Thursday, March 1, 2012

Today's links

1--Fed Drains $100 Million From Banking System With Reverse Repos, Bloomberg

Excerpt: The Federal Reserve drained $100 million in reserves from the banking system when it arranged one-day tri-party reverse repurchase agreements....

In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties. The central bank added more than $1 trillion in extra cash to its balance sheet as part of its effort to combat the financial crisis.

The repos were the first in the series of “readiness exercises” to utilize eight new banks and two new primary dealers added last year as counterparties. The Fed began adding counterparties in 2010.

2--Household Deleveraging Slows Recovery, The Big Picture

Excerpt: (See charts) Why has the recovery been so weak? The short answer is Household Deleveraging. Its why post credit crisis recoveries are so much slower across the boards.

Deleveraging prevents the virtuous cycle from beginning. Less borrowing means less retail spending. That eventually bites into corporate profits, which ultimately means more modest CapEx spending and weaker hiring.

Which is pretty much what we have seen: Weak holiday retail sales, soft spending (other than Autos and Gasoline), mediocre (but improving) NFP, flat wages, mild inflation, ok GDP.

This is what a post credit crisis recovery is supposed to look like.

3--Bernanke Offers No Hint Of QE3 Despite "Uneven" U.S. Recovery, Nasdaq

Excerpt: The U.S. economy is on the mend, but conditions have not improved enough for the Federal Reserve to scale back support measures, the nation's top central banker told Congress on Wednesday.

Bernanke offered no hints of a change to the Fed's conditional pledge to keep interest rates near zero through late 2014, nor did he signal that another round of asset purchases is imminent.

He warned of lingering weakness in the jobs market, and downplayed figures showing the U.S. economy unexpectedly grew at an annual rate of 3 percent in the final quarter of 2011.

"The recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards," Bernanke told the House Committee on Financial Services.

The nation's unemployment rate hovered around 9 percent for much of last year but has moved down appreciably since September, reaching 8.3 percent in January.

However, "the job market remains far from normal," he warned. "The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high."

Bernanke said the sluggish housing market market remains a drag on overall economic activity.

Even though houses are more affordable as a result of falling prices and historically low mortgage rates, tight credit conditions and concerns about the jobs market have prevented a more robust housing recovery, he added.

In a sign that the Fed will not move from January's ultra-low interest rate pledge, Bernanke was unconcerned that easy monetary policy and economic growth could spark a sudden jump in consumer prices.

4--Brace Yourself for Election-Driven Enforcement Theater, naked capitalism

Excerpt: It’s bad enough that we are being subjected to relentless propaganda about how housing is just about to turn the corner and the state-Federal mortgage settlement is such a great deal for homeowners. In fact, as we’ve stressed, and bond investors such as Pimco have reiterated, the deal is above all a back door bailout of the banks. Bloomberg weighed in yesterday:

Bank of America Corp., Wells Fargo & Co. and three other banks that settled a nationwide probe of foreclosure practices this month will get a bonus from the deal: protection for $308 billion of home-equity loans they hold.

The banks that service about half the nation's mortgages on behalf of investors will be able to share losses on their junior loans with bondholders and get credit toward the cash they pledged to spend in the settlement, said an Obama administration official involved in drafting the $25 billion agreement. Second liens would typically be wiped out before senior-mortgage investors take a loss, said Laurie Goodman, managing director at Amherst Securities Group LP in New York.

It's “a gift to the banks, at investors' expense,” said Goodman, a member of the Fixed Income Analysts Society's Hall of Fame. “A proportionate write-down of the first and second represents a reversal of normal lien priority.”

5--Was Marx right after all, Marketwatch

Excerpt: Grantham, however, takes a longer view, and isn’t so “aw shucks” about the future of our broken economic system.

“Capitalism,” he writes, “threatens our existence.”

Already, capitalism is proving that Karl Marx and Friedrich Engels were at least partially correct. They “looked forward to globalization and the supranational company because they argued it would make capitalism even more powerful, overreaching, and eventually reckless,” Grantham writes.

Globalization “would ... offer the capitalists more rope to hang themselves with ... rope ... bought from briskly competing capitalists, eager till the end for a good deal.”

Grantham, who is British, studied economics at the University of Sheffield and has an MBA from Harvard Business School. He started his investment career as an economist with Royal Dutch Shell before starting GMO in 1977.

He says capitalism does almost everything better than any other economic system. It’s just that its two or three main flaws are potentially fatal and have gone largely unaddressed. A sustainable economic system, for instance, can’t be based on ever-increasing debt, corporations can’t be allowed to run governments and loot treasuries, and “growth at any cost” is a recipe for planetary suicide.

Here are some of Grantham’s finer points:

• Capitalism too heavily discounts the future value of cash flows as it seeks to raise debts: “Your grandchildren have no value.”

Companies foolishly reward executives for taking on debt: “Total remuneration ... for senior officers ... rose as a percentage of the average worker’s pay from 40 times in Eisenhower’s era to over 600 times today with no indication of any general improvement in talent.”

• It’s about profit, not people: “Capitalism in general has no sense of ethics or conscience. Whatever the Supreme Court may think, it is not a person.”

• The more people borrow, the more they just gamble: “Leverage ... increases your returns over and over until, suddenly, it ruins you. ... There are no Investors Anonymous meetings to attend.”

• This time, it’s not so different: “Ignore the ... inevitable cheerleaders who will assure you that this time it’s a new high plateau ... even if that view comes from the Federal Reserve itself. No. Make that, especially if it comes from there.”

• Washington is becoming a corporate subsidiary: “What capitalism has always had is money with which to try to buy influence. ... The issues they influence are precisely ... the ones that are most important to society’s ... very existence.”

6--More on deleveraging, Marketwatch

Excerpt: Families have been reducing their debt burdens rapidly since the Panic of 2008. After growing 10% a year during the bubble years, household debt levels have actually declined by about 4% over the past four years. Although charge-offs have accounted for most of the decline in debt, households have also been actively deleveraging by about $200 billion a year, according to research by Benjamin Tal and Emanuella Enenajor of CIBC World Markets.

By some measures, the debt burden is back to normal levels. For instance, households have to pay just 11.1% of their after-tax income to service their debts, the lowest in 17 years and down from 14% at the height of the frenzy in 2007. Low interest rates, especially for mortgages, are really helping.

But by other measures, the deleveraging has a ways to go. Households have only reduced their debts from 127% of their after-tax income in 2007 to 111% in 2011. That’s progress, but it’s still far above the 90% or less that prevailed before the housing bubble.

Delinquencies and foreclosures are still elevated from pre-recession levels. It’s going to take a few more years to clear out the backlog of delayed foreclosures, which will keep home prices soft.

Most likely, it’ll take several more years before the housing market truly recovers, and American families have paid off enough debt to feel comfortable again. Until then, the recovery will remain hobbled.

7--Data summary, Pragmatic Capitalism

Excerpt: Bernanke gives his latest Congressional testimony and takes Q&A at 10am tomorrow.

He’s unlikely to diverge much from the recent narrative and I expect him to focus more on the changes they made at the last FOMC meeting (easing via extending conditional commitment and new set of forecasts) than highlight more policy changes (QE3 or Twist 2). March/April a more likely time frame for next set of policy changes.

Today’s data backs up the view stated by the Fed in January and recent speeches:

House prices continue to fall. Case-Shiller HPI -1.1% in December and -4% y/y.

Core durable goods orders -4.5%. Even adjusted for new year effect (expiration of accelerated depreciation in December), still weak, with the 3m annual rate of change now -3.7% vs +1.7%.

Conference Board survey rises from 61.5 to 70.8, a 12mth high, with notable improvement in Labor Differential (Jobs Plentiful Less Jobs Hard To Get). But, Plans to Buy a Home in next 6mths drops 0.2, to lowest level since August 2011.

Fits in with the following from their last Statement (where they eased):

While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.”

8--Income Revisions Suggest Consumers Have More Cash, WSJ

Excerpt: More domestic demand, less stockpiling. It’s a win-win situation for the economic outlook and the Federal Reserve.

The Bureau of Economic Analysis took a second look at the data and decided real gross domestic product grew faster in the fourth quarter than previously thought: at a 3.0% annualized rate versus 2.8%.

While upward revisions to growth are always welcome, the GDP report contained two even more important pieces of new information that are positive for early 2012. One, the mix of GDP sectors now more favors future production gains and, two, consumers had more income than originally thought.

According to Wednesday’s report, consumer and business spending were a bit stronger last quarter than first thought, while inventory growth was slightly slower.

While the changes were small, the mix means inventories and sales are better balanced. Instead of satisfying customers by pulling goods out of warehouses, businesses will be ordering new merchandise and supplies, supporting further production and hiring gains.

Consumers spent more because it turns out they had more cash to spend. Personal income in the third and fourth quarters were revised up so that income at the end of 2011 was almost $100 billion higher than first thought. The new-found money went both to increased spending and higher savings.

9--War with Iran? Easy does it, press tv

Excerpt: The most important thing I've read these last few days is the excellent article 'Armageddon Approaches' written by Dr Lasha Darkmoon , a cautionary piece which points the reader towards some very scary background information.

For example, according to Russ Winter of The Wall Street Examiner , Iran’s Sunburn missiles, acquired from Russia and China over the last 10 years, have the capability of creating "a world of hurt" for the US Navy’s 5th Fleet.

"The Sunburn is perhaps the most lethal anti-ship missile in the world, designed to fly as low as 9 feet above ground/water at more than 1,500 miles per hour (mach 2+). The missile uses a violent pop-up maneuver for its terminal approach to throw off Phalanx and other US anti-missile defense systems. Given their low cost, they’re perfectly suited for close quarter naval conflict in the bathtub-like Persian Gulf.”

With its 90-mile range, the Sunburn can be fired from practically any platform, including a flat bed truck, and could hit a ship in the Strait in less than a minute.

Adding this warning, Mark Gaffney says , "The US Navy has never faced anything in combat as formidable as the Sunburn missile.”

He mentions the even more-advanced SS-NX-26 Yakhonts missiles, also Russian-made (speed: Mach 2.9; range: 180 miles) deployed by the Iranians along the Persian Gulf's northern shore.

“Every US ship will be exposed and vulnerable. When the Iranians spring the trap, the entire lake will become a killing field,”

“In the Gulf's shallow and confined waters evasive manoeuvres will be difficult, at best, and escape impossible. Even if US planes control of the skies over the battlefield, the sailors caught in the net below will be hard-pressed to survive. The Gulf will run red with American blood."

As both writers point out, the Iranians will have mapped every firing angle along their Gulf coastline. And the rugged terrain will not make detection easy

10--Individual Investors Can't Participate In America's Fire Sale On Foreclosed Homes, Business Insider

Excerpt: For example, the federal government is about to dump millions of the foreclosed homes at fire-sale prices to hedge funds and private-equity firms with government connections. If you’re an individual investor who might like to get in on the action, forget it! You’re shut out of this deal.

Homeowners who might be interested in buying the foreclosure property next door? Out of luck. And retirees hoping for a return on their money more than 1.8% on a five-year CD find another avenue closed off....

If you’ve got the hammer for it, we may as well get down to brass tacks: As many as 10,000 properties might be unloaded in a single transaction during the first quarter of 2012 — thanks to a government program so new it doesn’t have a catchy name yet, only the working title “Enterprise/FHA REO Asset Disposition.”

Roger Arnold, chief economist for Pasadena, Calif.-based ALM Advisors, has a different name for it — “the largest transfer of wealth from the public to the private sector.”

As of last September, there were about 800,000 “real estate owned” or REO homes in the United States — homes repossessed and on the market. Close to one-third of these — 250,000 — sit on the books of Fannie Mae, Freddie Mac and the Federal Housing Administration. That is, 250,000 homes are owned by you and me, the US taxpayers.

But that number is about to explode: According to Ken Harney at the real estate industry publication Inman News, “The three agencies face a tsunami-sized shadow inventory that is now heading their way — a combined 1.4 million delinquent loans on their books, at least half of which, they estimate, will end up in foreclosure.”

So now we’re talking that 250,000 number suddenly ballooning to nearly a million. The early-warning waves of the tsunami started lapping at the shore in November, when foreclosure auctions reached a nine-month high. The final numbers might end up even higher: Late-stage delinquencies tallied by Lender Processing Services in January approach 2 million.

Thus, the hypothetical excuse for the fire sale: “Even with heroic efforts,” Harney says, “Fannie, Freddie and FHA won’t be able to handle that level of REO volume using their current systems of individual sales, directed at owner-occupants and small investors.”

Thus, “You and I will not be allowed to participate,” says Roger Arnold of the newprogram. “These [new] investors will come from the private-equity and fund community, Goldman Sachs and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.

“The US taxpayer will get pennies on the dollar for these homes, and then be allowed to rent them back at market rates.”

The groundwork is being laid right now. During the first week of January, the Federal Reserve issued a white paper on housing: “A government-facilitated REO-to-rental program,” it said, “has the potential to help the housing market and improve loss recoveries on REO portfolios.” Three Fed governors put the word out in speeches the same week.

The big boys can smell the money and they are lining up to play.

Among the players that expect to profit big from this government-sponsored scam are the private firms that already manage properties for the government. The Department of Housing and Urban Development calls them “management and marketing contractors.” Their principal owners and officers tend to consist of former high-ranking officials with HUD, the Treasury, FHA and so on.

There are 20 of these “M&M” firms, according to a list on HUD’s website. On the theory that perhaps you could reclaim some of your tax dollars by investing in these firms — the same theory with which we suggested ITA, the defense and aerospace ETF — we examined whether any of them are publicly traded. None are. Sorry.

No, the only way you’ll be able to make any money off these insider deals will come long after the feast is over and you’re allowed a few crumbs. “Once the privatization has occurred,” one analyst observes, “and the properties are generating rental income for the investors, the initial investors will cash out by forming real estate investment trusts (REITs), real estate operating companies (REOCs) or limited partnerships that will be made available to retail investors.”

Alas, by then, the easy money will have been made…at your expense. Feels pretty good, doesn’t it?

That’s why, increasingly we find ourselves casting our gaze overseas, longing for returns in foreign lands in places where the governments are somewhat less corrupt and the playing field slopes somewhat less directly toward the pockets of crony-capitalists.

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