Monday, March 14, 2011

Today's links

1--First-time Buyers Fade From Market, Wall Street Journal

Excerpt: There’s more evidence today that cash buyers and investors are dominating the housing market.

A report out today from Capital Economics says that cash buyers and investors together have driven 70% of the increase in existing home sales seen since last July, while first-time buyers have been responsible for just 6%. Favorable valuations “mean there is plenty of scope for housing to perform well in the medium-term,” the report, “U.S. Housing Market Monthly,” says. “But over the next year, weak demand, high supply and many more forced sales of foreclosed properties will push prices lower.”

Indeed, the influence of cash buyers and investors is one signal that prices are falling. Cash buyers often buy at a discount, something sellers are willing to offer because they know the deal won’t be scuttled by picky lenders or appraisers. The fact that regular transactions have slowed may also indicate that more buyers are having trouble getting qualified for a loan.

“The point we’ve been stressing is that first-time buyers are really a small percentage of what is going on here,” said Paul Ashworth, chief U.S. economist for Capital Economics, a research firm with North American headquarters in Toronto. The report looks at buyers between July of last year and January, showing, in part, the drop-off after the first-time buyer’s tax credit expired.

Last month, the Journal reported on the boost that cash buyers are providing for troubled markets around the country. In the Miami-Fort Lauderdale area last year, cash buyers represented more than half of all transactions, according to an analysis from real estate portal In the fourth quarter of 2006, they represented just 13% of deals.

2--Nothing to Prevent Another Crisis, Says Former FDIC Chairman Bill Isaac, Yahoo Finance

Excerpt: Crisis may create opportunity, but Congress completely flubbed its opportunity to enact meaningful financial reform in the aftermath of the worst crisis since the Great Depression, says the former chairman of the FDIC, Bill Isaac.

The Dodd-Frank reform bill--the one major piece of legislation to emerge since the financial crisis--is mostly meaningless, says Isaac, who is also the chairman of regional bank Fifth Third. Dodd-Frank does nothing to address the root causes of the financial crisis, Isaac says, and it won't prevent the next one.

Specifically, Dodd-Frank will just create more bureaucracy and red tape. Meanwhile, our biggest banks are still "Too Big To Fail." Our commercial banks are still allowed to take way too much risk. Our regulators are still balkanized and political. And we still haven't addressed Fannie Mae and Freddie Mac.

Isaac suggests the solution may be to re-implement the Glass-Steagall Act which separated commercial and investment banking. But, at this stage of the game, that's not likely, considering the size and scope of the bank lobby in Washington.

3--When Things Fall Apart, Charles Hugh Smith, of two minds

Excerpt: Financialization rewards concentrations of capital that can off-load speculative risks onto the Central State while keeping profits private. Thus financial capital comes to dominate the entire economy and mechanisms of governance.

Empoyees no longer share in the gains from rising productivity: those gains flow to capital/global corporations who influence or control the political machinery....

Corporate profits have skyrocketed as Cartel/Monopoly Capital captures an ever larger share of thenational income and buys political power with that cash flow that enables Capital to offload risk on the State and insure a steady supply of cheap/free credit from the central bank (the Fed) to fund its speculations....

The substitution of money-printing/credit creation for actual wealth creation has led to an explosion of debt across private and public sectors. This debt will soon require crushing interest payments; once again, Capital that owns the debt will profit at the expense of real production.

In a nation increasingly diverging into hackneyed, hardened ideological camps whose sole goal behind their soaring rhetoric is defense of their own preferred cartel-State fiefdoms, clearly the center (common ground, common sense) is not holding.

4--Profit Margins at 18-Year High Signal Bigger S&P 500 Dividends, Bloomberg

Excerpt: Record earnings fueled by the highest profit margins since 1993 are giving executives more leeway than ever to boost dividends as the bull market enters its third year.

Margins will climb to 8.9 percent in 2011, the highest level in at least 18 years, according to data compiled by Bloomberg on non-financial companies in the Standard & Poor’s 500 Index. Greater profitability combined with dividend cuts during the credit crisis have pushed earnings to 6.53 percent of the gauge’s price, or 3.5 times more than its payout rate, close to the record 3.6 multiple in January.

“The economy seems to be doing well and earnings are on the recovery path, which companies wanted to be sure about before they raised their dividends,” said John Carey, a Boston- based money manager at Pioneer Investments, which oversees about $250 billion. “I feel relatively confident that most of the dividends out there are secure, and we’ll see some fairly broad based increases.”

5-- Another Inside Job, Paul Krugman, New York Times via Economist's View

Excerpt: Count me among those who were glad to see the documentary “Inside Job” win an Oscar. The film reminded us that the financial crisis of 2008 ... didn’t just happen — it was made possible by bad behavior on the part of bankers, regulators and, yes, economists.

What the film didn’t point out, however, is that the crisis has spawned a whole new set of abuses, many of them illegal as well as immoral. And leading political figures are, at long last, showing some outrage. Unfortunately, this outrage is directed, not at banking abuses, but at those trying to hold banks accountable for these abuses.

The immediate flashpoint is a proposed settlement between state attorneys general and the mortgage servicing industry. That settlement is a “shakedown,” says Senator Richard Shelby of Alabama. The money banks would be required to allot to mortgage modification would be “extorted,” declares The Wall Street Journal. And the bankers themselves warn that any action against them would place economic recovery at risk.

All of which goes to confirm that the rich are different from you and me: when they break the law, it’s the prosecutors who find themselves on trial.

To get an idea of what we’re talking about here, look at the complaint filed by Nevada’s attorney general against Bank of America. The complaint charges the bank with luring families into its loan-modification program ... under false pretenses; with giving false information about the program’s requirements...; with stringing families along with promises of action, then “sending foreclosure notices, scheduling auction dates, and even selling consumers’ homes while they waited for decisions”; and, in general, with exploiting the program to enrich itself at those families’ expense.....

6-- “Anonymous” Whistleblower Charges BofA With Large Scale Force Placed Insurance Scheme With Cooperation of Servicers, naked capitalism

Excerpt: Ooh, this is ugly...The charge made in this Anonymous release (via BankofAmericaSuck) is that Bank of America, through its wholly-owned subsidiary Balboa Insurance and the help of cooperating servicers, engaged in a mortgage borrower abuse called “force placed insurance”. This is absolutely 100% not kosher. Famed subprime servicer miscreant Fairbanks in 2003 signed a consent decree with the FTC and HUD over abuses that included forced placed insurance. The industry is well aware that this sort of thing is not permissible.

Regardless, this release lends credence a notion too obvious to borrowers yet the banks and its co-conspirators, meaning the regulators, have long denied, that mortgage servicing and foreclosures are rife with abuses and criminality....

The release also alleges that regulators were complicit...And if these allegations are indeed accurate, they make a mockery of the settlement charade underway among 50 state attorneys general, Federal regulators, and what amount to banking industry crooks, aka servicers.

7-- EU Puts Periphery Countries on the Rack, naked capitalism

Excerpt: Wolfgang Munchau of the Financial Times, simply sounds resigned to an eventual train wreck. His reading is straightforward: there are only two mechanisms for resolving a debt crisis, namely a bailout or a default (or a combination). I actually disagree a tad, since the options are really “provide new funds” which might not be nuts if debt were written down enough, a voluntary restructuring, or a default. But his bottom line is right: the Europeans are engaged in what we call “extend and pretend” and for countries like Greece, the only possible endgame is default:

This game will continue until the debtor country’s economy collapses under its debt burden, at which point the inevitable default will be very messy. If you are lucky, you are no longer in office by then, and you can blame your successor for the mess.

So what to do instead? You could either accept the logic of a default, and arrange for it now, followed by a big programme for bank bail-outs, a recapitalisation of the European Central Bank, and credit support for the defaulting country. Or else, you accept the principle of a bail-out, not through cross-country transfers, but a single European bond that replaces all national debt. I personally would choose that option. A large and highly flexible rescue mechanism with pari passu status, the ability to underwrite debt or buy bonds in secondary markets, would have been a step in that direction.

Ms Merkel said at her press conference that her one concession – for the ESM to be able to buy bonds in primary markets – is not going to make much of a difference. She is right. The rescue mechanism as constructed now is an emergency facility only. On Saturday morning, the EU got itself an arrangement that lives in a purgatory between bail-out and default, as it muddles through a never-ending crisis....

One part I find particularly alarming, as I suspect subject states will, is the demand for infrastructure sales. Per Evans-Pritchard:

For Greece, the terms are a fire-sale of €50bn (£43.2bn) of national assets within four years, a tenfold increase from the original €5bn that premier George Papandreou thought he signed up to a year ago.

When the IMF first mooted this sum last month he told the inspectors not to “meddle in the internal matters of the country.“

State holdings in Hellenic Post, Hellenic Railways, Athens Public Gas, the Pireaus port authority, Athens airport, Thessaloniki water, and ATEbank, to name a few, will not fetch more €15bn. What next?…

Meanwhile, austerity is biting harder. The jobless number jumped almost a full point to 14.8pc in January. Youth unemployment hit 39pc....

In the end, default by Greece and Ireland is inevitable, and austerity policies that produce deflation will push more countries into default or restructuring. But as Munchau has repeatedly pointed out, the current wishful thinking among the Eurozone officialdom is that a crisis deferred is a victory, when it instead guarantees a worse explosion when the bomb finally goes off.

8--Update on Fukushima reactors, Union of Concerned Scientists

Excerpt: The nuclear crisis in Japan took a turn for the worse as serious problems developed in reactor Unit 3.

Officials from Tokyo Electric reported that after multiple cooling system failures, the water level in the Unit 3 reactor vessel dropped 3 meters (nearly 10 feet), uncovering approximately 90 percent of the fuel in the reactor core. Authorities were able to inject cooling water with a fire pump after reducing the containment pressure by a controlled venting of radioactive gas. As they did with Unit 1, they began pumping sea water into Unit 3, which is highly corrosive and may preclude any future use of the reactor even if a crisis is averted.

However, Tokyo Electric has reported that the water level in the Unit 3 reactor still remains more than 2 meters (6 feet) below the top of the fuel, exposing about half the fuel to air, and they believe that water may be leaking from the reactor vessel. When the fuel is exposed to air it eventually overheats and suffers damage. It is likely that the fuel has experienced significant damage at this point, and the authorities have said they are proceeding on this assumption.

One particular concern with Unit 3 is the presence of mixed-oxide (MOX) fuel in the core. MOX is a mixture of plutonium and uranium oxides. In September 2010, 32 fuel assemblies containing MOX fuel were loaded into this reactor. This is about 6% of the core.

I have done considerable analysis on the safety risks associated with using MOX fuel in light-water reactors. The use of MOX generally increases the consequences of severe accidents in which large amounts of radioactive gas and aerosol are released compared to the same accident in a reactor using non-MOX fuel, because MOX fuel contains greater amounts of plutonium and other actinides, such as americium and curium, which have high radio-toxicities.

Because of this, the number of latent cancer fatalities resulting from an accident could increase by as much as a factor of five for a full core of MOX fuel compared to the same accident with no MOX. Fortunately, as noted above, the fraction of the fuel in this reactor that is MOX is small. Even so, I would estimate this could cause a roughly 10% increase in latent cancer fatalities if there were a severe accident with core melt and containment breach.

9-- Companies’ Cash Hoard Grows, Wall Street Journal

Excerpt: $1.9 trillion: Corporate America’s cash

U.S. companies’ cash hoard keeps getting bigger, a trend both good and troubling.

After hitting new highs in five of the last six quarters, nonfinancial corporations’ cash and other liquid assets reached $1.9 trillion at the end of 2010, according to the Federal Reserve. That’s 7% of all their assets, the highest level since 1963.

On the bright side, the cash pile reflects the resilience of America’s companies and capital markets. Thanks in part to improved resource-management systems, executives have been able to act with lightning speed, slashing costs during the recession and hiring only as much as they need during the recovery — tactics that have generated record profits, if not jobs. Dynamic bond markets have allowed big companies to raise vast amounts of money even as banks have pulled back on lending. That has helped the U.S. avoid the kind of bankruptcy epidemic many had expected.

At the same time, though, the persistent growth of companies’ cash hoard suggests a problem: Businesses appear to lack the confidence in the recovery needed to plow the money back into new projects and hiring. In the final quarter of 2010, capital expenditures amounted to $975 billion, or 6.6% of gross domestic product — up from a low of 5.4% in 2009 but still well below the 10-year average of about 8%. Nonfarm employers added a monthly average of 136,000 jobs in the past three months, just a bit more than required to keep the unemployment rate from growing.

Meanwhile, companies are giving some cash back to their shareholders through stock buybacks, which reached $86 billion in the final quarter of 2010, the highest level since early 2008. That’s an easy way to boost earnings per share, but hardly a sign of optimism. Perhaps investors will find a better use for the money, such as financing the startups that create an outsized share of new jobs.

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