Friday, December 31, 2010

Today's Links

1--Fresh Crises Loom in Europe and the U.S., Simon Johnson, New York Times

Excerpt: Most experienced watchers of the euro zone are expecting another serious crisis in early 2011, tied to the rollover funding needs of its weaker governments. With debts coming due from March through May, the crisis seems much more predictable than what happened to Greece or Ireland in 2010.

And the investment bankers who fell over themselves to lend to these countries on the way up now lead the way in talking up the prospects for a serious crisis....

One or more weaker countries will drop out of the euro zone, probably becoming rather like Montenegro, which uses the euro as its currency but does not have access to the European Central Bank-run credit system. Greece is probably the flashpoint; when it misses a payment on government debt, why should the central bank continue to accept Greek banks’ bonds, backed at that point by a sovereign entity in default?

2--2011 New year's predictions, Robert Reich blog via

Excerpt: In a typical recovery, profits lead to more hiring. That’s because in a typical recovery, American consumers head back to the malls — and their buying justifies more hires. Not this time. All the hype about Christmas sales over the last few weeks masked the fact that American consumers demanded bargain-basement prices. And the price-cutting dramatically reduced sellers’ margins. In short, profits aren’t coming from American consumers — and profits won’t be coming from American consumers in 2011.

Most Americans don’t have the dough. They’re still deep in debt, can’t borrow against their homes, and have to start saving for retirement.

The Dow Jones Industrial Average is rising because of foreign sales. General Motors is now making more cars in China than in the US, and two-thirds of its total sales are coming from abroad. When it went public last month it boasted that soon almost half its cars will be made around the world where labor is less than $15 an hour.

3-- How MERS Toasted the Banks, Randall Wray, Huffington Post

Excerpt: In a series of pieces I have argued that MERS, a creation of the mortgage banking industry, has effectively destroyed the institution of private property in America. Ironically, MERS was created to facilitate quick and easy and cheap securitization of mortgages -- what are called mortgage-backed securities. In fact, what it did was to eliminate any backing of the securities by mortgages. Of the total securitized asset universe, something like $7 trillion are (supposedly) backed by residential mortgages. However, MERS helped to delink the securities from the mortgages. At best, they are unsecured debt -- there is no property backing the securities. What this means is that foreclosure is not permitted. As I have said before, it is likely that most or even all foreclosures occurring in the US are illegal seizures of property -- home thefts. We are talking about 100,000 completed home thefts per month, with another 250,000 new foreclosures started to steal homes every month. Projections are that 13 million homes will have been "foreclosed" (read: stolen) by 2012.

If the notes cannot be found and a Lost Note Affidavit can not reestablish the indebtedness, then foreclosure is not possible and collecting of the indebtedness is also not possible. Homeowners still can be sued for collection of owed moneys upon a "proved up" note or lost note affidavit but a current perfected lien is required to foreclose.

6. However since the mortgage-backed securities are governed by PSAs (pooling and service agreements), the practices above make the securities unsecured debt and there is no solution. The securities are no good....

What does all this mean? In plain simple language, the banks are royally screwed. They cannot foreclose on the properties. Holders of the "mortgage-backed" securities can turn them back to the banks because they are actually unsecured debt....

So, in short, banks have got to take the whole lot of toxic waste securities back. Trillions of dollars worth. The banks are toast. There is no cooking of the books that will turn this blackened toast back to bread.

4--For-Profit Colleges Charging More While Doing Less for Poorest, Bloomberg

Excerpt: As state budget cuts lock students out of community-college classrooms or force them to stand in class, for-profit colleges are attracting hundreds of thousands of poor and minority students, charging up to 10 times as much for the same degree.

The industry, including Washington Post Co.’s Kaplan University, has tripled enrollment to 1.8 million in the past decade by pouring billions of dollars into marketing and recruiting, offering flexible online classes and outfitting more-modern campuses while states slash funding for community colleges. As much as 90 percent of revenue at each for-profit college comes from federal student aid....

Today, one in seven minority students attends a for-profit college, as does one in four poor students who receive federal Pell grants for low-income families, according to the U.S. Department of Education and an industry group. Students in for- profit college programs graduate or stay in school less than those at community colleges, according to a study sponsored by the U.S. Department of Education and released this month.

Students in two-year programs at for-profit colleges are also eight times likelier to be in debt than those at community colleges, according to a report last month from the Education Trust, a nonprofit advocacy organization based in Washington.

“One of the reasons the for-profits have grown so much is that the community colleges are filled to capacity and even turning people away,” said Thomas Bailey, director of the New York-based Community College Research Center. Bailey provided information on community colleges for a White House conference on Oct. 5.

5--Ex-Treasury chief Paulson loses $1 million on DC home, Reuters

Excerpt: Treasury Secretary Henry Paulson sold his three-bedroom home in a tony Washington neighborhood last week for close to a third less than his initial asking price and more than $1 million below what he paid for it more than four years ago.

The villa-style home near the official vice president's mansion and the National Cathedral sold for $3.25 million on Dec. 21. Paulson put it on the market for $4.6 million in April, later lowering the asking price to $4.15 million, according to real estate industry records. He paid $4.3 million in August 2006, according to government records.

"A jewel-like facade, reminiscent of a Provencal villa, gives way to a remarkable interior with living space on three levels and expansive common areas," gushed the listing......The value of Paulson's house fell 24.4 percent during his ownership.

6--Why the rich are getting richer, Robert C. Lieberman, Foreign Affairs

Excerpt: The U.S. economy appears to be coming apart at the seams. Unemployment remains at nearly ten percent, the highest level in almost 30 years; foreclosures have forced millions of Americans out of their homes; and real incomes have fallen faster and further than at any time since the Great Depression. Many of those laid off fear that the jobs they have lost -- the secure, often unionized, industrial jobs that provided wealth, security, and opportunity -- will never return. They are probably right.

And yet a curious thing has happened in the midst of all this misery. The wealthiest Americans, among them presumably the very titans of global finance whose misadventures brought about the financial meltdown, got richer. And not just a little bit richer; a lot richer. In 2009, the average income of the top five percent of earners went up, while on average everyone else's income went down. This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom. The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today.

This is what the political scientists Jacob Hacker and Paul Pierson call the "winner-take-all economy." It is not a picture of a healthy society. Such a level of economic inequality, not seen in the United States since the eve of the Great Depression, bespeaks a political economy in which the financial rewards are increasingly concentrated among a tiny elite and whose risks are borne by an increasingly exposed and unprotected middle class. Income inequality in the United States is higher than in any other advanced industrial democracy and by conventional measures comparable to that in countries such as Ghana, Nicaragua, and Turkmenistan. It breeds political polarization, mistrust, and resentment between the haves and the have-nots and tends to distort the workings of a democratic political system in which money increasingly confers political voice and power.

7-- The New Voodoo, Paul Krugman, New York Times, via Economist's View

Excerpt: Hypocrisy never goes out of style, but, even so, 2010 was something special. For it was the year of budget doubletalk — the year of ... railing against deficits while doing everything they could to make those deficits bigger. ...

In the first half of 2010, impassioned speeches denouncing federal red ink were the G.O.P. norm. And concerns about the deficit were the stated reason for Republican opposition to extension of unemployment benefits, or for that matter any proposal to help Americans cope with economic hardship.

But the tone changed during the summer, as B-day — the day when the Bush tax breaks for the wealthy were scheduled to expire — began to approach. My nomination for headline of the year comes from the newspaper Roll Call, on July 18: “McConnell Blasts Deficit Spending, Urges Extension of Tax Cuts.”

8--Will housing return to the mean price?, Pragmatic Capitalism

Excerpt: “This huge and growing surplus inventory of houses will probably depress prices considerably from here, perhaps another 20% over the next several years. That would bring the total decline from the first quarter 2006 peak to 42%.This may sound like a lot, but it would return single-family house prices, corrected for general inflation and also for the tendency of houses to increase in size over time, back to the flat trend that has held since 1890...

Furthermore, our forecast of another 20% fall in house prices may be conservative. Prices may well end up back on their long- term trendline (Chart 26), but fall below in the meanwhile. Just as they way overshot the trend on the way up, they may do so on the way down, as is often the case in cycles.....

As gauged by an aggregate of housing indexes dating to 1890, real home prices rose 85 percent to their highest level in August 2006. They have since declined 33 percent, falling short of most predictions for a cumulative correction of at least 40 percent.[1] In fact, home prices still must fall 23 percent if they are to revert to their long-term mean..... (from Business Insider)

9--U.K. Think Tank Sees 20% Chance Of Euro’s Survival, Wall Street Journal

Excerpt: Europe’s common currency, battered for more than a year by a sovereign debt crisis, is unlikely to survive the next decade in its current form, the Center for Economics and Business Research warned Friday.

In a list of top 10 predictions for 2011, the CEBR, a U.K.-based think-tank, gave the euro a slim one-in-five chance of being preserved in its present incarnation as the legal tender for the 16 nation currency bloc. That number will increase to 17 on Monday, when Estonia accedes to the euro zone.

The organization sees brewing debt problems in Spain and Italy as the catalyst for a new downturn. While economists have long warned that Spain and Portugal are two of the most vulnerable economies in the euro zone, Italy’s heavy debt load — approximately 115% of GDP — and sluggish growth have made some analysts wary about the country’s long-term prospects.

Douglas McWilliams, the CEBR’s chief executive said in a statement that the specter of a full-fledged break-up can’t be completely ruled out. “I suspect that what will break up the euro will be the failure of most of the countries to take the tough medicine necessary to make their economies competitive over the longer term,” he said.

Thursday, December 30, 2010

Today's links

1--Home price plunge is widespread, CNN Money

Excerpt: Home prices took a shockingly steep plunge on a monthly basis, an indication that the housing market could be on the verge of -- if it's not already in -- a double-dip slump.

Prices in 20 key cities fell 1.3% in October from a month earlier, an annualized decline of 15%, according to the S&P/Case-Shiller index released Tuesday. Prices were down 0.8% from 12 months earlier.

Month-over-month prices dropped in all 20 metro areas covered by the index. Six markets reached their lowest levels since the housing bust first began in 2006 and 2007. They were Atlanta, Charlotte, N.C., Miami, Portland, Ore., Seattle and Tampa, Fla.

"The double-dip is almost here," said David Blitzer, chairman of the Index Committee at Standard & Poor's. "There is no good news in October's report. Home prices across the country continue to fall."

The report was far more dire than anticipated by industry experts, who had forecast an almost flat market in October. It followed weak September numbers. The inventory of homes on the market is up about 50% compared with last year at this time, and there are millions of potential homes for sale waiting on the sideline for markets to improve.

Much of that "shadow inventory" is held as repossessed properties by banks, who will eventually have to release them back on the market.

2--Roubini: 'Housing Prices Can Only Move Down', CNBC

Excerpt: According to economist Nouriel Roubini, the housing market is in a double dip.

"It's pretty clear the housing market has already double dipped," says Roubini. "And the rate of decline is stronger than in previous months," he said of the new housing data....

"If you look at the data, Case Shiller has been falling every month since the tax credit expired in May. Everyone who wanted to buy a home did so by April," Roubini said.

"That tax credit stole demand from the future and its expiration led to another 30% fall in home sales, pushing Case & Shiller lower for the last few months," Roubini wrote in a text message earlier this morning.

The second factor putting downward pressure on home prices is the ongoing chaos with mortgage documentation, and the consequent suspension by banks of mortgage foreclosure proceedings—which has actually worsened the underlying problems in the housing market.

"There has been an effective moratorium on foreclosure," said Roubini.

3--For-Profit Colleges and the road to debt peonage, Bloomberg

Excerpt: Students seeking to move up in life by getting a degree from a for-profit college are being trapped in a growing underclass of education debtors. Under U.S. law, their loan obligations can rarely be discharged in bankruptcy, making them more onerous than credit-card debt or subprime mortgages taken out before the housing bubble burst. Along with blocking students from further education and access to housing, defaults can subject them to government confiscation of tax refunds and Social Security payments, as well as paychecks.

“I’m cornered, and I don’t know what to do,” DiGiacomo, a 30-year-old former U.S. Army supply and logistics specialist, said in an interview. “I would love to forget I ever went to those two schools and start from scratch.”

Taxpayer Money

Students at for-profit colleges, which rely on federal financial-aid programs for as much as 90 percent of revenue, carry the biggest loans in U.S. higher education. Bachelor’s degree recipients at for-profits have median debt of $31,190 compared with $17,040 at private, nonprofit institutions and $7,960 at public colleges, according to Education Trust, a Washington-based nonprofit research and student-advocacy organization....

“These students have debt loads that leave them out of the running for a productive life in America,” Jose Cruz, a vice president of Education Trust, said in a telephone interview. “It’s a dead end.”...

With the U.S. unemployment rate at 9.8 percent, many college graduates, from traditional universities as well as for- profit colleges, aren’t finding jobs and are piling up debt. Thirty-four million borrowers owe $713 billion, not including interest, in federal student loans, 11 times the amount of two decades ago, according to the Education Department. A total of $50 billion in these loans was in default in the year ended Sept. 30, twice the sum five years earlier.

President Barack Obama’s administration wants to curb rising default rates and the threat of student destitution by cutting off federal funds to for-profit college programs whose students have the worst loan-repayment rates and lowest incomes relative to debt. Representative John Kline, the Minnesota Republican who will lead the House education committee beginning in January, pledged this month to block the plan, known as “gainful employment,” saying the measures don’t reflect an accurate picture of the quality of for-profit education....

For-profit colleges have higher student-loan default rates because they serve lower-income students, minorities, immigrants and working adults, Harris Miller, president of the Association of Private Sector Colleges & Universities, a Washington-based trade group, said in a telephone interview....

Once in default on student loans, people often can’t pass the credit screenings needed to rent apartments, said Deanne Loonin, a lawyer with the National Consumer Law Center, a nonprofit advocacy organization in Boston....

To collect on federal loans, the Education Department can seize borrowers’ paychecks, tax refunds and Social Security payments without a court order -- as much as 15 percent of a borrower’s disposable income.

4--Plunge of For-Profit College Stock Makes Sperling Rail at Obama, Bloomberg

Excerpt: As a humanities professor at San Jose State University from 1961 to 1973, John Sperling pioneered remedial reading classes for Mexican Americans and courses in social problems for police officers.

Defying the education establishment, he expanded such programs into the for-profit University of Phoenix, now largely online and the biggest U.S. university, with almost 500,000 students. Sperling and his proteges transformed a backwater of mom-and-pop trade schools into a $30 billion industry attracting Washington Post Co. and Goldman Sachs Group Inc. as investors. For-profit colleges enroll 12 percent of U.S. undergraduates and consume 24 percent of U.S. Pell grants for low-income students....

The colleges use deceptive practices to lure homeless people, veterans and individuals who aren’t prepared for college into unsuitable courses in order to obtain tuition funded by grants and also by federal loans that students have trouble repaying, according to advocates for the homeless, veterans’ groups and current and former students. Almost 90 percent of Phoenix’s students use federal grants or loans to pay tuition....

In September, Sperling sent every member of Congress a 74- page PowerPoint presentation making the case that, while four- year public and private nonprofit colleges cost taxpayers $9,709 and $6,379 a student respectively, for-profit colleges pay taxes and save the government money.

He personally made almost $100,000 in campaign donations for the 2010 elections, while Apollo Group’s political-action committee gave $92,100 to federal candidates, including $15,000 to George Miller, the outgoing chair of the House education committee, and $14,000 to John Boehner, the incoming House speaker. Starting with the 2002 campaign, Apollo Group’s PAC has given Boehner $36,600, more than any other member of Congress....

“His pitch to me was that, by overregulating for-profit colleges, we are constricting the access of people of color to higher education,” Grijalva, who has received campaign donations from Sperling, said in a telephone interview.

“My response is, to have someone saddled with a debt they can’t pay back, and they don’t finish school, and put their financial lives in jeopardy, that’s a double-edged sword. The community colleges are there, that’s accessible and inexpensive.”...

While he coauthored a book calling for an end to corporate welfare, his for-profit university depends on federal aid for 88 percent of its revenue....

Sperling’s industry has grown through misleading sales pitches from recruiters who are paid on the basis of how many people they sign up, according to Senate education committee reports and testimony and an Aug. 4 Government Accountability Office report.

For-profit colleges in 2008 graduated just 22 percent of their first-time, fulltime students seeking bachelor’s degrees, compared with 55 percent at public institutions and 65 percent at nonprofit private universities, according to the Washington- based National Center for Education Statistics. Only 36 percent of their students repay the loans, compared with at least 54 percent at traditional colleges, according to an analysis of government data by the Institute for College Access & Success, a nonprofit group in Oakland, California...

Alarmed by such disparities, the Education Department wants to cut off aid to for-profit colleges if their graduates don’t earn enough to pay off student loans.

Sperling and his son, Apollo Vice Chairman Peter Sperling, have collected almost $840 million in stock sales since 2003. The company disclosed in October that the Securities and Exchange Commission is looking at the company’s insider-trading policies....

Because most of its students were low-income and qualified for federal grants and loans, Axia fostered Phoenix’s dependence on its biggest source of funds, the Education Department. Phoenix derived 88 percent of its revenue from federal student aid in the year ended Aug. 31, up from 48 percent in fiscal 2001.

Reliance on federal funds is “a bad business model,” Iowa Senator Tom Harkin, the chairman of the Senate education committee, said in a telephone interview. “You get the maximum return by recruiting the lowest-income students, and getting rid of them as soon as possible.”

Fanning Out

“I’ve been accused of being against private enterprise,” Harkin said. “This is not private enterprise. Ninety percent of their money is coming from the taxpayer.”...

Founded in 2004 by a former Phoenix vice president named Andrew S. Clark, Bridgepoint Education Inc. had 77,179 students on Sept. 30, up from 1,063 at the end of 2005. Almost all took classes exclusively online. Bridgepoint, based in San Diego, had $521 million in revenue in the first nine months of this year, up 62 percent from the comparable period a year earlier, according to the company’s filings. Its flagship Ashford University derived 86 percent of revenue from federal aid in 2009...

Goldman Stake

Todd Nelson, the former CEO for Apollo, now holds the same title at Pittsburgh-based Education Management Corp., the No. 2 higher-education company by enrollment, with 158,300 students in October. New York-based Goldman Sachs, Wall Street’s most profitable bank, owns a 39 percent stake in the company.

The sector also attracted Washington Post Co. Once known primarily for preparing high-school students for the SAT college-entrance examination, the company’s Kaplan unit derived 63 percent of its revenue in the quarter ended Oct. 3 from its higher-education division. Kaplan has 112,000 students, of whom about 70,000 attend online.

Jack Welch, former chairman and CEO of Fairfield, Connecticut-based General Electric Co., is an investor in Chancellor University in Cleveland, which named its online master’s degree program in business administration after him.

Sperling and his industry got a boost from the election in 2000 of George W. Bush, who in 2002 named the former Apollo lobbyist Stroup to oversee higher education....

Goldman Stake

Todd Nelson, the former CEO for Apollo, now holds the same title at Pittsburgh-based Education Management Corp., the No. 2 higher-education company by enrollment, with 158,300 students in October. New York-based Goldman Sachs, Wall Street’s most profitable bank, owns a 39 percent stake in the company.

The sector also attracted Washington Post Co. Once known primarily for preparing high-school students for the SAT college-entrance examination, the company’s Kaplan unit derived 63 percent of its revenue in the quarter ended Oct. 3 from its higher-education division. Kaplan has 112,000 students, of whom about 70,000 attend online.

Jack Welch, former chairman and CEO of Fairfield, Connecticut-based General Electric Co., is an investor in Chancellor University in Cleveland, which named its online master’s degree program in business administration after him.

Sperling and his industry got a boost from the election in 2000 of George W. Bush, who in 2002 named the former Apollo lobbyist Stroup to oversee higher education.

5--After 33 Consecutive Weeks Of Outflows, ICI Reports First Inflow Into US Equity Funds As Bond Outflows Persist, zero hedge

Excerpt: The inflection point has arrived. After pulling money for 33 consecutive weeks, and withdrawing over $98 billion in capital from domestic equity mutual funds, in the week ended December 21, the Fed has finally succeeded in getting the rotation out of bonds and into stocks as per ICI. After a total of $4.4 billion was redeemed from bond funds in the same week, mostly from municipals but also $837 million from taxable bonds (still a major decline from the almost $9 billion in bond outflows the prior week), domestic equity funds saw a token inflow of $335 million, compared to last week's $2.4 billion outflow. Just enough to halt the seemingly endless outflow. Still, since the bulk of the move seems predicated upon a move out of muni bonds, with $9.5 billion in outflows in December alone, should the muni crisis accelerate, and validate the investor concern, stocks as an asset class will certainly be impaired once the muni insolvency thesis start being played out... unless of course it is met with further action from Ben Bernanke in the form of QE3, as most Zero Hedge readers believe will inevitably happen. At that point, and as always when the Fed intervenes, all bets are off, suffice to say that gold will be well over $2,000 by then.

6--Rising foreclosures presage troubles ahead, RTT News

Excerpt: A day after a closely-watched report showed home prices declined in October, regulators in Washington said that foreclosures rose sharply in the third quarter.

New foreclosure filings rose to 382,000 in the third quarter, up 31.2 percent over the previous quarter, according to the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

The economy plodded through much of 2010 after a solid first quarter, beset by lingering weakness the housing and jobs market.

What seems certain is that US unemployment will remain unacceptably high in 2011, compelling the Federal Reserve to support the economy with record low interest rates and its massive asset purchase program.

Barring a brief rally sparked by a popular home buyer tax credit that expired seven months ago, the housing market has been in the dumps for the better part of two years, and may get worse before things turn around in a meaningful way.

7--Home foreclosures continue to mount, presenting challenge to Obama and GOP, The Hill

Excerpt: Home foreclosures increased 31.2 percent in the third quarter of 2010, illustrating the severe housing problem that continues to plague the economy.

The number of new foreclosures increased to more than 382,000 between July and September, a figure 3.7 percent higher than the previous year.

Another 1.2 million homes are in the process of foreclosing, according to a report released Wednesday by government regulators.

The jump in foreclosures shows housing will remain a serious issue in 2010 for President Obama and a new divided Congress with Republicans controlling the House....

The government instituted the Home Affordable Modification Program to address the housing crisis by changing mortgage loans for home owners. It was hoped that the program would help millions of people stay in their homes by modifying loans, but so far the program has only permanently modified a little more than 500,000 mortgages.

8--2010 Racks Up Most Bank Failures Since 1992, Wall Street Journal

Excerpt: More banks failed in 2010 than any year since the savings-and-loan crisis ended in 1992, but regulators said Wednesday they believe failures have passed their peak.

So far this year, the 157 banks that failed had total assets of $92.1 billion compared to 140 bank failures with total assets of $169.7 billion in 2009....

As of Sept. 30, when the FDIC released its last quarterly report, there were 860 banks on the agency’s “problem list.”

Since 2008, 322 banks have failed with combined assets of $633.7 billion and total cost to the FDIC of $79.5 billion.

9--Obama's stimulus plan: Where did the money go?, Ezra Klein, Washington Post

Excerpt: So far, the overwhelming share of that stimulus has been devoted to three items: Tax cuts for households; direct benefits to people adversely affected by the severe recession, mostly the unemployed or poor; and fiscal relief to state and local governments. Vermont did not need any "Czar" to receive or administer funds under these programs. The money for them quickly left the U.S. Treasury without any effort on the part of the Czar who penned this highly misleading op-ed piece. People in Vermont *directly* received benefits from the stimulus as: (1) lower federal tax withholding from their paychecks; (2) extended unemployment benefits; (3) premium subsidies so they could maintain their health insurance after they were laid off from a job in which they received health protection; (4) miscellaneous benefits (e.g., for college costs) under one provision or another; and (5) aid from the Treasury that permitted Vermont and its localities to finance their Medicaid and K-12 education programs without hiking taxes or lowering other public spending. The kinds of infrastructure spending for which the WSJ's "Czar" had some responsibility constituted a small percentage of the stimulus the Congress authorized for 2009 and 2010.

In FY 2009 and 2010, the EXPECTED spending on infrastructure and other items for which the Vermont “Czar” may have had partial responsibility accounted for just 11% of anticipated spending under the stimulus legislation. The other 89% had nothing to do with the programs criticized by Vermont’s supposed Czar.

Wednesday, December 29, 2010

Today's links

1--NYSE November Margin Debt Rises To Fresh Post-Lehman High, zero hedge

Excerpt: After we recently disclosed that surging NYSE margin debt is the latest indication of record euphoria (which presumably was sufficiently interesting that it made Alan Abelson's latest column), after it hit a post-Lehman high of $269 billion, we are happy to announce that as we expected, November margin credit grew by another $5 billion to $274 billion, which implies that investors continue to purchase stocks increasingly on margin, i.e., on credit, which is fantastic when stocks levitate, but leads to a circular sell off when sell offs generate collateral calls, forcing more sell offs, etc. And looking at net cash, it was flat M/M at ($34) billion meaning that there was no incremental real cash going into cash accounts, and the entire November outperformance was achieved as net cash remained flat, and every incremental point in gains was financed by net crediting. As before, we expect no change to this trend when December data is announced.

2--Floyd Norris On The End Of The American Love Affair With Stocks, zero hedge

Excerpt: Three weeks ago when we noted the 30th consecutive outflow from US-based equity mutual funds (now at 33 straight weeks), we said: "America's love affair with stocks is over, has bypassed the marriage stage and gone straight to the bitter divorce." Today, we are happy to see that the the NYT's Floyd Norris for repackaging our metaphor in a slightly more palatable fashion: "The love affair of American investors with the stock market appears to have ended." His piece in today's NYT "For U.S. investors, the glow is off domestic stocks" will not be news to anyone who follows our weekly report on ICI data: "The year now ending will be the fourth consecutive year in which mutual funds that invest primarily in American stocks experienced net outflows of funds, meaning that investors as a group withdrew more money than they put in." And yet stocks continue to ramp higher, in big part due to the rapid increase in NYSE margin interest which means the bulk of investors are buying stock increasingly on leverage, but still the question to just who continues to do the actual holding remains unanswered. Indeed, only a few people, Charles Biderman among them, have answered with the response that everyone knows is true, yet most are afraid to utter....

Norris: The first of those years came after the 1987 crash, which scared many investors as the market fell more than 20 percent in one day. But it recovered all of that loss and more in 1988, and many investors learned from that experience that market declines presented buying opportunities, not reasons to sell. The assumption that stocks were sure to rise, at least in the long run, became widely accepted.

In some ways, the current mood is reminiscent of the one that prevailed then. In 1979, Business Week published a cover article on the “Death of Equities,” which it attributed in large part to rising inflation. By 1982, inflation had begun to fall, but the country was in a deep recession. That is when the great bull market of the 1980s began. Few investors seem confident that such a renewal of optimism is likely this time.

3--After Nearly Two Years Of Searching, TrimTabs Still Can't Figure Out Who Is Buying Stocks, zero hedge

Excerpt: A year after Charles Biderman's provocative post first appeared on Zero Hedge, in which he asked just who is doing all the buying of stocks as the money was obviously not coming from retail investors (and came up with one very notable suggestion), today Maria Bartiromo invited the TrimTabs head once again (conveniently in CNBC's lowest rated show, during Christmas Eve eve, at a time when perhaps 5 people would be watching) in an interview which disclosed that after more than a year of searching, Biderman still has no idea who actually buying. In response to Bartiromo's question if the retail investor, who left after the flash crash (thank you SEC), Biderman responds what every Zero Hedger has known for 33 weeks: "Retail investors are not coming back to the US. Those investors that are investing are buying global equities and are buying commodities. We are seeing lots money going into commodity ETF funds: gold, silver..." and the even more unpleasant summation: "individuals have been selling, companies are net selling, insider selling and new offerings are swamping any buyback and any cash M&A activity since QE 2 was announced. Pension funds and hedge funds don't really have that much cash to invest. So what nobody's asking is what happens when QE 2 stops: if the only buyer is the Fed, and the Fed stops buying, I don't know what is going to happen...When I was on your show a year ago I was saying the same thing: we can't figure out who is doing the buying it has to be the government, and people said I was nuts. Now the government is admitting it is rigging the market." Cue Bartiromo jaw dropping.

as for the simple math of where the money is actually going:

"Money flows come out of income, take home pay of everybody plus money that came from real estate is down about $1 trillion a year. It peaked in the 3rd quarter of 2008, at $7 trillion, that's take home pay for everybody who pays taxes plus the money that came from real estate. It has now bottomed at $5.9 trillion. We are still down $1.1 trillion in money that people have to spend each year, that 16%. And some of the money that is leaving equity markets we think is going to pay bills."

Due to time constraints, what I didn’t get to address on CNBC today is what will happen after the Fed is either successful or not successful with QE2. The Fed is rigging the market by digitally creating money that is used to buy financial institutions assets — currently Treasuries, last year all kinds of toxic waste. What will happen when the Fed stops buying assets?

4--Japan November Consumer Prices Fall for 21st Month as Deflation Persists, Bloomberg

Excerpt: Japan’s consumer prices fell for a 21st month in November, a sign sustained deflation may prompt the central bank to revise its price projections.

Consumer prices excluding fresh food declined 0.5 percent from a year earlier, the statistics bureau said today in Tokyo. That compared with a median 0.6 percent drop predicted by 28 economists surveyed by Bloomberg News.

Entrenched deflation is weighing on an economy at risk of contracting this quarter as the effects of Prime Minister Naoto Kan’s stimulus spending fades. Miyako Suda, a Bank of Japan policy maker, said this month the persistent price falls will continue in the year starting April, an outlook that conflicts with the bank’s forecast of moderate inflation in the period.

5--U.S. Economy: Confidence Falls on Concern Over Jobs, Bloomberg

Excerpt: Confidence among U.S. consumers unexpectedly fell in December, restrained by concern that jobs will remain scarce in 2011.

The Conference Board’s confidence index unexpectedly fell to 52.5, lower than the most pessimistic forecast of economists surveyed by Bloomberg News, figures from the New York-based research group showed today. Another report showed home values dropped more than economists projected.

The loss of confidence is at odds with a report from the University of Michigan that showed sentiment improved to a six- month high in December, and with data showing holiday spending posted the biggest gain in five years. Federal Reserve policy makers this month said “depressed” housing and high unemployment remained constraints on consumer spending, supporting their plans to expand record monetary stimulus.

“We should watch what consumers do and not what they say,” said Omair Sharif, an economist at RBS Securities Inc. in Stamford, Connecticut. “If you looked at the confidence data you wouldn’t have looked for the pace of spending to accelerate as much as it has. Consumers are still very cautious and very nervous about where the labor market is headed.”

6--One in Four Borrowers Is Underwater, Wall Street Journal

Excerpt: The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American....

But negative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job." Borrowers who owe more than 120% of their home's value, he said, were more likely to default....

More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value....

About 7.5 million households were 30 days or more behind on their mortgage payments or in foreclosure at the end of September, according to the Mortgage Bankers Association. Many of those homes will be lost to foreclosure, adding to the supply of homes for sale.

7--1 out of 3 Americans has zero dollars in a retirement account,

Excerpt: Retirement account fantasy and middle class erosion – 1 out of 3 Americans has zero dollars in a retirement account. From 1950 to 1989 top 1 percent earned roughly 7 to 8 percent of nationwide income. Today it is inching closer to 20 percent resembling pre-Great Depression levels....

43 million Americans are depending on government food assistance to get by. But many more millions are merely living paycheck to paycheck hidden in the cellar of the headlines. 1 out of 3 Americans has zero in any retirement account (not one slowly eroding dollar). Half of Americans have $2,000 or less which puts them one month away from needing government assistance....

There has been virtually no real income growth for most Americans. The real significant wage growth over the last 50 years has occurred at the very top 10 percent of income earners in the country with this inequality accelerating in the last bubble decade.

8--Opposition to the Euro Grows in Germany, Der Spiegel

Excerpt: Surveys show that many Germans are worried about the future of the euro, but the country's political parties are not taking their fears seriously. The number of grassroots initiatives against the common currency is increasing, and political observers say a Tea Party-style anti-euro movement could do well....

Unnerved by shaky, debt-ridden countries and bailout packages worth billions, the majority of Germans want the mark back. In a survey conducted in early December by the polling firm Infratest dimap, 57 percent of respondents agreed with the statement that Germany would have been better off keeping the mark than introducing the euro. Germans, it seems, are gripped once again by their historic fear of inflation: According to the Forschungsgruppe Wahlen polling institute, 82 percent of the population is worried about the stability of their currency....

The euro, as the presenter and audience quickly agreed, is bad money. It should be abolished. Since the introduction of the European common currency, Schäffler has counted over 70 violations of the Stability Pact, which limits the annual budget deficits of euro-zone countries to 3 percent of GDP. He has also vehemently criticized the European Central Bank, which has been purchasing government bonds from cash-strapped countries, even though EU rules forbid it from buying debt directly from governments. "We buy everything except animal feed," said the FDP politician to general applause.

9--Case-Shiller: Home Prices Weaken Further in October, Calculated Risk

Excerpt: From S&P: U.S. Home Prices Weaken Further as Six Cities Make New Lows

Data through October 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show a deceleration in the annual growth rates in 18 of the 20 MSAs and the 10- and 20-City Composites in October compared to what was reported for September 2010. The 10-City Composite was up only 0.2% and the 20-City Composite fell 0.8% from their levels in October 2009. Home prices decreased in all 20 MSAs and both Composites in October from their September levels. In October, only the 10-City Composite and four MSAs – Los Angeles, San Diego, San Francisco and Washington DC – showed year-over-year gains. While the composite housing prices are still above their spring 2009 lows, six markets – Atlanta, Charlotte, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices started to fall in 2006 and 2007, meaning that average home prices in those markets have fallen beyond the recent lows seen in most other markets in the spring of 2009....

The Composite 10 index is off 30.7% from the peak, and down 0.9% in October(SA)....Prices are now falling - and falling just about everywhere. As S&P noted "six markets – Atlanta, Charlotte, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices started to fall in 2006 and 2007". More cities will join them soon.

Monday, December 27, 2010

Today's links

1--The Finite World, Paul Krugman, New York Times

Excerpt: ... the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.

And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. ... Also, over the past year, extreme weather ... played an important role in driving up food prices. And, yes, there’s every reason to believe that climate change is making such weather episodes more common.

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

2--Economic Letter—Insights from the Federal Reserve Bank of Dallas, FRB of Dallas

Excerpt: In the mid-1990s, the public policy goal of increasing the U.S. homeownership rate collided with a huge leap in financial innovation. Lenders shifted from originating and holding mortgages to originating and packaging them for sale to investors. These new financial products enabled millions of Americans who hadn’t previously qualified to buy a home to become owners. Housing construction boomed, reaching a postwar high—9.1 million homes were built between 2002 and 2006, a period when 5.6 million U.S. households were formed.

The resulting oversupply of homes presents policymakers with a formidable challenge as they struggle to craft a sustainable economic recovery. Usually a driver of economic recoveries, the housing market is foundering as an engine of growth....

One factor inhibiting the new-home market is a growing supply of existing units. The 3.9 million homes listed in October represent a 10.5-month supply. One in five mortgage holders owes more than the home is worth, an impediment that could hinder refinancings in the next year, when a fresh wave of adjustable-rate mortgages is due to reset. The number of listed homes, in other words, is at risk of growing further. This so-called shadow inventory incorporates mortgages at high risk of default; adding these to the total implies at least a two-year supply....

A study found that in a best-case outcome, 20 to 25 percent of modifications will become permanent....Without intervention, modest home price declines could be allowed to resume until inventories clear. An analysis found that home prices increased by about 5 percentage points as a result of the combined efforts to arrest price deterioration.[7] Absent incentive programs and as modifications reach a saturation point, these price increases will likely be reversed in the coming years. Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices, which cannot escape the pressure exerted by oversupply...

About 3.6 million housing units, representing 2.7 percent of the total housing stock, are vacant and being held off the market. These are not occasional-use homes visited by people whose usual residence is elsewhere but units that are vacant year-round. Presumably, many are among the 6 million distressed properties that are listed as at least 60 days delinquent, in foreclosure or foreclosed in banks’ inventories....

With nearly half of total bank assets backed by real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines.[8] This unease highlights the housing market’s fragility and suggests there may be no pain-free path to the eventual righting of the market. No perfect solution to the housing crisis exists. The latest price declines will undoubtedly cause more economic dislocation. As the crisis enters its fifth year, uncertainty is as prevalent as ever and continues to hinder a more robust economic recovery. Given that time has not proven beneficial in rendering pricing clarity, allowing the market to clear may be the path of least distress.

3--Question #7 for 2011: State and Local Governments, Calculated Risk

Excerpt: 7) State and Local Governments: How much of a drag will state and local budget problems have on economic growth and employment? Will there be any significant muni defaults?....

The good news is it appears state and local government revenue has stabilized. The bad news is the budget gaps will still be huge in 2011. The National Conference of State Legislatures (NCSL) released a report earlier this month, "State Budget Update: November 2010," forecasting
an increasing majority of state legislative fiscal directors are reporting that the revenue outlook for the remaining seven months of FY 2011 looks promising. At the same time, however, most states also are forecasting significant budget gaps in FY 2012. ... Funds from the American Recovery and Reinvestment Act (ARRA) have helped support state budgets since FY 2009. States will face a $37.9 billion loss in federal funds in FY 2012 compared to FY 2011, according to the Federal Funds Information for States. This is expected to make big holes in state budgets, what many state officials call the "ARRA cliff effect."

Including the loss of the ARRA funds, the state budget gaps are expected to total around $110 billion in 2011, down from $174 billion in 2010. This suggests further budget cuts for states.

4--Lessons from the Muni Bond Market in 2010, The Big Picture

Excerpt: When Meredith Whitney talks about Munis, I turn down the sound.

Both in September and recently on 60 Minutes, Meredith Whitney – without giving any supporting numbers – predicted widespread municipal defaults. She forecasted $50-to-$100 billion in 2011.” We disagree and would like to debate her.

Many municipalities, local and state, just printed their third quarter in a row of rising tax receipts. In the past eight quarters, state and local governments swung a collective $115 billion in budget balance, from $65 billion deficit to $50 billion surplus (source Strategas). “State spending fell 3.8 percent in the 2009 fiscal year and 7.3 percent more in the 2010 fiscal year” said the lead editorial in the Sunday New York Times (December 26). They are making tough decisions on budgets and expenses. Our take is that not all situations can be painted with the same broad brush. The Harrisburg, PA incinerator has NOTHING to do with the Kansas Turnpike Authority. Ms. Whitney is not the only person who has been fanning flames without the facts. CNBC and the Wall Street Journal have also added to the hype. Security for most general-obligation and essential-service revenue bonds is very strong. There are difficult choices for state and local governments – and most are making them by adding forms of austerity to their budget lines....

Build America Bonds (BABs) were a good thing.

BABs will end 2010 with approximately $186 billion in issuance. The program, which began in April of 2009, is that rare program crafted in Washington, DC that actually WORKED the way it was intended to. It provided lower financing (through a 35% Federal subsidy of the interest paid) to municipal bonds issued for SHOVEL-READY projects. While it currently has not been renewed for 2011, there is talk that a bill will be introduced in the new Congress to extend BABs, albeit at a lower subsidy rate. The existence of BABs subtracted from new tax-free supply. That put downward pressure on tax-free bond rates until this November. It also opened up the municipal marketplace to a newer and broader scope of investors: pension funds, foundations, IRAs, Keogh plans, and foreign buyers. Expanding the base of buyers of municipal debt was one of the BAB goals and it was VERY successful.

5--Economists: Expect No Home-Price Growth in 2011, Wall Street Journal

Excerpt: Home prices won’t show any year-over-year appreciation in 2011, according to the latest average of 110 forecasts from economists and housing analysts surveyed by MacroMarkets LLC....

Some 96 analysts surveyed made their forecasts public. Of those, 30 expect prices to fall next year, and another 30 are calling for annual home price appreciation of no more than 1%. The most bearish forecaster, A. Gary Shilling, president of A. Gary Shilling & Co., calls for prices to fall by 11% in 2011.

6--Growth to improve. Housing? Jobs? Not so much, CNN Money

Excerpt: Economists are getting more bullish on U.S. economic growth. But the benefits of the stronger economy are going to take a while to reach job seekers and homeowners.'s survey of 23 leading economists forecasts a 3.1% annual growth rate for the final three months of the year.

That estimate is up from the 2.5% growth rate economists were predicting just three months ago. It's also an improvement over the third quarter, when the economy grew by 2.6%, according to the government's final reading released Wednesday.

And economists now expect 2011 growth to be stronger as well -- 3.3%, up from their earlier estimate of 2.8%. And they expect to continue that trajectory into 2012, predicting growth of 3.4%.

7--Home loan demand drops, lowest in nearly 1 year, Yahoo News

Excerpt: Mortgage applications tumbled to their lowest level in nearly a year as a six-week-long rise in interest rates took a significant toll on demand, an industry group said on Wednesday.

The Mortgage Bankers Association on Wednesday said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended December 17 decreased 18.6 percent, reaching its lowest level since the week ended January 1.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 9.8 percent.

The drop in demand last week was largely a reflection of the lack of interest by homeowners to refinance their existing home loans.....

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.85 percent, up 0.01 percentage point from the previous week. Interest rates, however, were below their year-ago level of 4.92 percent.

8--Rosenberg: "Era Of Green Shoots Over", zero hedge

Excerpt: It was fun while it lasted but if the latest set of data couldn't kybosh the 'green shoot' theory, then FedEx sure did when it posted earnings results that fell well short of target and the CEO announcing that the economic backdrop was "extremely difficult". On top of that, UAL stated that its 2Q traffic is expected to drop as much as 10.5% YoY on a 9.0% decline in available seats. Not only have the transports rolled over but so have the banks — the group that led the rally since early March — with a huge 3.3% loss yesterday (and now the group is down 20% for the year). Due to mounting concerns over commercial real estate exposure, S&P cut the ratings and/or outlooks on 22 banks yesterday (the regional banks of course — the ones that the Fed, Treasury and White House don't believe are too big to fail......

Screening for the CPI

The consumer price index rose by a much lower than expected 0.1% in May and this, like the PPI, took the YoY trend to a five-decade low, of -1.0%. We are going to see some larger monthly prints due to higher gasoline prices but because of the huge base effects of a year ago, when oil hit $150/bbl, we could still very likely see the YoY headline inflation rate sink to as low as -2.0% by the end of the summer. It is very clear that we are either in an extremely benign inflation environment or on the precipice of a deflationary environment. Either way, pricing power is confined to relatively few sectors.

Who has Good Pricing Trends at a time of -5.0% PPI?

We also ran sector screens on actual pricing power using the PPI, which is deflating at a 5.0% YoY pace, the most pronounced deflation rate in 50 years.

9--Federal Reserve Blocks New Foreclosure Regulations, Zach Carter, Huffington Post

Excerpt: Top policymakers at the Federal Reserve are fighting efforts to rein in widely reported bank abuses, sparking an inter-agency feud with the FDIC and the Treasury Department. The Fed, along with the more bank-friendly Office of the Comptroller of the Currency, is resisting moves to craft rules cracking down on banks that charge illegal fees and carry out improper foreclosures. The FDIC supports such rules, according to an FDIC official involved in the dispute.....

The new regulations would rein in debt collection, loan modification and foreclosure proceedings at bank divisions called "mortgage servicers." Servicers have committed widespread fraud in the foreclosure process....

Servicers have also failed to live up to the rules proposed by the Treasury Department under President Obama's Home Affordable Modification Plan. According to a recent report by the Congressional Oversight Panel, a full 29,000 borrowers have been in temporary payment plans for more than a year without being granted permanent relief. The temporary modifications are supposed to last just three months under Treasury Department rules.

Regulators at all federal banking agencies are aware of the problems...

Mortgage servicing sprang into existence with the invention of mortgage securitization markets in the 1970s and became a major part of the banking business as the housing bubble ballooned over the past decade. Servicers do not own the loans they handle. Instead, they make their money by skimming from interest payments they forward to mortgage investors who own the loan and by charging fees to delinquent borrowers. Critics argue that the arrangement encourages servicers to take actions that hurt both borrowers and investors, pushing homeowners into unnecessary foreclosures in order to reap bigger fees.

On Tuesday, more than fifty economists, banking experts and consumer advocates sent an open letter to banking regulators demanding action on mortgage servicers. Many of the proposed rules are simple standards of banking conduct, like appropriately crediting borrower accounts when they make payments. But most mortgage servicers are effectively unregulated at the moment.....

"Widely reported servicer fraud, whether in the foreclosure process or in the systematic assessment of illegal fees against homeowners, is . . . a serious problem," the letter reads, noting that, "problems of this magnitude are a threat not only to the economic recovery, but to the safety and soundness of all insured depository institutions."

The Wall Street reform bill signed into law by President Barack Obama this summer requires regulators to craft new rules to ensure the securitization market functions properly. The FDIC wants those rules to include standards for mortgage servicer conduct and hopes to have rules ready by the end of next month.

Nevertheless, the Fed and the OCC are pushing back, according to a source at the FDIC. Spokespeople from both the Fed and the OCC said their agencies support new mortgage servicing standards but declined to comment on the new rules being advocated by the FDIC....

Reform advocates say that regulators can take action under so called "skin-in-the-game" or "risk-retention" requirements in the Wall Street reform bill. Banks that package and sell mortgage securities would be required to keep at least five percent of the credit risk from those securities on their own books, in an effort to prevent banks from scoring profits by selling garbage securities. The FDIC is on board.

"The FDIC believes that the risk retention rules are an appropriate vehicle permitted by the statute that would establish serving standards for the industry as a whole, and we should not miss this opportunity to set quality servicing standards for the future," FDIC General Counsel Michael Krimminger told The Huffington Post.

Under the new rules, banks will not have to maintain credit risk for top-quality mortgages, which regulators must define. Reformers hope to include mortgage servicing standards in the definition of a top-quality mortgage. The result, reformers say, would be a new industry standard that banks adopt as a matter of course to limit their own potential losses.

Friday, December 24, 2010

Today's links

1--Another bubble? The Economist

Excerpt: For the first time since 2000, internet and technology entrepreneurs can raise seed capital with little more than a half-formed idea and a dozen PowerPoint slides. “There is probably a bubble in the number of start-ups,” says Alan Patricof, a venture capitalist, though he is not yet convinced that there is irrational exuberance in later-stage valuations.

Yet valuations have certainly risen, especially for the leading firms in this latest, “social” phase of the digital revolution. Groupon, a two-year-old firm that offers group discounts to online consumers, reportedly turned down an offer potentially worth $6 billion from Google, prompting analysts to ask if Groupon’s founders had lost their coupons. A secondary-market auction of shares in Facebook in December had a minimum offer-price 77% higher than the price reportedly paid in a similar transaction three months earlier. Twitter is valued at $3.7 billion, up nearly fourfold in a year. The number of deals with (pre-investment) valuations of at least $100m is also increasing, according to Cooley, a law firm...

The emergence of an active secondary market in shares of start-ups yet to go public has allowed founders and early investors in firms such as Facebook and Twitter to bank fortunes without waiting for a traditional exit by IPO or acquisition. These secondary-market prices feed hype about what these firms might be worth, were they to list on the stockmarket. Not many shares are available; many punters are chasing them. And those punters tend to be outsiders, such as fund managers and private-equity firms, who may not understand the tech business as well as insiders do.

2--The end of cheap credit, Huffington Post

Excerpt: Americans are leaving bond mutual funds at the fastest rate in more than two years.

U.S. investors pulled $8.6 billion out of bond funds in the week ended Dec. 15, the largest withdrawal since October 2008 when financial markets were in free-fall. They pulled an average of almost $3 billion every week since Nov. 23, according to the Investment Company Institute. Prior to November, money had been flowing into bond funds every week for nearly two years.

"This is the real deal," says Marilyn Cohen, founder of Envision Capital Management, which oversees $300 million in mostly fixed-income investments.

If she's right, the end of cheap credit is near. Interest rates would rise, which would ripple through the economy. It would become more expensive for cities, states and companies to borrow money to build schools, roads and expand their businesses. It would also cause the value of bond funds to fall, blindsiding Americans who thought they'd stashed their retirement savings in an investment that wouldn't sink.

3--New Home Sales weak in November, Calculated Risk

Excerpt: The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 290 thousand. This is up from a revised 275 thousand in October...

Months of supply decreased to 8.2 in November from 8.8 in October. The all time record was 12.4 months of supply in January 2009. This is still high (less than 6 months supply is normal)...

The 290 thousand annual sales rate for November is just above the all time record low in August (274 thousand). This was the weakest November on record and below the consensus forecast of 300 thousand....This was another very weak report

4--Overall Housing Stock Growth Likely to Slow Even Further in 2011, Calculated Risk

Excerpt: From economist Tom Lawler: Overall Housing Stock Growth Likely to Slow Even Further in 2011:

Given recent and likely first half housing starts numbers, it seems highly likely that the growth in the US housing stock – which this year was the slowest in US history – will slow even further in 2011, even if housing starts begin to increase next year. Generally there is an average 7-8 month lag between SF housing starts are SF housing completions, and for MF housing starts the average lag is a little over a year. Given what housing starts have done, and given near-term indicators point to low levels of new housing production in the early part of next year, it seems highly likely that overall housing completions will be down in 2011.

While final numbers are not yet in, overall [2010] housing completions plus manufactured housing placements probably will total around 696,000 or so. While there ARE no good timely data on how many homes were on net lost due to demolition, obsolescence, net conversions, etc., past data suggest that somewhere in the range of 300,000 to 325,000 homes were lost this way – implying growth in the housing stock in 2010 (EOY to EOY) of around 371,000 to 396,000. Next year I estimate that housing completions plus MH placements will total around 630,000, implying growth in the housing stock of around 300,000 to 330,000. If the labor market improves and household growth can just move back to 1.1 million a year or so, the combination of faster household growth and de minimus housing-stock growth would put a major dent in the excess supply of housing.

For some unknown reason, many housing “analysts” who talk about housing “supply” (shadow inventory, listings, etc.) do not even MENTION the outlook for the supply of the aggregate housing stock!!!!!!!

5--The Humbug Express, Paul Krugman, NY Times via Economist's View

Excerpt: If you listen to the recent speeches of Republican presidential hopefuls, you’ll find several of them talking at length about the harm done by unionized government workers, who have, they say, multiplied under the Obama administration....

There has not, however, been any visible effort to retract those erroneous claims. And this isn’t the only case... Still, why does it matter what some politicians and think tanks say? The answer is that there’s a well-developed right-wing media infrastructure in place to catapult the propaganda, as former President George W. Bush put it, to rapidly disseminate bogus analysis to a wide audience where it becomes part of what “everyone knows.” ...

And it’s a very effective process. When discussing the alleged huge expansion of government under Mr. Obama, I’ve repeatedly found that people just won’t believe me when I try to point out that it never happened. They assume that I’m lying, or somehow cherry-picking the data. After all, they’ve heard over and over again about that surge in government spending and employment, and they don’t realize that everything they’ve heard was a special delivery from the Humbug Express.

6--The balance sheet recession, Modeled Behavior

Excerpt: Mark Thoma has a good piece up on at the Fiscal Times about why the particular causes of this recession have led to a slow recovery:

Recessions can occur for a variety of reasons. For example, oil price shocks, stock market crashes, housing bubbles, monetary shocks, and productivity shocks can all lead to economic downturns….

..One way to distinguish recessions is through differences in their effects on balance sheets, in particular those of households and banks. For households, the collapse of a housing bubble, which also tends to cause a stock market crash, results in a decline in home equity as well as the loss of retirement and education savings. When combined with the loss of jobs due to the recession, and the fact the debts do not decline with the fall in asset values, the effect on balance sheets can be devastating – much larger than, say, the balance sheet impact of an oil price shock. Households have no choice but to set aside part of their income to both rebuild the asset side of the balance sheet and to pay down their debts.

Monetary policy can help us recover in a recession like this by increasing nominal asset and income values relative to average debt, some portion of which is nominally fixed. But cleaning up household balance sheets while unemployment remains high is difficult.

I don’t see any good way to do this, but as Mark points out banks have repaired their balance sheets, and if there was a good way for some of that wealth to be transferred to households with poor balance sheets I think it would help the recovery. The only thing that comes close to that is mortgage cramdowns, which I am not optimistic could be done without lots of unintended consequences. My secret hope was that the foreclosure fraud debacle would provide a way to transfer wealth from banks to underwater homeowners that would be consistent with a fair interpretation of existing laws, and wouldn’t represent an ad hoc transfer of wealth that would undermine banks future willingness to lend.

7--Incompetent Economists, Not Pensions, Push Property Taxes Higher, Dean Baker, CEPR

Excerpt: The Wall Street Journal told readers today that "pensions push property taxes higher," in a headline of a news article. The article notes that large pension shortfalls, together with a loss of other tax revenue, are causing many local and county governments to raise property taxes.

Of course the reason that pensions face large shortfalls is that economists like Alan Greenspan and Ben Bernanke were not able to see the $8 trillion housing bubble, the collapse of which wrecked the economy. These pension funds also suffered because they listened to highly paid investment advisers who had no idea what they were doing. It is worth noting that almost all of these highly paid investment advisers still hold their high paying jobs.

8--10 Reasons to be Cautious for the 2011 Market Outlook, The Big Picture

Excerpt: (From David Rosenberg) The weekly fund flow data from the ICI showed not only massive outflows, but in aggregate, retail investors withdrew a RECORD net $8.6 billion from bond funds during the week ended December 15 (on top of the $1.7 billion of outflows in the prior week). Maybe now all the bond bears will shut their traps over this “bond-bubble” nonsense....

From a historical standpoint, the yield on the S&P 500 is very low ― too low, in fact. This smacks of a market top and underscores the point that the market is too optimistic in the sense that investors are willing to forgo yield because they assume that they will get the return via the capital gain. In essence, dividend yields are supposed to be higher than the risk free yield in a fairly valued market because the higher yield is “supposed to” compensate the investor for taking on extra risk. The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that. When the S&P yield gets to its long-term average of 4.35%, maybe even a little higher, then stocks will likely be a long-term buy....

Stocks are overvalued at the present levels. For December, the Shiller P/E ratio says stocks are now trading at a whopping 22.7 times earnings! In normal economic periods, the Shiller P/E is between 14 and 16 times earnings. Coming out of the bursting of a credit bubble, the P/E ratio historically is 12. Coming out of a credit bubble of the magnitude we just had, the P/E should be at single digits...

The potential for a significant down-leg in home prices is being underestimated. The unsold existing inventory is still 80% above the historical norm, at 3.7 million. And that does not include the ‘shadow’ foreclosed inventory. According to some superb research conducted by the Dallas Fed, completing the mean-reversion process would entail a further 23% decline in real home prices from here. In a near zero percent inflation environment, that is one massive decline in nominal terms. Prices may not hit their ultimate bottom until some point in 2015.

10. Arguably the most understated, yet significant, issue facing both U.S. economy and U.S. markets is the escalating fiscal strains at the state and local government levels, particularly those jurisdictions with uncomfortably high pension liabilities. Have a look at Alabama town shows the cost of neglecting a pension fund on the front page of the NYT as well as Chapter 9 weighed in pension woes on page C1 on WSJ.

Consumer spending was taken down 0.4 of a percentage point to 2.4%, which of course you never would have guessed from those “ripping” retail sales numbers.

9--More proof the Fed was complicit in the bubble, McClatchy News

Excerpt: In early 2005, at a time when the housing market was overheated and economic danger signs were in the air, the Fed had an opportunity to put a damper on risk taking among banks, especially those that had long been bedrocks of smaller cities and towns across the nation.

But the Fed rejected calls from one of the nation's top banking regulators, a professional accounting board and the Fed's own staff for curbs on the banks' use of special debt securities to raise capital that was allowing them to mushroom in size.

Then-Chairman Alan Greenspan and the other six Fed governors voted unanimously to reaffirm a nine-year-old rule allowing liberal use of what are called trust-preferred securities.

This was like a magic bullet for community banks that had few ways to raise capital without issuing more common stock and diluting their share price. The Fed allowed the banks to count the securities as debt, even while counting the proceeds as reserves. Banks were then free to borrow and lend in amounts 10 times or more than the value of the securities being issued.....

The Fed supervised about 1,400 bank-holding companies, the bulk of them parent companies of community banks.

Data emerging from the carnage of collapsed and teetering banks leaves little doubt that the Fed rule, and regulators' failure to adequately police the issuance of these securities, created big cracks to the already shaky foundations of the nation's banking system.

A four-month McClatchy inquiry found that the Fed rule enabled Wall Street to encourage many community banks to take on huge debt and to plunge the borrowings into risky real estate loans.

Thursday, December 23, 2010

Today's links

1--No End In Sight To Equity Outflows As Stock Boycott Persists Despite Largest Bond Outflow Since Lehman Failure, zero hedge

Excerpt: For the second week in a row, those claiming that flows will shift away from bonds and go to equities are proven dead wrong. ICI has just reported that in the week ended December 15, not only was there another massive outflow, the 33rd in a row, from domestic equity mutual funds to the tune of $2.4 billion, but taxable and municipal bonds saw a stunning $8.6 billion in outflows, including another record $4.9 billion in muni outflows.

At this point absent another major pull back in bond prices, we anticipate that bond inflows will once again resume, even as stock outflows persist indefinitely. Year to date investors have pulled just under $100 billion in money from US-focused equity mutual funds, offset by just $16 billion in comparable inflows into equity strategies via ETFs as we described yesterday. The reason for this seemingly endless boycott of stocks via the bulk of the population was given best by Geoff Bobroff, who told Bloomberg: "I would guess most retail investors are staying put because you aren’t seeing the money go anywhere else." Another explanation, and just as spot on: nobody, save for a few hedge funds, gives a rats ass about manipulated stocks prices anymore.

2--Obama's tax deal: read the small print, Dean Baker, The Guardian

Excerpt: First, it is important to remember that although the total package is scored as costing almost $900bn over two years, almost everything in this package simply leaves in place current tax rates and spending. The biggest portion of the tax cut continues the tax rates put in place by President Bush in 2001. The continuation of these tax cuts, including a lower estate tax rate, accounts for almost $400bn of the $900bn.

Adding in the cost of a technical fix to the Alternative Minimum Tax, which is done every year, and the continuation of a series of smaller tax breaks, brings the total to $670bn. This portion of the package buys exactly zero stimulus, since it simply amounts to continuing tax policies already in place. Had these tax breaks not continued, it would have been a drag on growth, but their continuation does not provide any additional momentum to the economy. The $60bn cost of extending unemployment insurance for another year can also be put in this category.

The only net stimulus in this package comes from replacing the $60bn Making Work Pay tax credit in 2011 with a $110bn reduction in the payroll tax and the allowance full expensing of new investment. The latter is projected to cost $55bn a year for the next two years. The full expensing in this deal replaces a provision of the 2009 stimulus package that provided for 50% expensing, which means that the net boost to the economy is half this size.

In sum, the net stimulus for the economy from this package in 2011 will be in the range of $70bn, or about 0.5% of GDP. This is not likely to provide a substantial boost to growth.

3--Banks accused of illegally looting homes, New York Times

Excerpt: When Mimi Ash arrived at her mountain chalet here for a weekend ski trip, she discovered that someone had broken into the home and changed the locks.

When she finally got into the house, it was empty. All of her possessions were gone: furniture, her son’s ski medals, winter clothes and family photos.

Also missing was a wooden box, its top inscribed with the words “Together Forever,” that contained the ashes of her late husband, Robert.

The culprit, Ms. Ash soon learned, was not a burglar but her bank. According to a federal lawsuit filed in October by Ms. Ash, Bank of America had wrongfully foreclosed on her house and thrown out her belongings, without alerting Ms. Ash beforehand.

In an era when millions of homes have received foreclosure notices nationwide, lawsuits detailing bank break-ins like the one at Ms. Ash’s house keep surfacing.

4--The Tax-Payers' Tab: a Cool $9 Trillion and Then Some, Pam Martens, counterpunch

Excerpt: This mystery is further intensified by one Fed spread sheet showing that the largest Wall Street firms deposited a total of $2.1 trillion in stocks as collateral in order to obtain liquid funds from the Fed. Depositing stocks as collateral began on the day Lehman died and was done in large size by Lehman Brothers, Morgan Stanley, Merrill Lynch, and Citigroup. Raising additional red flags, tens of billions of dollars in stocks were posted as collateral by the London operations of Morgan, Merrill and Citi.

Was this publicly traded stock from the firms’ proprietary trading desks, otherwise known as the in-house casino? Was it illiquid private equity in which the firms had their money tied up? Was it equity tranches from the dubious Collateralized Debt Obligations (CDOs)? If it was either of the latter, how could it have been properly priced as collateral? The Fed describes the equity as follows: “Securities representing ownership interest in a private corporation….” Without knowing the details of these securities, or the other unspecified junk bonds used as collateral, we don’t know the extent of the trash the Fed was swapping for cash with Wall Street...

A July 2010 staff report from the Federal Reserve Bank of New York, titled “Shadow Banking,” noted the following about the shadow system in which conduits played a significant role:

“The liquidity facilities of the Federal Reserve and other government agencies’ guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks….

“…this [shadow banking] system of public and private market participants has evolved and grown to a gross size of nearly $20 trillion in March 2008, which was significantly larger than the liabilities of the traditional banking system. However, market participants as well as regulators failed to synthesize the rich detail of otherwise publicly available information on either the scale of the shadow banking system or its interconnectedness with the traditional banking system…At a size of roughly $16 trillion in the first quarter of 2010, the shadow banking system remains an important, albeit shrinking source of credit for the real economy…”

In other words, the leverage in the system was not coming just from mortgage securitizations and esoteric derivatives but from off-balance-sheet debt parking schemes quite similar to that used by Enron.

5-- Inflation in 2011?, Calculated Risk

Excerpt: Inflation: With all the slack in the system, will the U.S. inflation rate stay below target? Will there be any spillover from rising inflation rates in China and elsewhere?

First lets look at the current situation. Over the last 12 months, several key measures of inflation have shown small increases: CPI (Consumer Price Index) rose 1.1%, the median CPI increased 0.5%, the trimmed-mean CPI increased 0.8%, core CPI (less food and energy) increased 0.8%, and core PCE prices increased 1.2% (Q3 2009 to Q3 2010).

For more on inflation, and a discussion of inflation measures, see Dr. Dave Altig's post today: An inflation (or lack thereof) chart show. Altig concludes:

I believe this is basically the bottom line: whether we look at headline inflation (straight-up, component-by-component, or in terms of the long-run trend), core inflation measures (of virtually any sensible variety), or inflation expectations (survey or market based), there is little a hint of building inflationary pressure.

I agree with Dr. Altig. My view is:

• I think the inflation rate (by these measures) will stay below the Fed's 2% target throughout 2011 (I'll guess close to 1%).

• I think rising prices in China, and rising commodity prices (like oil at $90 per barrel), will cause little spillover into U.S. inflation in 2011.

6--Weekly Initial Unemployment Claims at 420,000, Calculated Risk

Excerpt: The DOL reports on weekly unemployment insurance claims:

In the week ending Dec. 18, the advance figure for seasonally adjusted initial claims was 420,000, a decrease of 3,000 from the previous week's revised figure of 423,000. The 4-week moving average was 426,000, an increase of 2,500 from the previous week's revised average of 423,500.

The four-week average of weekly unemployment claims increased this week by 3,000 to 426,000.
In general the four-week moving average has been declining ... and that is good news.

7--Buy vs. Rent: An Update, New York Times

Excerpt: Below is an updated list of rent ratios — the price of a typical home divided by the annual cost of renting that home — for 55 metropolitan areas across the country.

We last covered this subject about eight months ago, and you’ll notice that most ratios have not changed much since then. A good rule of thumb is that you should often buy when the ratio is below 15 and rent when the ratio is above 20. If it’s between 15 and 20, lean toward renting — unless you find a home you really like and expect to stay there for many years. (see chart)

8--The economic outrage of 2010: Cowardly leaders failed to help working people -- and coddled the rich, Joseph Stiglitz, New York Daily News

Excerpt: The bankers had used their money and political influence first to buy deregulation, then to get a massive bailout and finally, this year, to prevent effective reregulation.

Although the passage of the major Dodd-Frank financial sector regulation bill was a move in the right direction, it is riddled with exemptions and exceptions. It doesn't do what needs to be done with the too-big-to-fail banks - namely, break them up. It doesn't do what needed to be done about the risky credit default swaps and derivatives, which were responsible for the $180 billion bailout of AIG. While there may be debate over whether these are gambling instruments or insurance products, there should have been no debate that government-insured banks shouldn't be able to write these risky products. Yet they were allowed to continue to do so....

Some of the pain felt by the middle class could have been averted if our politicians had gotten up the gumption to pass a second round of stimulus.

Contrary to what you may have heard, the first round worked: But for the $800 billion stimulus passed in February 2009, unemployment would have peaked in excess of 12%. It just wasn't big enough, and wasn't well enough designed, to get unemployment down to an acceptable level.

Instead, Congress has now passed a tax cut, much of the benefit of which will go to the richest Americans - including the bankers responsible for the crisis.

9--North Korea threatens 'sacred war' with the South, CNN

Excerpt: Seoul, South Korea (CNN) -- North Korea threatened Thursday to launch a "sacred war" after South Korea completed large military exercises near the volatile inter-Korean border.

"The revolutionary armed forces of the DPRK (Democratic People's Republic of Korea) are getting fully prepared to launch a sacred war of justice of Korean style based on the nuclear deterrent at anytime necessary," North Korea's defense minister Kim Yong Chun said, according to the state-run news agency.

"The South Korean puppet forces perpetrated such grave military provocation as renewing their shelling against the DPRK during their recent exercises for a war of aggression in the West Sea of Korea," Chun said. "This indicates that the enemy's scenario for aggression aimed at the start of another Korean War, has reached the phase of its implementation.

The long-planned South Korean exercises, billed as the largest land and air winter drills, were conducted just 15 miles from the North Korean border....

South Korean President Lee Myung-bak had harsh words for North Korea on Thursday.
"In the case of another surprise attack, the country must launch a merciless counterattack," Lee said.

Wednesday, December 22, 2010

Today's links

1--Inflation troubles brewing in China, Bloomberg

Excerpt: The People’s Bank of China has held off from adding to October’s interest-rate increase, the first since 2007, because further rises may spur capital inflows that stoke inflation, Wu Xiaoling, a former deputy governor, said Dec. 11. Consumer prices jumped 5.1 percent from a year earlier in November, the most in 28 months, and the nation’s top planning agency said last week that prices “urgently” need to be stabilized to safeguard people’s standards of living.

“Surging inflation and sustained robust economic growth may prompt the central bank to raise interest rates five to six times next year,” said Guo Caomin, a bond analyst at Industrial Bank Co. in Shanghai. “We are quite pessimistic about the bond market next year.”...

Credit growth in the past two years has played a part in deterring Chinese policy makers from raising rates too fast, according to DBS. Outstanding local-currency loans jumped 60 percent in that time to total a record 47.4 trillion yuan ($7.1 trillion) at the end of last month, central bank figures show.....Instead of lifting borrowing costs, China has in recent months focused on restricting lending to help quell inflation.

2--Derivatives Blitz Needed to Tame Anarchic Bonds, Mark Gilbert, Bloomberg

Excerpt: Europe’s debt crisis is getting worse, not better. The European Central Bank’s milquetoast bond-buying efforts have done diddly and squat to prevent borrowing costs from soaring to levels that mean each new sale of securities drags euro region governments closer to the bankruptcy courts.

If the ECB is serious about backstopping bonds -- and that’s a big if, since it’s pretty easy to envisage the Frankfurt crowd cheering yields higher with “go baby, that’ll teach them for their fiscal indiscipline” -- tinkering at the edges by bidding for a Greek bond here, an Irish security there, isn’t the way to go.

Instead, the central bank should expand its armory to include the most potent weapon the sorcerers of financial alchemy have concocted to date. By crying havoc and letting slip the dogs of derivatives, European policy makers could prove their commitment to averting default, restoring some sense of order to the government bond market and maintaining the integrity of the common currency project....

The creditworthiness of euro nations continues to melt. Just three more cuts, and Ireland will have metastasized into a junk-rated borrower at Moody’s. Spain may lose its Aa1 grade at the rating company, while Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece.

No wonder the euro is the world’s worst-performing major currency this year, also dragging down the Danish currency, which is pegged to it.

3--The great bank heist of 2010, Marketwatch

Excerpt: Consider the Dodd-Frank reform act — all 2,300 pages of it. Sure, it fills in a few regulatory gaps, ends a couple of the more gratuitous abuses. You have to throw a few scraps to the masses.

But most of the reforms are meaningless. New rule books and committees. Bah. They’re like half-built fences. Anyone can just walk around them.

As for the new consumer finance watchdog? The agency that’s supposed to stand up to the banks will be housed… within the Federal Reserve. Literally, it will be a tenant of the banking system.

Champions of the “reforms” say this won’t really matter. But if that’s the case, why did Wall Street fight so hard to make sure it happened?....There are no coincidences in Washington.

4--$2tn debt crisis threatens to bring down 100 US cities, Guardian

Excerpt: Overdrawn American cities could face financial collapse in 2011, defaulting on hundreds of billions of dollars of borrowings and derailing the US economic recovery. Nor are European cities safe – Florence, Barcelona, Madrid, Venice: all are in trouble.

More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.

Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.

"Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy," Whitney told the CBS 60 Minutes programme on Sunday night.

"There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars' worth of defaults."

5--Housing Chill Could Trash 2011, Huffington Post

Excerpt: Madeline Schnapp, TrimTabs' research chief, likewise strikes an ominous note, telling me "the housing depression is unlikely to end before 2013." Documenting this warning, she cites the following deterrents to a housing recovery anytime soon:

As of October (the latest month for which data is available), 7.04 million households were not current on their current mortgages, up 1% in the past two months.

25% of mortgage holders or 6.2 million are under water, meaning they owe more on their house than it's worth.

Housing prices are at risk of declining another 20%, putting more homeowners under water and more into foreclosure.

Recent documentation flaws are keeping foreclosures off the market, but foreclosures currently account for 25% to 40% of all housing sales. Without a foreclosure inventory, sales will continue to decline, taking housing prices with them.

The unsold housing inventory, visible and shadow (foreclosed or seized homes held by banks that have not yet been put on the market) stands at 6.2 million units or a 1.5 years' supply.
A recent backup in mortgage rates to 4.83% from 4.17%.

Between 2003 and 2007, 40% of all new jobs were in some way related to housing.

6--Home Loan Demand Drops To Lowest Level In One Year, Huffington Post

Excerpt: (Reuters) - Mortgage applications tumbled to their lowest level in nearly a year as a six-week-long rise in interest rates took a significant toll on demand, an industry group said on Wednesday.

The Mortgage Bankers Association on Wednesday said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended December 17 decreased 18.6 percent, reaching its lowest level since the week ended January 1.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 9.8 percent.

The drop in demand last week was largely a reflection of the lack of interest by homeowners to refinance their existing home loans.

The MBA's seasonally adjusted index of refinancing applications decreased 24.6 percent, reaching its lowest level since the week ended April 30.

7--Misc: Ernst & Young accused of fraud, Banks accused of illegal break-ins, Clculated Risk

Excerpt: From the NY Times DealBook: Cuomo Sues Ernst & Young Over Lehman--

The New York attorney general on Tuesday sued Ernst & Young, accusing the accounting firm of helping Lehman Brothers, its client, “engage in a massive accounting fraud” by misleading investors about the investment bank’s financial health.

From Andrew Martin at the NY Times: In a Sign of Foreclosure Flaws, Suits Claim Break-Ins by Banks

In Texas, for example, Bank of America had the locks changed and the electricity shut off last year at Alan Schroit’s second home in Galveston, according to court papers. Mr. Schroit, who had paid off the house, had stored 75 pounds of salmon and halibut in his refrigerator and freezer, caught during a recent Alaskan fishing vacation.

“Lacking power, the freezer’s contents melted, spoiled and reeking melt water spread through the property and leaked through the flooring into joists and lower areas,” the lawsuit says. The case was settled for an undisclosed amount.

8--Internet Gets New Rules of the Road, Wall Street Journal

Excerpt: Consumers for the first time got federally approved rules guaranteeing their right to view what they want on the Internet. The new framework could also result in tiered charges for web access and alter how companies profit from the network.

The Federal Communications Commission on Tuesday voted 3-2 to back Chairman Julius Genachowski's plan for what is commonly known as "net neutrality," or rules prohibiting Internet providers from interfering with legal web traffic. President Barack Obama said the FCC's action will "help preserve the free and open nature of the Internet."

The move was prompted by worries that large phone and cable firms were getting too powerful as Internet gatekeepers.....

Comcast Corp. and other Internet providers have experimented with ways to handle the growing problem of network congestion. Recently, Mr. Genachowski suggested that instead of selectively slowing certain traffic to cope with congestion, providers could consider charging consumers for how much data they consume. That would be a departure from the flat monthly fees consumers pay now for Web access. It's something providers privately say is one of the only ways to make a profit and fund network infrastructure.

9--South Korea plans huge drill to provoke the North, Reuters

Excerpt: South Korea announced land and sea military exercises on Wednesday including its largest-ever live-fire drill near North Korea just as tension on the peninsula was beginning to ease after Pyongyang's attack on a southern island.

The land drill, involving three dozen mobile artillery guns, six fighter jets, multiple launch rocket systems and 800 troops, the largest number of personnel in a single peace-time exercise, will take place on Thursday and is likely irritate the North.

The scale of the drill and the timing, coming right after the tensely staged a live-fire exercise on Monday, indicate South Korea's conservative President Lee Myung-bak sees more political mileage in taking a tough military stance rather than reverting to dialogue, despite overtures from Pyongyang.

"We'll be sure to deal a punishing blow if the North tries to repeat the kind of situation like the artillery shelling of Yeonpyeong," Brigadier General Ju Eun-shik said in a statement.