Wednesday, October 3, 2012 - Happy Anniversary

Happy Anniversary

by Sinclair Noe

DOW + 12 = 13,494
SPX + 5 = 1450
NAS + 15 = 3135
10 YR YLD +.01 = 1.62%
OIL – 3.86 = 88.03
GOLD + 4.60 = 1780.00
SILV +.02 = 34.74
PLAT + 10.00 = 1692.00

So, how are we doing?

Well, we're seeing some stronger employment figures, a surge in refinancing applications, and expansion in the services sector.

The Institute for Supply Management’s service sector index rose to 55.1 from 53.7 last month – well ahead of expectations for a small decline.

The Mortgage Bankers Association’s latest weekly survey showed mortgage applications jumped 20 per cent over the previous seven days to the highest level since April 2009. The average interest rate on a 30-year fixed-rate mortgage fell to 3.53 per cent from 3.63 per cent last week, a new historic low. The increase in mortgage applications comes on top of already strong refinancing activity. We've seen 10 months of improving existing home sales and prices. The Federal Reserve stepped in with QE to Infinity and Beyond; maybe the Fed is leading this parade; maybe the Fed just jumped on the bandwagon; we'll see in a couple of months.

The big monthly jobs report is Friday. Economists are expecting an increase in payrolls in the neighborhood of 115,000 to 130,000 but also a rise in the overall unemployment rate to 8.2 per cent. Today, the payroll processing company ADP reported private companies added 162,000 jobs in September. That sounds good but the ADP numbers are not a good predictor for the official monthly jobs report. We would probably need a surprising number, up or down, to shift sentiment in the election.

So rather than wait for the debate tonight or the jobs report on Friday, the markets are trying to figure out the elections, and maybe trying to price in results. An outfit called LPL Financial is contrasting the performance of 16 different industry groups; eight that are perceived to be beneficiaries if President Obama is re-elected, and eight that would likely do better under Republican rule. Now, this is not scientific, but here are the lists. On the Democratic side: Health Care facilities, Food and Staples Retailing, Gas Utilities, Health Care Services, Life Sciences Tools and Services, Construction Materials, Homebuilding, Construction and Farm Machinery. On the Republican side: Coal and consumable Fuels, Diversified Financial Services, Oil & Gas Exploration, Oil and Gas Drilling, Managed Care, Electric Utilities, Specialty Retail, Telecommunications Services.

I'm not real sure why gas utilities would do better under Democrats and electric utilities would be better under Republicans. And I'm not sure why oil and gas industries would do better under Republicans. Oil fell to a two-month low after a report this morning that US crude production climbed to the highest level in more than 15 years and fuel consumption decreased.

Futures dropped 4.1 percent after the Energy Department said crude output rose 11,000 barrels a day to 6.52 million last week, the most since December 1996. Total fuel demand fell 0.3 percent to 18.3 million barrels a day in the four weeks ended Sept. 28, the lowest level since April. Crude and distillate stockpiles declined as gasoline supplies rose.

So, anyway they looked at the performance of the industries and Democrat's industries have far outperformed the Republican's.

So, the Economist magazine conducted a survey of 384 economists (appropriately). About half of the economists surveyed said that Obama understands economics better than Romney, in contrast to the 28 percent of respondents who believed that Romney had a better grasp of the discipline. In addition, the number of economists that said the economy would grow more quickly under Obama was nearly double the number that said it would grow more quickly under Romney.

I guess we'll just have to watch the debates and the jobs report and maybe we just have to wait until people actually vote. And then we can start talking about the questions that weren't asked and the issues that were avoided.

Today is an anniversary of sorts. Four years ago today, President George W. Bush signed into law the biggest corporate rescue in American history. Even as unemployment has remained above 8 percent for 43 months, the country’s biggest banks are making almost as much as they ever have. The six largest banks in the US posted combined profit of $63 billion over the past 4 quarters through June. The $63 billion profit for the 12 months ended June 30 was exceeded only in calendar years 2005 and 2006, when combined net income was $68 billion and $83 billion. The six financial firms will have combined profits of $9.9 billion in the third quarter, $17.4 billion in the last three months of the year and $75.8 billion in 2013, according to current earnings estimates. The firms report third-quarter results later this month.

The Federal Reserve, for its part, has traveled through the looking glass to find increasingly exotic ways to provide more stimulus, recently saying that it is just going to keep buying bonds and pumping cash into the economy until we sink or until we see a real recovery, whichever comes first. So, the Fed has been propping up the banks but the money hasn't made its way to Main Street. And now the bankers complain they can't pump out loans fast enough; they say there is a capacity problem. The very low interest-rate environment that bailed these guys out was also a curse, to hear them tell. The bankers claim revenue is being squeezed by low interest rates and the 2010 Dodd-Frank Act, which includes caps on debit-card fees that have cost the biggest US lenders about $8 billion a year. Of course, most of the Dodd-Frank Act has been emasculated by the bankers' lobbyists. The bankers haven't talked much about the problems of excessive risk from their own prop trading desks, you know, like the problem with the London Whale.

Of course, the regulations are difficult for the bankers, mainly because they were never held accountable for their wrongdoing. The five big banks that agreed in a $25 billion mortgage settlement to reform foreclosure practices have continued to "dual-track" homeowners, an abusive technique that pushes families out of homes they thought their bank was trying to help them save. A new report looks at the progress the banks have made in complying with the terms of the deal, reached in March after federal and state investigations. Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial have until Wednesday to implement hundreds of "servicing" reforms mandated by the settlement, or face penalties of up to $1 million per occurrence.

And now we hear the New York AG has filed a fraud lawsuit against the nation’s biggest banks claiming tens of billions of dollars in damages tied to investor losses on mortgage bonds. The allegation is that the Bear Stearns business that JPMorgan took over in 2008 deceived mortgage-bond investors about defective loans backing securities they bought. Bear Stearns “systematically failed” to evaluate loans, ignored defects uncovered and “kept investors in the dark” about review procedures and problems with the loans.

The Bear Stearns mortgage unit packaged $212 billion in mortgage bonds from 2003 through 2006, according to the state’s complaint. Losses on $87 billion of those bonds packaged during just two of those years total $22.5 billion so far.

This is what happens when there is no accountability.

That's not exactly accurate. The banks have accountability, it's just that they count different than the rest of the world. JPMorgan's retail division that cut $555 million in the second quarter from an allowance covering future loan losses. That translates into a gain in pretax earnings. In the same period the previous year, the bank added about $1 billion to that sum, an addition treated as an expense. The $1.55 billion swing was more than one-fifth of the company’s pretax income for the three months.

JPMorgan wasn’t alone in profiting from loan-loss accounting. A $1.48 billion decline from a year earlier in Bank of America’s provision amounted to more than 40 percent of the firm’s $3.4 billion second-quarter pretax income.

I keep getting the uneasy feeling that the big banks are just pretending to be solvent, even as the numbers paint a different picture. Maybe that's why all of the Federal Reserve's actions have centered on Wall Street stimulus rather than Main Street stimulus.

Iceland didn't follow the rest of the world by bailing out bankers. Surprisingly, they arrested them instead. Now their economy is recovering faster than the EU and the United States.

Remember when the United States government told the American people that action was required to save the banks? Four years ago today. Action in the form of Billions of dollars of debt. Hard to forget that. Hundreds of billions of dollars in national debt later and we're still digging our way out of the hole.

At the start of the world wide 2008 economic collapse, Iceland was in worse shape than almost any other country in the world. Imagine what America would be like today if we bailed out the victims of poor banking practices, while punishing the bankers who were responsible instead of bailing them out. Is Iceland merely being a rebel desperate for revenge against a powerful industry, or on to something that America should have done as well?

Thursday, August 30, 2012 - While We Wait for Fed, Banks Behave Badly

While We Wait for Fed, Banks Behave Badly

-by Sinclair Noe

DOW – 106 = 13,000
SPX – 11 = 1399
NAS – 32 = 3048
10 YR YLD -.03 = 1.62%
OIL - .67= 95.88
GOLD - .80 = 1656.30
SILV -.29 = 30.54
PLAT – 11.00 = 1512.00

Federal Reserve Chairman Ben Bernanke has returned to Jackson Hole Wyoming for the annual economic symposium.  Following the minutes of the most recent FOMC meeting, in which we learned the Fed felt compelled to take action unless the economy shows dramatic improvement, there has been general acknowledgment the Fed must certainly act sooner rather than later. Sooner being tomorrow or later being at the next FOMC meeting September 13^th.  And although it is unlikely Bernanke will announce a major new program tomorrow, he must at least telegraph.

Any new Fed actions are likely to have only a small effect on job creation. Among possible options, Bernanke might announce he’ll extend the Zero Interest Rate Policy to late 2014 or into 2015. He could move toward QE3, another round of bond purchases, most likely involving Treasury bonds and mortgage bonds. This would flood money into the economy and housing market, pushing record-low interest rates even lower. Both republicans and democrats have weighed in. Democrats say he should not be deterred from doing what’s needed to reduce unemployment; Republicans say new action should be avoided because of the risk of inflation. So we have a question of whether inflation or no job is the main culprit to eroding incomes.  Bernanke says that the big economic decisions are Congress’s to make. And that should frighten everyone.

If Bernanke doesn’t move with authority, you can expect an adverse reaction.

Meanwhile, the head of the European Central bank, Mario Draghi has vowed to do whatever it takes; and the former prime Minister of Greece has a suggestion but I doubt Drgahi will take it.  Former Greece prime minister George Papandreou has said his country might have avoided a bailout if the economy had not been robbed by funds being funneled to tax havens. Papandreou says $21 trillion was hidden in tax havens around the world.

"Whether it is in developed or developing nations, it is our citizens that are being robbed," he said, saying this "plain robbery" denied governments the capacity to invest in areas like welfare and education. I know this, Greece is suffering from this. Had this alone been tackled, Greece would have most likely never have needed a bailout.  Yet Europe, the G8, G20, the banking system despite my pleas as prime minister, despite token reference in our council of G20 decisions, have done nothing to change this."

Meanwhile, another day brings another example of banks behaving badly.  Citigroup has agreed to pay $590 million to shareholders who sued the bank over toxic assets the bank was hiding on its own books.  The story goes back to before the 2008 meltdown and bailout. Citi lied to its own shareholders regarding billions of dollars in toxic mortgage-backed securities on its books. The bank did not write-down the positions even though executives knew the assets were worth less than what was shown on the books.   In a separate suit last year, Citi agreed to pay the SEC $285 million to settle charges of lying to investors about CDOs. In that case, Citi sold the CDO to investors then bet against the $1 billion CDO, with losses to investors topping $160 million.

A judge must still approve the new settlement on toxic assets but it would essentially clear Citi of ongoing litigation associate with the financial meltdown.  Of course, Citi did not admit wrongdoing in the case. And for this reason, I truly hope the judge rejects the settlement. I understand the expediency of a universal settlement with no admission of wrongdoing, but at some point, somebody has to take responsibility.

The Office of Mortgage Settlement Oversight has released their initial assessment of the foreclosure fraud settlement. And what they’re finding is that banks are “paying off” their portion of the settlement by engaging in short sales with their borrowers; which is something they were already doing in greater numbers prior to the settlement. The Mortgage Settlement was the $25 billion, multi-state deal. So far the banks are claiming credit for more than $10.5 billion, but $8.6 billion is short sales which were already happening. Short sales increased by 25% year-over-year in the first quarter of 2012, according to RealtyTrac. That mostly predates the foreclosure fraud settlement. Fannie and Freddie just inaugurated a program facilitating short sales that has nothing to do with the settlement. And there’s the issue that economically a short sale amounts to waiving a deficiency judgment, which are barred in non-recourse states anyway, including… California and Arizona, where we’ve seen high pickup on short sales for a year now.

On principal reduction, which was supposed to be the purpose of the settlement, banks have not even done $750 million; and in the case of Bank of America, the number is a big fat zero.  BofA has not completed any first-mortgage modifications that reduce loan balances for borrowers – and that was supposed to be the big point of the settlement. BofA did complete $4.8 billion in short sales, which they were already doing. So, you break the law, you get caught, you don’t’ have to admit wrongdoing, the court forces you to go home, go to your job, and continue doing exactly what you were doing before.  

Global food prices rose 10% in the month of July, raising fears of soaring prices for the planet's poorest, the World Bank has warned.  The bank said that a US heatwave and drought in parts of Eastern Europe were partly to blame for the rising costs.  The price of key grains such as corn, wheat and soybean saw the most dramatic increases, described by the World Bank president as "historic".  The bank warned countries importing grains will be particularly vulnerable.

From June to July this year, corn and wheat prices each rose by 25% while soybean prices increased by 17%, the World Bank said. Only rice prices decreased - by 4%. In the United States, the most severe, widespread drought in half a century has wreaked havoc on the corn and soybean crops while in Russia, Ukraine and Kazakhstan, wheat crops have been badly damaged.

The World Bank said that the use of corn to produce ethanol biofuel - which represents 40% of US corn production - was also a key factor in the sharp rise in the US maize price.  Overall, the World Bank's Food Price Index - which tracks the price of internationally traded food commodities - was six percent higher than in July of last year, and one percent over its previous peak, in February 2011.