Friday, May 18, 2012

Weekend links



"We're convinced public debt is an enemy for the country. Our task will be reduce deficits and debt ... this is the task we will address first."  Pierre Moscovici, French Finance Minister


1--Eurozone troubles explained in 4 min video, zero hedge

2--Fed May Prefer Another Twist to Adding Assets, Bloomberg

Excerpt: (more of the same)  Federal Reserve policy makers may find another round of Operation Twist is preferable to an outright asset-purchase program if the economy shows further signs of weakness or risks increase.


Chairman Ben S. Bernanke on April 25 said he was prepared to take further action to aid the economy if necessary, even as he signaled that he didn’t see an immediate need to add stimulus with inflation near the Fed’s goal and unemployment falling. The minutes from the Fed’s April meeting showed several policy makers said additional action could be necessary if the recovery slips.

“If there were scope to do another twist of some type it would be prudent to consider it, especially in the scenario where things are worse and the Fed feels like it needs to move,” said Nathan Sheets, Global Head of International Economics at Citigroup Inc. in New York. Until August, Sheets was the Fed’s top international economist.


Economists such as Sheets and Credit Suisse Securities’ Dana Saporta say the Fed’s $400 billion program to extend the maturity of bonds has been just as effective as earlier programs to expand its balance sheet, known as quantitative easing. That may make another version of the maturity extension, which is dubbed Operation Twist and is set to expire in June, preferable because it doesn’t risk the same political backlash.

“From a purely economic standpoint it doesn’t matter that much” which option the Fed chooses, Sheets said. “From a public-relations standpoint it might have consequences.”

3--JP Morgan debacle shows data limitations, IFR

Excerpt:  The ease with which JP Morgan’s chief investment office appears to have built a US$100bn position in an illiquid credit index without the blink of a regulatory eyelid has called into question the ability of trade repositories to flag up irregularities before they result in crisis situations. It also highlights the lack of regulatory capacity to monitor the sheer volume of data now being amassed
For example, within hours of Lehman Brothers going into administration in 2008, the DTCC was able to confirm that net notional of CDS exposure amounted to US$75bn, of which all but US$6bn would settle immediately. That information was crucial in calming credit markets as speculation of a figure around US$400bn had initially been circling.


Regulators investigating the JPM trade should find there is no shortage of trade information, but without detailed and ongoing monitoring, data collection itself is unlikely to prevent further toxic trades.

“Aggregated data might not tell you anything,” said the credit head. “A potentially worrying position is likely to grow gradually and you won’t be able to see that information from a macro database. Trade repositories are good in a crisis as they provide crucial information when it comes to unwinds, but on an ongoing basis to interpret what is happening in the market, it’s a very different matter.”

4--UK banknote printer readies for Greek call - source, Reuters

Excerpt:  De La Rue (DLAR.L) has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source told Reuters on Friday.


The news comes as EU trade commissioner Karel De Gucht said on Friday the European Commission and the European Central Bank are working on an emergency scenario in case Greece has to leave the euro zone - the first time an EU official has confirmed the existence of contingency plans

The source, who asked not to be named, said that as a commercial printer De La Rue needed to be alive to the possibility of a Greek exit from the single currency and prepare accordingly.


Crisis-hit Greece will be led by an emergency government into new elections on June 17 which will ultimately determine whether it must quit the euro - possibly spreading financial devastation across the continent.

An exit from Europe's single currency would spark a major demand for the returning drachma and while the country's state printers could orchestrate its production, a handful of global firms like De La Rue could be called on to help.

5--Treasury Bonds Toying With Prospects Of New Record-Low Yields, WSJ

Excerpt:  Some see the 10-year yield hitting 1.5% or even lower

6--Foreclosures Fall...And That's a Bad Thing?, CNBC

Excerpt: Why all the declines? Unfortunately it’s not an overall improvement in the housing market, nor an increasing ability of borrowers to stay current on their mortgage payments.


“Instead we are seeing unprecedented government intervention into the foreclosure process, leaving underwater homeowners in limbo, while stealing opportunity from investors and first-time buyers,” says Foreclosure Radar CEO Sean O’Toole, who cites new legislation in Nevada which brought foreclosure activity to a near halt, and similar pending legislation in California. “The reality is that these laws don’t solve anything, as they fail to address the real problem—negative equity – while instead they punish real estate professionals, homebuyers, and investors far more than the banks they were aimed at,” argues O’Toole.

The recent $25 billion mortgage servicing settlement between the nation’s five largest lenders, state attorneys general and the U.S. Department of Justice, has sent servicers back to the drawing board on many thousands of delinquent loans and loans that were already in the foreclosure process. Bank of America [BAC 7.14 0.03 (+0.42%) ] alone has suspended 200,000 foreclosure actions, as it offers principal reduction modifications to comply with its $11 billion share of the settlement.

7--The American Foreclosure Process Has Ground To A Halt, zero hedge

Excerpt:  As BofA explains:


A streamlined foreclosure process should result in faster liquidations, which means a pickup in the flow of distressed inventory into the market. This would weigh on prices in the near term, but speed up the eventual recovery. However, countering the efficiency on the part of servicers are the delays by courts in the judicial states. It takes 31 months for a loan to be liquidated once it becomes 60 days delinquent in judicial states versus 24 in non-judicial. There have been efforts to improve the process in states like New York and Florida, but the delays remain.

8--Shadow housing inventory, zero hedge  (chart)

9--Benefit To US Economy From Deadbeat Squatters: $50 Billion Per Year, zero hedge

Excerpt:  Furthermore we disclosed yesterday, per LPS the average delinquency period is now 573 days meaning the typical deadbeat resides in their home for over a year and a half without paying a single cent. And since there are millions of delinquent mortgages, all this adds up to a lot of money. How much? .... As to quantifying this amount - per Ferroli until recently it was $60 billion a year! This is a stunning 0.5% of GDP.

10--Money is fleeing China, macrobusiness

Excerpt:  The detailed statistics from China’s April monetary statistics show that the change in the position of forex purchases has turned negative again in April.


With a relatively large trade surplus in April, this indicates that capital flow turned hugely negative. I estimate that excluding the trade surplus, capital outflow would be RMB177 billion (I don’t distinguish the type of flow). As explained in the past, under the current arrangements, a capital outflow will contribute to a tightening of monetary conditions within China. Thus we now know, more or less, the reason for last weekend’s decision to reduce Reserve Requirement Ratio. Indeed, while the 50bps cut of RRR would have made RMB421.14 billion available for banks to lend, almost half of that would have been offset by the April’s capital outflow:

On top the the negative shift in the forex position, more evidence emerged yesterday that Chinese banks are struggling with weak credit demand and deposit outflow...

Recently I have speculated that a debt deflation has begun in China. All of this new evidence supports that notion.

11--Falling interest rates reveal slowdown in China, pragmatic capitalism

12--Treasury Yields Drop; Stocks' Slide Deepens, WSJ

Excerpt:  Investors piled into Treasurys, sending prices higher and yields lower, amid rumors of bank runs in Spain and concerns about a weak reading on mid-Atlantic business conditions.


The yield on the 10-year note ended the session at 1.702% at 3 p.m. in New York, breaking the low set in September last year. Back then, investors were piling into Treasurys as worries mounted about Europe's debt troubles and the health of the U.S. economy.

The Dow Jones Industrial Average slid 156.06 points, or 1.2%, to 12442.49, its lowest close since January. The decline was the eleventh in 12 sessions for the blue chips, the most down days in that many sessions since 2002....

"It has been like water torture, really. It's just drip, drip, drip with these pieces of bad news," said Seth Setrakian, co-head of U.S. equities at First New York Securities. "I think you're finally seeing a lot of capitulation from a lot of funds."


Many investors worry there are likely to be more losses to come amid worries about possible contagion should Greece exit the euro zone.

Those same worries are leading investors to the perceived safety of Treasurys, even though yields on the 10-year note are well below expected levels of inflation. That means investors effectively would be receiving a negative yield on the note.

Yields on the 10-year note have tumbled from about 4% just two years ago as the crisis in Europe continues. The yield touched a record intraday low of 1.672% in September...

Another potential catalyst for falling yields is the prospect of sharp fiscal tightening at the turn of the year. Tax cuts and payroll-tax breaks are scheduled to expire and $1.2 trillion in automatic spending cuts from the debt-ceiling negotiation are set to kick in, unless Democratic and Republican lawmakers are able to reach agreements to alleviate their impact

13--Foreclosure activity in April fell nationally to the lowest level since the summer of 2007, CNBC

Excerpt:  Foreclosure activity in April fell nationally to the lowest level since the summer of 2007, but government intervention and the recent $25 billion mortgage servicing settlement are now changing the face of the crisis.


Foreclosure filings, which include default notices, scheduled auctions and bank repossessions, fell 5 percent in April from March, according to a new report from RealtyTrac, and are down 14 percent from April of 2011. One in every 698 U.S. housing units had a foreclosure filing during the month.

“Rising foreclosure activity in many state and local markets in April was masked at the national level by sizable decreases in hard-hit foreclosure states like California, Arizona and Nevada,” said Brandon Moore, CEO of RealtyTrac in a release. “Those three states, and several other non-judicial foreclosure states like them, more efficiently processed foreclosures last year, resulting in fewer catch-up foreclosures this year.”

Major banks are also suspending foreclosure actions, as they comply with the mortgage servicing settlement that was the result of so-called “robo-signing” in foreclosure document processing. Bank of America [BAC 6.9256 -0.0544 (-0.78%) ]recently announced that it was beginning a summer-long campaign to contact 200,000 borrowers, and offer them principal reduction, as part of the settlement; foreclosure actions, bank representatives said, would be suspended until the bank had reached them all and determined if they were eligible for new loan modifications....

As also reported today by the Mortgage Bankers Association, there is a big discrepancy between foreclosure activity in states that require a judge in the process (judicial) and states that do not (non-judicial). The MBA reported a rising number of loans in the foreclosure process in judicial states, but a falling number in non-judicial states during the first three months of the year. For April, RealtyTrac reports foreclosure activity down 7 percent from March and down 29 percent from a year ago. In judicial states, activity was down just 3 percent month to month but still up 15 percent from a year ago.


The judicial/non-judicial split is pushing the foreclosure crisis east, as some of the worst-hit states like California, Arizona and Nevada are able to clear through the backlog more quickly. The 11 cities with annual increases in foreclosure activity were all in the Midwest, South or on the East Coast, while six of the nine cities with annual decreases were out West in California, Arizona and Washington, according to RealtyTrac. California and Nevada, however, still post the top foreclosure rates, along with judicial Florida.

The supply of bank-owned properties in non-judicial states is also falling, as a growing cadre of investors sweeps in to buy distressed properties at the courthouse steps. One California Realtor speaking at the National Association of Realtors’ midyear conference this week told the conservator of Fannie Mae and Freddie Mac, “We don’t need a bulk REO sale program, we have no inventory!”



































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