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.

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