Wednesday, February 23, 2011

Today's links

1--$100 oil, Calculated Risk

Excerpt: From Reuters: Brent Hits 2-1/2 Year High on Libya Export Concerns

Clashes in oil producer Libya sent benchmark Brent crude to 2-1/2-year highs on Monday above $105 a barrel on fears that supplies to Western countries could be disrupted, while U.S. prices rallied by more than $4.

• From the WSJ: The Stealth Return of $100 Oil

The days of $100 oil are back—and not just in Europe, where the Brent crude benchmark vaulted past $108 a barrel on Monday.

While U.S. prices haven't scaled such heights ... many U.S. oil refiners and consumers are finding their costs have already escalated.

2--Home Prices Slid in December in Most U.S. Cities, New York Times

Excerpt: Mr. Shiller, noting the unrest in the Middle East, a large backlog of foreclosed houses, the uncertain future of the mortgage holding companies Fannie Mae and Freddie Mac and proposals to reduce the mortgage tax deduction, saw “a substantial risk” of declines of “15 percent, 20 percent, 25 percent.”

3---Richard Koo: QE2 is undermining US economic policy, pragmatic capitalism

Excerpt: Richard Koo, likely the foremost expert in quantitative easing brings us a global perspective on the Fed’s QE2 policy and he believes it is having a strictly negative impact on the USA’s ability to manage its economy. In his latest economic note Koo writes that QE is undermining the USA’s attempts to generate stability:

“Given the extreme instability and fluidity characterizing the global political and economic situation, I think anything could happen next.

Adding to the instability is the absence of a decision-making body—the G20 is now jokingly described as the G0. Under ordinary circumstances the US would play a leadership role in this organization, but now it finds itself almost isolated as a result of the Fed’s QE2 program, which sparked a heavy backlash from many emerging nations.

To make the matter worse, Western countries are shifting their focus at the G20 meeting and other international summits from economic recovery—both in their own countries and the global economy—to the correction of imbalances. From the standpoint of the emerging economies that are currently driving global economic growth, this appears as little more than a thinly disguised effort to pass the buck.

Emerging countries have continued to post robust growth based on solid economic management without adopting US-style financial capitalism. Their first question is why they should have to participate in the cleanup of a global mess created by the issue of fraudulent Western financial instruments sold with fraudulent ratings.

Blaming China’s foreign exchange policy for the recent financial crisis is neither reasonable nor persuasive. Yet lately the US focus at G20 meetings has been the Chinese currency, and I think that is increasingly undermining US leadership within the organization.”

It’s difficult to reject anything that Koo says with regards to QE. After all, he has been right about this policy and its effects for almost 20 years running….

The 20-city composite is currently off 31.2 percent from its peak. Many economists expect the market to fall another 5 to 10 percent in the next few months....

Also released Tuesday was the Case-Shiller quarterly index that covers all homes in the country. It showed prices fell 3.9 percent in the fourth quarter and 4.1 percent for all of 2010....

“Every place is pretty much getting hit a second time for essentially the same reasons,” said Andrew LePage, an analyst with DataQuick Information Systems. “Slow economic recovery, little job growth, still-tight credit, no more government stimulus, a pervasive and gnawing sense that prices could fall more, too few people getting jobs and too many worrying about losing the one they have.”

4--Housing data may have understated extent of collapse: report, Reuters

Excerpt: A housing trade association is examining the possibility that the data it releases underestimated the collapse of the housing industry, the Wall Street Journal reported on Monday.

The National Association of Realtors, which issues the monthly existing home sales report that is closely watched by economists and financial markets, may have over-counted home sales dating as far back as 2007, the newspaper said in an article posted to its web site.

NAR's home sales count was at odds with calculations by CoreLogic, a California real estate analysis firm, according to the report. CoreLogic says NAR could have overstated home sales by as much as 20 percent.

An over-count of home sales may mean that there is a bigger backlog of unsold homes and that it will take longer for the U.S. housing sector to climb out of the deep hole it is already in, dragging on the broader economic recovery.

5---Oil price shock: Pandora's Box is opened, The Telegraph

Excerpt: The last time the oil price lost all sense of gravity, as it threatens to again with the price of Brent crude now well north of $100 a barrel, it helped tip the world economy into the deepest recession since the 1930s.

Is history about to repeat itself? Much depends on developments in the Middle East, but things are once more looking perilous.

By adding to energy costs, the effect of high oil prices is to reduce the amount of money for spending on other things, thereby undermining aggregate demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given what happened as recently as 2008, you would expect OPEC to be acting quickly to prevent the same thing recurring. By raising quotas with dispatch, OPEC might limit any further explosive increase in prices....

An unduly elevated price will eventually destroy demand, which in turn will undermine sustainable investment in new capacity to meet future demand growth. These cycles are a major influence on the ups and downs of the broader business environment.

6---US housing market is in suspended animation, The Economist

Excerpt: The role of the FHA, which is to guarantee mortgages with low downpayments to families of modest means in return for a fee, is relatively uncontroversial. The big debate is to what extent the federal government should also guarantee mortgages to middle-class families. The Treasury’s options will include doing so through a stand-alone federal agency—perhaps a nationalised version of Fannie or Freddie—or by selling an explicit government guarantee for a fee to any lender, much as the Federal Deposit Insurance Corporation charges banks to insure their deposits....

The Treasury can start to trim back the firms’ role in other ways. Fannie and Freddie are allowed to guarantee mortgages as big as $729,750, but in October that limit should start to drop, leaving more of the market to private firms. The fees they charge for their guarantee can also be raised, crowding in private insurance.

But the Treasury’s power over the pair is limited as long as they remain under the control of the Federal Housing Finance Agency, an independent agency. The Treasury cannot, for example, force them to write down mortgage principal to mitigate defaults, even though taxpayers rather than shareholders would bear any associated costs. That is a pity, given the government’s flailing foreclosure strategy.

When Barack Obama first unveiled the Home Affordable Modification Programme (HAMP) in March 2009, the hope was to modify 3m-4m mortgages by subsidising payment reductions through the Troubled Asset Relief Programme (TARP), a bail-out fund. But by the end of last year, only 522,000 loans had been permanently modified. Of the $50 billion originally allocated to the programme, just $1 billion had been spent, according to Neil Barofsky, the TARP’s watchdog. “It’s remarkably dispiriting,” he told Congress on January 26th...

Still, the lack of progress means foreclosures are likely to be higher this year than last. That will maintain downward pressure on home prices, which have resumed their fall after the expiry of a tax credit last year. The home-ownership rate fell to 66.5% at the end of 2010, its lowest level since 1998, as many former and would-be home-owners rent (see chart). Long after the crisis and the recession, the housing bust that caused them lingers on.

7--Mortgages in foreclosure process hit record, SF Gate

Excerpt: A record share of U.S. mortgages were in the foreclosure process at the end of 2010, matching the all-time high, as lenders and servicers delayed home seizures to investigate charges of improper documentation.

About 4.63 percent of loans were in foreclosure in the fourth quarter, up from 4.39 percent in the previous three months, the Mortgage Bankers Association said in a report Thursday. The combined share of foreclosures and loans with overdue payments was 14 percent, or about one in every seven mortgages.

Property seizures plunged at the end of 2010 as lenders such as Bank of America Corp. and JPMorgan Chase & Co. temporarily halted proceedings to review their handling of court documents. That left more homes in the foreclosure process with their status unresolved. Repossessions tumbled 32 percent in the fourth quarter from the prior period, according to data from RealtyTrac Inc. in Irvine.

"It's clear that the process issues were driving the increase," said Jay Brinkmann, chief economist of the Mortgage Bankers Association. "We would expect the foreclosure inventory to start coming down as that gets resolved and the court situations get cleared up."

8--Survey: Sales of Distressed Homes increased in January, Calculated Risk

Excerpt: From Campbell/Inside Mortgage Finance HousingPulse: HousingPulse Distressed Property Index Hits 49.6% in January

Perhaps the biggest news in the January data was a sharp rise in the HousingPulse Distressed Property Index or DPI, a key indicator of the health of the housing market. The DPI, or share of total transactions involving distressed properties, climbed from 47.2% in December to 49.6% in January. The increase was a continuation of a trend as the DPI registered just 44.5% back in November.

Already, in the key state of California, distressed property transactions account for 66% of the market. In Florida, distressed property transactions account for 63% of the market. And in the combined area of Arizona and Nevada, distressed property transactions are a stunning 72% of home sales.

The increase in distressed properties, combined with a reduction in first-time homebuyers, is causing downward pricing pressure to build in the market, especially for the categories of damaged REO and move-in ready REO.

This fits with other recent reports suggesting the percent of distressed sales was very high in January. The Case-Shiller house price data, to be released this morning, will be for last year (October, November and December) - and this survey suggests the repeat transaction house price indexes will show further weakness in 2011.

9---Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough, Calculated Risk

Excerpt: From S&P: National Home Prices Are Close to the 2009Q1 Trough

Data through December 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices ... show that the U.S. National Home Price Index declined by 3.9% during the fourth quarter of 2010. The National Index is down 4.1% versus the fourth quarter of 2009, which is the lowest annual growth rate since the third quarter of 2009, when prices were falling at an 8.6% annual rate. As of December 2010, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down compared to December 2009....

The Composite 10 index is off 31.2% from the peak, and down 0.4% in December(SA). The Composite 10 is still 2.4% above the May 2009 post-bubble bottom.

The Composite 20 index is also off 31.2% from the peak, and down 0.4% in December (SA). The Composite 20 is only 0.8% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low in January....

Prices in Las Vegas are off 58% from the peak, and prices in Dallas only off 8% from the peak.

From S&P:

Eleven MSAs posted new index level lows in December 2010, since their 2006/2007 peaks. These cities are Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa. Nine of these cities had also posted lows with November’s report as well. New York and Phoenix are the new entrants to this group with December’s data.

Prices are now falling just about everywhere, and more cities are hitting new post-bubble lows. Both composite indices are still slightly above the post-bubble low, but the indexes will probably be at new lows in early 2011.

10---Stocks Tumble as Mideast Unrest Intensifies, Bloomberg

Excerpt: Oil climbed to a two-year high while stocks fell the most in three weeks and Treasuries and the Swiss franc gained as anti-government violence escalated in Libya.

Oil for March delivery rose as much as 9.6 percent to $94.49 a barrel and traded 6.8 percent higher at 9:36 a.m. in New York.... The Standard & Poor’s 500 Index lost 1.3 percent, the most since Jan. 28. Ten-year Treasury yields slid six basis points....

Protests in the Middle East are driving oil prices higher, stoking concern inflation will accelerate. At least 250 people died in the Libyan capital Tripoli overnight as violence spread in the nation with Africa’s largest oil reserves, al-Jazeera reported. China told banks to recalculate capital levels to account for higher risk weightings on some loans as it seeks to curb lending, two people with knowledge of the matter said.

“If oil continues to rise and the dots get connected beyond Libya, then you can set yourself up for a setback in stocks,” said David Sowerby, a Bloomfield Hills, Michigan-based money manager at Loomis Sayles & Co., which oversees $150 billion. “People are going to wait and see what type of unrest there is in the largest producing oil countries. Risk aversion is going to be everybody’s assessment.”...

The S&P 500 retreated from its highest level since June 2008 as trading resumed today after the Presidents’ Day holiday. Wal-Mart Stores Inc. declined 4.1 percent after posting a seventh straight quarterly sales decline at its U.S. stores, trailing its own projections....U.S. equities also declined after the S&P/Case-Shiller index of home values in 20 cities fell 2.4 percent in December from the same month in 2009, the biggest 12-month decrease in a year.

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