Thursday, December 16, 2010

Today's Links

1--Mortgage Applications decline, Mortgage rates rise sharply, Calculated Risk

Excerpt: The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 0.7 percent from the previous week. This is the fifth straight weekly decline for the Refinance Index. The seasonally adjusted Purchase Index decreased 5.0 percent from one week earlier.
The average contract interest rate for 30-year fixed-rate mortgages increased to 4.84 percent from 4.66 percent, with points increasing to 1.34 from 0.94 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The four-week moving average of the purchase index is at about the levels of 1997 - and about 17% below the levels of April this year - suggesting weak existing home sales through the end of the year and into January.

2--Fed Watch, Turning Tide, Tim Duy, Economist's View

Excerpt: ...consumer spending is accelerating,...And if an improving consumer and external outlook themselves would have been sufficient to generate above trend growth, the tax cut deal is icing on the cake. On net, it is more than anti-contractionary. It offers some real stimulus - for example, the payroll tax holiday will be less easily saved than a lump-sum check in the is not really much of a surprise that long term interest rates are headed higher. I tend to agree with those analysts echoed by Jim Hamilton and Brad DeLong - rising rates are a signal that the economy is strengthening....

Will the Fed shift course, even in a rosier environment? Doubtful, at least near term. They will likely see the current plan through to its fruition, while holding rates at rock bottom levels until it is quite evident that the output gap is closing, which will take a few years even if growth accelerates sustainably to 4%. Will more be forthcoming? Also doubtful, especially as the composition of the FOMC turns more hawkish.

In short: In general, the data flow of the last eight weeks is clearly encouraging. To be sure, not every release, like the employment report, is perfect. But enough are perfect that forecasters are quickly reversing the downgrades made just a few months ago during the mid-year slowdown. Will the data suddenly turn on us again? Always possible, always something to watch for, but I don't think that should be the expected path. Right now, the data suggest the US economy might start firing on more than just a few of its eight cylinders. A little optimism is justified. Don't expect the Fed to reverse course soon - they have yet to embrace the possibility that the economy is set to grow at something above trend. But a data flow like this cannot be ignored forever. Look for more glimmers of hope creeping into Fedspeak in the weeks ahead.

3--Invincible Ignorance, Paul Krugman, New York Times

Excerpt: So Republican members of the Financial Crisis Inquiry Commission are going to issue their own report, placing primary blame on the government — because it’s always the government’s fault.

And according to reporting at the Huffington Post:

"...all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal."

Yep. It was all Fannie and Freddie, which somehow managed to cause housing bubbles in Ireland, Iceland, Latvia, and Spain as well as the United States; and the repo market had nothing to do with it.

And bear in mind that this wasn’t one Republican; it was all of them.

4--Insiders Bet, Mark Hulbert, Marketwatch

Excerpt: (MarketWatch) — Corporate insiders evidently believe that the stock market’s rally will soon run out of steam. That’s because they recently have been selling the shares of their companies’ stock at a pace last seen since early 2007. Need I remind you that this was just a few short months before the Great Recession began?

Insiders, of course, are a company’s officers, directors and largest shareholders. They are required by law to almost immediately report to the SEC whenever they have bought or sold shares of their companies’ stock.

Vickers Weekly Insider Report is a service that analyzes the insider data, calculating each week a ratio of the number of shares that insiders have sold that week to the number that they have bought. Over the last four decades, according to Vickers, this ratio has averaged between 2 and 2.5 to 1. As a result, the firm considers any reading above 2.5-to-1 to be bearish, since it indicates an above-average pace of selling on the part of insiders.

You better be sitting down before reading what this sell-to-buy ratio was this past week: 7.07-to-1. In other words, corporate insiders on balance are selling more than seven shares for every one that they are buying.

The last time this ratio was this high was the week ending Feb. 14, 2007, almost four years ago.

5--Impending Munis Bloodbath, Wall Street Journal

Excerpt: Investors demanded higher interest payments on municipal bonds on Monday amid strong year-end issuance, pushing yields to the highest levels since 2009, on news that a popular bond subsidy program appeared increasingly unlikely to be extended.

The higher yields were driven in part by fears that cash-strapped state and local governments would have a harder time selling debt without the Build America Bonds program, which provides a federal subsidy on taxable bonds issued by state and local governments and opened the market to more potential buyers.

"It's finally settling in," said Patrick Early, chief municipal analyst at Wells Fargo Advisors. "We just don't see BABs coming back."...

The Senate voted Monday to take an initial step toward approving a tax-cut package that doesn't include the BABs program. The bill is likely to be sent to the House by midweek.....

Still, the increasing certainty of the BABs program's expiration on Dec. 31 was the main driver behind Monday's price decline, analysts say....Monday's jump in yields, which move inversely to prices, comes amid weeks of turmoil in the typically tranquil $2.8 trillion muni market. State and local government borrowers seeking to take advantage of the BABs subsidy before its expiration have hit the market with a glut of issuance, while the Federal Reserve's bond-buying program has put upward pressure on longer-maturity U.S. Treasurys.

6--Sarkozy wants to torpedo the dollar as reserve currency, Reuters

Excerpt: - French President Nicolas Sarkozy said on Monday that his G20 agenda to reform the international monetary system would look at widening the role of the IMF's Special Drawing Rights and tackling international capital flows....

We need to start thinking about the relevance of a system based on accumulation of dollar reserves," Sarkozy said, adding that France would float proposals during the next year.

"Does not this system make part of the world dependent on American monetary policy? Should we not reflect on the role of the SDR (Special Drawing Rights) and on the internationalisation of other currencies?" asked Sarkozy, in a speech to mark the 50th anniversary of the Organisation for Economic Co-operation and Development (OECD)....

China wants to promote the use of SDRs for pricing commodities and in global trade. Russia has championed SDRs and recruited fellow emerging heavyweights China, Brazil and India to promote it as a reserve currency.


Sarkozy said his agenda was not aimed at harming the dollar, which he insisted should remain strong and retain an "eminent" role.

"But eminent does not mean exclusive," he said, noting the system needed to reflect the emergence of new economic powers. "Our monetary organisation cannot sustainably continue to reflect the world of yesterday in which neither India, nor China nor Brazil were the economic powers that they are today."

The 34 countries of the OECD -- which do not include big developing economies like China -- will account for just 50 percent of the global economy by 2015, versus 65 percent in 1975, he said.

7--Congress' Job Approval Rating Worst in Gallup History, Gallup

Excerpt: Americans' assessment of Congress has hit a new low, with 13% saying they approve of the way Congress is handling its job. The 83% disapproval rating is also the worst Gallup has measured in more than 30 years of tracking congressional job performance.

The prior low approval rating for Congress was 14% in July 2008 when the United States was dealing with record-high gas prices and the economy was in recession....Frustration with the tax deal among Democrats in the general population could be a major reason for Americans' historically low approval rating of Congress. That frustration could be opposition to the bill's particulars or frustration with the Democrats in Congress opposing the president's deal. Democrats' approval of Congress is down significantly, to 16% now, from 29% in November....

Americans currently hold Congress in lower esteem for the job it is doing than at any point in the last 36 years. In the past month, many of the supporters it had, largely Democrats, appear to have become frustrated with its work.

8--The ECB’s technical insolvency, Ft.Alphaville

Excerpt: €60bn worth of covered bonds + €70bn of government bonds = €130bn of potential problem assets on the European Central Bank’s balance sheet.

A 1 per cent interest rate increase at a 3 per cent coupon with an average of seven years maturity makes just under a 5.32 per cent loss rate — which is quite a rough (but conservative) estimate by German financial consultant Achim Dübel.

Add in some forex losses and presto…

… The ECB’s subscribed (2009) capital of €5.8bn is already used up.

Small surprise then, that Europe’s massively leveraged central bank is reported by Reuters to be considering raising additional capital — to use as a cushion to protect the ECB from losses on its 2010 government bond-buying programme....A technically insolvent ECB, however, doesn’t spell immediate doom for the eurosystem. Europe’s national central banks will move to top it up if they have to.

9--How to write the euro's obituary, Edmund Conway, The Telegraph

Excerpt: The euro is not yet dead, but already I can envisage two quite different obituaries for the single European currency.

The first will go something along the following lines:

The euro was doomed from its very beginnings. Its progenitors failed to realise that it is impossible to have full monetary union and a completely free market without instituting some kind of centralised treasury. It was this, in the end, that contributed to the fatal imbalances that eventually destroyed the euro: one half of euroland (Germany) was allowed to live frugally; the other recklessly (Portugal, Greece, Ireland, Italy, Spain). Such imbalances are fine in a loosely-connected group of countries, but not when you are yoked to a single currency and interest rate. Sad as the euro’s collapse was, it was inevitable from the start.

The other might read like this:

The tragedy of the eurozone’s collapse was that it represented a combination of misfortune and ham-fisted crisis management. The project was flawed and incomplete, yes. No-one denies it needed more political and fiscal union to work. But to have expected it to have implemented a central Treasury from the very start was politically unfeasible. In its later years it was gradually moving towards more fiscal co-ordination. The problem was that at this very stage along came a financial tsunami too powerful to resist and overwhelmed the entire enterprise.

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