square feet of industrial property, which is twice as big as the next largest market, Chicago.

Key to all this is logistics; the organization and movement of goods to accommodate business. The Inland Empire is close to the ports, which in turn means that the Inland Empire is close to the Pacific Rim. Once upon a time, a warehouse was where you stored things for weeks or months, such as toys and canned food that retailers would grab to restock their shelves. Sorting, organizing and moving the inventory was a constant challenge.

Tracking goods in the modern age of bar codes, scanners and computers is a comparative breeze. The location of every widget can be identified with pinpoint accuracy and fetched by robots that can lift and carry 3,000-pound loads with ease. Technology has allowed larger facilities with more sophisticated equipment to be able to deliver products very efficiently, enabling businesses to consolidate their logistical operations into bigger warehouses.

And it's not just the Inland Empire; the general wave of industrial revival has hit many core markets, including Chicago, Atlanta, the Inland Empire, New Jersey and others. The expansion of e-commerce has sparked the need for big-box distribution centers in major distribution hubs. More than one-third of 2012 build-to-suit requirements were e-commerce related. According to the US Census Bureau, e-commerce sales totaled $225 billion in 2012, more than double the amount in 2005. Strong demand for big-box quality space in major logistics markets has triggered an increase in both BTS and spec development. Last year, 58 million square feet of supply was added to the nation’s inventory and 57.7% of that was built to suit,

In total, developers currently have 57 million square feet of industrial space under construction. The Inland Empire leads all markets with 6.8 million, and Dallas comes in second with 5.8 million. New starts remain well below historical norms, which means new demand can quickly tighten the market. In fact, supported by strong new demand, the vacancy rate declined 30 basis points in the fourth quarter of 2012, the largest quarterly decline since 2006. So, with any luck, this is something that won't turn into a bubble. Knock on wood.