Wednesday, January 15, 2014 - A Few Pages of Pork

A Few Pages of Pork

by Sinclair Noe

DOW + 108 = 16,481
SPX + 9 = 1848.38
NAS + 31 = 4214

10 YR YLD + .01 = 2.88%
OIL + 1.75 = 94.34
GOLD – 3.00 = 1243.00
SILV - .05 = 20.30

The S&P 500 hit a record high close, just a few pennies better than December 31^st. The market has had a weak start to January but we're still at elevated levels. The Dow Industrials are about another day like today away from records; that close was 16,576 on New Year's Eve.

A $1.1 trillion compromise spending bill that funds the government through September won approval today from the House of Representatives and now goes to the Senate for consideration. The Senate is expected to also pass the so-called "omnibus" bill and send it to President Barack Obama to be signed into law. The 1,582-page bill eases most of the automatic spending cuts that were part of the sequester and keeps the federal government funded through Sept. 30.

The budget bill calls for 1% increases in the paychecks of federal workers and military personnel, the first raises in three years for most agency workers. The spending measure also would protect disabled veterans and some military spouses from a pension cut set to go into effect in 2015.The bill would provide nearly $92 billion for US military operations abroad, mostly in Afghanistan, plus about $7 billion for disasters and other emergencies. That was just slightly less than last year’s war spending but about $44 billion less than was provided in 2013 for disasters, after Hurricane Sandy ravaged the Northeast in October 2012.

Democrats like a $1 billion increase in Head Start funding for early childhood education from its recent low point after forced budget cuts last year. Half of the money will go to help children 3 years old and younger, touching on an Obama administration priority. For Republicans, the compromise reduces funding to two of their least-favorite agencies: the Internal Revenue Service and the Environmental Protection Agency. Democrats also blocked GOP-sought curbs on the Environmental Protection Agency’s power to regulate utilities’ greenhouse gas emissions. The bill includes  an extra $155 million worth of financing for the Department of Energy to promote its nuclear projects. There is also money for the coal industry. The measure provided money for Obama’s 2010 health care overhaul and his revamping of federal oversight of the nation’s financial markets, though not as much as he requested. There are also cuts for financing the Securities Exchange Commission. Overall, federal spending would be lower than the final budget of President George W. Bush's administration.

Out of 1,582 pages I'm guessing we'll find a few pages dedicated to pork.

In the latest economic data, a measure of inflation at the wholesale level, the seasonally adjusted Producer Price Index rose 0.4 percent last month, the biggest increase since June, although inflation pressures remained benign. 

In its latest Beige Book report on business activity, the Fed said the economy grew at a moderate pace from late November through the end of 2013, with some regions of the country expecting a pickup in growth. Specifically, 9 of the 12 regions reported moderate growth, and 2 regions reported modest to moderate growth. Moderate is a little better than modest, both are better than mediocre, and that's just a smidge better than maudlin. In other words, the Fed's Beige Book is not very precise. They say that tourism has picked up in Florida, and that ripples out to help lift other parts of the Floridian economy. Around the Gulf of Mexico there has been significant energy investments, and that also ripples. In the Midwest, the auto industry has perked up, and that ripples out to other industries. Retail sales were pretty good across the country. Wages are still a problem across the country, and not likely to get better. Everything else was up just a little everywhere except the St. Louis region. Go figure.

The World Bank reported that advanced economies appeared to have turned the corner after five years of financial crises and recession. It forecast global growth will firm to 3.2% this year from 2.4% in 2013. The bank lowered its 2014 China GDP forecast to 7.7% from 8.0% forecast in June, but raised its Eurozone GDP estimate to 1.1% from 0.9%, and kept its US GDP estimate at 2.8% and its projection for Japan GDP at 1.4%.

The International Monetary Fund expects global growth to pick up this year, though it should still remain below its potential of about 4 percent. IMF Managing Director Christine Lagarde said: "Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven," and she says one of the biggest risks is deflation.

Earnings reporting season, and the big banks dominate the earnings news this week. Bank of America reported 4^th quarter net income of almost $3.2 billion. Revenue increased 14% to $22.3 billion. Consumer banking had its best quarter since 2011, the wealth management and global banking divisions posted record revenues. The bank made $11.6 billion in home loans, down 49% from the third quarter. BofA isn't alone in this. 

Both JP Morgan and Wells Fargo reported declines in their mortgage businesses yesterday. BofA' mortgage unit lost $1.1 billion, which was actually an improvement from a loss of $3.7 billion same time last year, but much of the earlier losses were due to legal expenses, which, at $2.3 billion for 4Q are still a bit of an embarrassment. BofA says the problem now is that demand for mortgages has dropped. This might explain the Fed taper; the banks just aren't producing mortgages. And the banks are setting aside fewer reserves for mortgage related losses. What could go wrong?

The housing market may be slowly improving, but weak spots remain. In 15 states, the share of “deeply underwater” foreclosures is larger than those with equity, according to housing data analyst RealtyTrac. But, overall, the December data show those deeply underwater foreclosures declining and homes rich in equity increasing. During the housing downturn we saw a downward spiral of falling home prices resulting in rising negative equity, which in turn put millions of homeowners at higher risk for foreclosure when they encountered a trigger event such as job loss. Now we are seeing the reverse trend: rising home prices resulting in falling negative equity, which in turn is giving millions of homeowners a lifeline to avoid foreclosure.

The data measure underwater status by comparing the value of a home loan to the value of the home itself. A foreclosure was defined as “deeply underwater” when the homeowner owed at least 25 percent more than the value of the property. (The loan-to-value was 125 percent or greater.) A foreclosure with equity was defined as one where the value of the loan was equal to or smaller than the value of the home. (A loan-to-value ratio of 100 percent or less.)

The states with the highest percentage of deeply underwater foreclosures were: Nevada (65 percent of foreclosures were deeply underwater), Florida (61 percent), Illinois (61 percent), Michigan (55 percent), and Ohio (48 percent).

But that data is just for those homes in foreclosure. In two states especially hard-hit by the housing crisis, Nevada and Florida, “deeply underwater” properties accounted for more than one in every three homes.

States with the most equity-rich homes — where the loan value was well below the value of the home — included Hawaii (36 percent), New York (33 percent), California (26 percent), Montana (24 percent), and Maine (24 percent). D.C. also had a rate of 24 percent.

Five bank regulatory agencies approved a tweak to the Volcker rule that would allow banks to keep interests in certain funds backed by trust-preferred securities. The change was aimed at easing the concerns of small banks that they needed to dump certain investments they thought would be allowed under the rule, losing money in the process.

The American Bankers Association, or ABA, a bank trade group, sued regulators, and lawmakers from both parties have backed the banks. After regulators announced the revision, the bankers group said it was considering the change and would decide whether to continue with its lawsuit.

The Volcker rule, which was required by the 2010 Dodd-Frank law, prohibits banks from making speculative bets with their own money and restricts their investments in certain funds. Five agencies, including the Federal Reserve and the Federal Deposit Insurance Corp, were involved in writing the rule. Smaller banks claimed that, as an unintended consequence of the final version, they would need to dump funds backed by trust-preferred securities, or TruPS, which are collateralized debt obligations, or CDO's that have characteristics of debt and equity. These CDOs were issued mainly by small banks and were attractive because they counted towards capital for regulatory purposes but they were regarded as debt instruments for tax purposes, so payments on them were deductible as interest. 

Regulators said banks could keep certain collateralized debt obligations backed by TruPS established before May 2010 and obtained before the Volcker rule was finalized last month. The agencies also said banks can continue to act as market makers in the TruPS-backed funds. Banks have 30 days to comment on the changes after which regulators have the power to make additional tweaks if necessary. Even the dumbest banker can get around the Volcker rule. The regulators started with a weak statute, and managed to make it weaker.