Thursday, July 19, 2012

Today's links

1--The real shadow inventory, OC Housing News

CoreLogic has the most widely accepted definition of shadow inventory, but it’s wrong, and their numbers under report the actual figures. CoreLogic, counts visible bank-owned inventory and borrowers who have been served notice. These properties are visible, and although they may not be on the MLS yet, they are not hiding in the shadows. The real shadow inventory is the total number of delinquent mortgage holders who haven’t been served notice. These people aren’t picked up on any foreclosure reports because they haven’t entered the system yet. CoreLogic’s estimate of this number is based on self-reported databases, and lenders are not making a full and accurate accounting to CoreLogic...

Just in the New York city metro area and surrounding areas, there are over 400,000 borrowers not paying their mortgages, and almost none of these people have been served a notice of default which is when services like Realtytrac would pick them up. CoreLogic would have us believe that there are less than a million seriously delinquent loans in the whole country (see red below). Does this make sense to you?

2--Bank of America has one million customers who missed at least two payments, OC Housing
Money quote: "The company has about 1 million customers who have missed at least 60 days of payments,

Whoa! Wait a minute. Remember yesterday’s discussion about shadow inventory? CoreLogic says there are only about a million delinquent borrowers nationwide. Bank of America has a million on its books alone! If B of A has a million delinquent borrowers, how many do the other major banks have? And what about the MBS pools they manage? How many people aren’t paying their loans?

3--More on foreclosures and delinquencies, OC Housing

Based on the rate at which foreclosures increased, I estimate it will take another three and a half years for foreclosure rates to drop all the way down to their historically low levels prior to the housing bust. However, somewhere in between, the total number of foreclosures being processed through the MLS will decline to where they no longer dominate total sales. At that point, foreclosures will no longer be a strong drag on prices. I estimate the market will reach this magic threshold sometime in 2015 or 2016. At that point, the choppy bottoming period of seasonal ups and downs will be replaced by normal market appreciation based on income and job growth. Some of the most beaten down markets may see above average appreciation as they rebound back up to levels of payment affordability matching historic norms.

If I am right, the housing market will begin a true recovery in 2015, a full ten years after the crash began. The bottoming period will have lasted for seven full years. I might be wrong. It may take even longer....

Sean O’Toole, the CEO of foreclosure-data aggregator, estimates that it will take at least another decade, at the housing market’s current pace of growth, for homeowners who are underwater just to break even on their houses.

“We went from $4.5 trillion of mortgage debt in 2000 to $10.5 trillion of debt in 2008 — and we are still only down to $9.8 trillion,” says O’Toole.

“All those people with negative equity, they can’t sell. They are stuck in a prison of debt.”

4--Housing vs stocks, Trimtabs

At the top of the bubble households had $13 trillion in home equity and $14 trillion in stocks. Now home equity have been cut in half to $6.5 trillion; yet stocks are just a trillion less then at the peak.

5--Housing vs stocks round 2, TrimTabs

Want to piss off homeowners? Tell them that while home prices have been cut in half since the bubble burst, stock prices are back to being down less than 15% the October 2007 peak. You heard that right: The S&P 500 is down less than 15% and home prices are down 50%, a half-price sale, from the high.

Why? Obvious answer. The Fed is rigging the stock market and doing everything it can to push stock prices higher. Each Fed easing somehow or other lowered interest rates which pushed money into stocks. On the other hand, the Fed has nationalized the mortgage market, and that has made it impossible for anyone without perfect credit to get a mortgage. From 0 down during the bubble to no mortgage money available, no wonder housing prices have been cut in half.

As I have said in many previous videos, investors believe religiously that stock prices are protected by the Bernanke Put. Remember how low stock prices plunged in March 2009? Stock prices back then had dropped more than half from the October 2007 peak, as had home equity. Well, that March the Fed announced a major new monetary-easing program and stock prices soared by around 50%. Then after a 20% selloff, the Fed rolled out QE2; stock prices popped 40%. Then after another 20% selloff, the Fed announced something called Operation Twist and stocks rose 30%. Notice a pattern here? Every Fed easing produces a smaller bounce. Now we are about 5% down from the most recent market peak in April. And at the April high, the U.S. stock market was only down about 10% from the peak.

Yet home prices are still down about 50%. How many of you know that at the cycle top in 2007, total household holdings of stocks and all home equity net of mortgages were roughly the same, according to the Federal Reserve Z1 Flow of Funds? That’s right. At the highs, home equity, the value of all homes minus all mortgages, was $13 trillion, and the value of stocks held by households was around $14 trillion. The most recent Fed Z1 reports that equity in all homes is about $6.6 trillion and total stocks held by households are about $13 trillion, just about double housing.

I’m willing to bet very few of you know that back in 1982, the year before the 25 year bull market in stocks began, households owned about $1 trillion in stocks and $2.5 trillion in houses. What a turnaround. In 1982 stocks were 40% of the value of homes. Before the housing and stock bubbles burst, they were about the same. Now household home equity is half that of stocks.

Without the Bernanke Put, where would stock prices be? My answer is lower, lots lower. And I say the Fed fix will not work for very much longer. Interest rates and mortgage costs are as low as they can go. And yet after all the easings, the U.S. economy is barely growing. Wages and salaries of everybody who pays taxes, which to me is the most important metric of economic health, is growing by about $20 billion each month. And the U.S. government has to borrow $100 billion a month to pay its bills so wages and salaries can grow by $20 billion. Crazy!...

When cheap money loses its ability to prop up stock prices, look out below.

6--Low Mortgage Rates Not Helping Refis, Big Picture

Housing bulls will tell you homes are at their cheapest level according to the worthless NAR Home Affordability Index. But there is an enormous difference between homes that are affordable and buyers that can afford them. A buyer needs a 20% down payment, a good credit score, steady income, and sufficient ability to qualify for a mortgage under tight credit conditions. Such buyers are much rarer today than 7 years ago when anyone who could fog a mirror could get financing

7---Gloomy Forecast for States, Even if Economy Rebounds, NY Times

8--Small investors ripped off by high-frequency trading, Dallas News

In recent years, the stock market has morphed into a vast network of high-speed trading firms operating lightning-fast computers with much of it devoid of human interaction.

The idea that market fundamentals, such as earnings and interest rates, drive the market has almost become quaint. Instead, high-frequency trading firms gorge their computers with mind-boggling formulas — called algorithms — that tell them when to buy, when to sell and when to stand pat.

And know this: The trading orders, which are executed in one-millionth of a second, have nothing to do with whether a stock is fundamentally sound. It is, sadly, more about who has the better algorithm....

Consider this: By some estimates, high-frequency trading accounts for 70 percent to 80 percent of all trading volume. The percentage is even higher if the number of orders that are placed but then canceled are counted.

“I have seen estimates that 99 percent of all buy and sell orders that high-frequency trading firms put into the market are canceled,” Patterson said...

‘Dark pools’

Patterson explained that these are private trading systems where buy and sell orders from participants are matched without displaying the quote to the public as is done on the exchanges — thus the name dark pools. Several of the largest investment banks and securities firms run dark pools where an ever larger number of shares are being traded.

Goldman Sachs operates a dark pool called Sigma X, Credit Suisse has Crossfinder, and now even the exchanges have dark pools. There are probably at least 50 of these mystery-shrouded dark pools.

Patterson said, however, that while the dark pools were supposed to be a haven from the algo hunters, “most have been thoroughly penetrated” by the high-frequency traders.

As he writes in the book, there are now “toxic dark pools” swarming with predator algos designed to front-run large trader orders and game the market. That is both brilliant and disgusting.

9--Assassination Nation, counterpunch

“A broad-gauged program of targeted assassination has now displaced counterinsurgency as the prevailing expression of the American way of war.”–Andrew Bacevich

10--War on All Fronts, counterpunch
The Russian government has finally caught on that its political opposition is being financed by the US taxpayer-funded National Endowment for Democracy and other CIA/State Department fronts in an attempt to subvert the Russian government and install an American puppet state in the geographically largest country on earth, the one country with a nuclear arsenal sufficient to deter Washington’s aggression.

Just as earlier this year Egypt expelled hundreds of people associated with foreign-funded “non-governmental organizations” (NGOs) for “instilling dissent and meddling in domestic policies,” the Russian Duma (parliament) has just passed a law that Putin is expected to sign that requires political organizations that receive foreign funding to register as foreign agents. The law is based on the US law requiring the registration of foreign agents.

Much of the Russian political opposition consists of foreign-paid agents, and once the law passes leading elements of the Russian political opposition will have to sign in with the Russian Ministry of Justice as foreign agents of Washington. The Itar-Tass News Agency reported on July 3 that there are about 1,000 organizations in Russia that are funded from abroad and engaged in political activity. Try to imagine the outcry if the Russians were funding 1,000 organizations in the US engaged in an effort to turn America into a Russian puppet state. (In the US the Russians would find a lot of competition from Israel.)

The Washington-funded Russian political opposition masquerades behind “human rights” and says it works to “open Russia.” What the disloyal and treasonous Washington-funded Russian “political opposition” means by “open Russia” is to open Russia for brainwashing by Western propaganda, to open Russia to economic plunder by the West, and to open Russia to having its domestic and foreign policies determined by Washington.

“Non-governmental organizations” are very governmental. They have played pivotal roles in both financing and running the various “color revolutions” that have established American puppet states in former constituent parts of the Soviet Empire. NGOs have been called “coup d’etat machines,” and they have served Washington well in this role. They are currently working in Venezuela against Chavez

11--Alcohol Harms Thinking in Older Adults, Researchers Say, Bloomberg

12--Video Footage Of Suspected Israel Bus Suicide Bomber Who Is Caucasian And Had Fake Michigan License, zero hedge

13--Wage stagnation--Paul Krugman, NYTimes

I see from some of the comments that there’s a widespread belief that the wage stagnation we’ve experienced under “modern capitalism” is some kind of illusion, that it would go away if we took benefits into account (see chart)

14--Underwater home owners, Dr Housing Bubble

It should be clear that the bulk of home owners come from the older cohorts. Many of these are actually in negative equity positions:

11.4 million (23.7 percent) of homeowners are in a negative equity position. That is, you have a large segment of our home owning population that simply cannot sell without losing money, and this does not factor in the standard 5 to 6 percent selling costs. So many baby boomers are simply staying put if they can. It was interesting but not surprising to read the following:

“(Bloomberg) When Bank of America Corp. sent letters to 60,000 struggling homeowners offering to slice an average $150,000 off their loans, the lender got an unusual response from most of them: silence.”

So why would someone not respond to a $150,000 reduction on their mortgage? Well if you are in Nevada and bought a $500,000 home that will now carry a $350,000 mortgage but is worth $150,000 is this even worth your time? Can you even afford the lowered price? Many obviously cannot as indicated by the foreclosure rate. So the foreclosure pipeline is still healthy and full yet leaked out inventory looks better because:

-1. Banks are selectively leaking out properties

-2. The 11.4 homeowners in negative equity keep supply low as well (many may like to sell but cannot)

-3. Household formation has slowed so less demand on more expensive homes (competition from echo boomers and boomers can be strong because of low inventory in some locations)

Yet the low inventory is more of a symptom of dysfunctional housing market

15--The Battle of the Flippers, Seattle Bubble

16--Americans Hold Dimmest View on Economic Outlook Since January, Bloomberg

Limited wage gains and unemployment stuck above 8 percent risk further slowing consumer spending and leaving the U.S. more vulnerable to a global slowdown. There is also growing pessimism little is being done in Washington to avoid the so-called fiscal cliff at the end of the year, when higher taxes and automatic spending cuts kick in, raising the risk of recession.

“A soft labor market and political tensions surrounding potential changes in tax policy are weighing on consumer sentiment,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “Consumers are concerned about their incomes and have become much more cautious about spending. The economy is limping into the third quarter.”

A report from the Labor Department today showed applications for jobless benefits increased by 34,000 to 386,000 in the week ended July 14. The median estimate of economists in a Bloomberg News survey called for 365,000 claims. A Labor Department spokesman said the figures were skewed by a change in the timing of annual auto factory layoffs...

Fed policy makers “are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market,” Bernanke said in response to questions from lawmakers on July 17.

Employers added 80,000 jobs to payrolls last month, fewer than economists forecast, while the jobless rate was unchanged at 8.2 percent. Retail sales unexpectedly fell for a third month in June, Commerce Department data showed this week.

17--The return of auto subprime lending,

The subprime auto lending market is exhibiting some characteristics last seen during the early- to mid-1990s, when overheated competition led to poor underwriting and drove unexpectedly high losses that put many smaller lenders out of business.

Then, as now, investor capital flowed into the sector, lured by the profit potential from the ability to charge high loan rates while enjoying low funding costs. When the lending boom in the 1990s eventually went bust, the number of lenders contracted drastically, and subprime auto ABS investors suffered losses.

If today’s subprime auto lending market were to deteriorate as it did back then, investors could suffer comparable or greater losses, especially in the absence of monoline guarantors or other controlling parties available to minimize or absorb their losses.

Over the last two years, the sector’s profit potential has lured private equity investment into subprime auto lenders, many of which are relatively small, specialty finance companies that exhibit speculative characteristics and relatively high medium-term default probabilities. As a result, the subprime autoloan ABS market in the US is booming, with 2012 issuance on pace to exceed the robust issuance of 2011.....

The credit quality of pools securitized in 2011 and 2012 indicate that credit has loosened since 2010. Recent data from Experian show that the average APR on loans for used autos decreased to its lowest level since 2008, to 8.61% from 8.71% between the fourth quarters of 2010 and 2011, even as the average borrower credit score also decreased, to 670 from 679. The credit loosening reflects increasing competition as well as a return to pre-recession normalcy after the lenders that remained following the financial crisis put more stringent underwriting in place.

Of course, the issue isn’t just about the decline of underwriting standards and collateral quality; it’s equally about whether the decline is recognised by investors. The problem with the MBS market wasn’t just that lending standards sucked, but that their suckitude was “hidden” because of the misunderstood riskiness of securitised products and the awful work of the rating agencies.

18--European retail lending as a dying bank business model walking,

Those are plummeting returns on equity for mortgages, credit cards and other basic business lines across the region, all holed below the waterline by the new generation of bank capital and liquidity regulations.

“We estimate that for the four largest markets as a whole, retail ROE will fall from about 10 percent to 6 percent, a drop of 41 percent,” McKinsey’s analysts say. It’s mostly because of the extra capital which Basel III will require these assets to be backed up with. This is the coal-face of the new, increasingly standardised, risk-weightings facing banks.

19--The terminal disease afflicting banking,

We’d like to argue that faced with certain death, banks have adapted. Moved on. Reapplied themselves. Done everything they can to squeeze a little extra life from the system.

We’re talking about developments that touch almost every modern commercial and investment bank — from the growth of shadow banking, to the fragmentation of markets and build up of dark inventory. Algorithmic trading and securitisation to ETFs and Libor manipulation. Rehypothecation, to dealing with the threat of corporate cash-piles.

With hindsight, all of these developments may have been signs of an industry in crisis. Signals of pariah banking and desperation....

The centerpiece of modern intermediation is the advent and growth of asset securitization: loans do not need to reside on the originator’s balance sheet until maturity any longer, but they can instead be packaged into securities and sold to investors....

In other words shadow banking was essential for facilitating the asset securitisation process, which in itself was necessary to keep banking liabilities stable and returns supported in what was otherwise a falling yield environment...In other words did securitisation simply delay the inevitable by acting as a form of life-extension for the banks by means of bolstering margins through financial engineering fees and market making margins?
20--Washington throws its weight behind al qaeda,

Washington is actively supporting the rebel militias with arms and resources, despite the fact that they have deep ties to al-Qaeda. The pressure to unseat Assad comes with no concern for the potential boost Sunni extremists will get in his wake.

21--Obama Administration Sued Over Assassinating US Citizens,

22--HSBC 'allowed drug cartels to launder money', aljazeera

Lax controls at Europe's largest bank, HSBC, allowed Mexican drug cartels to launder billions of dollars through its US operations, an investigation by the US senate has found.

The extensive report on London-based HSBC Holdings PLC by the Senate Permanent Subcommittee on Investigations also says US regulators knew the bank had a poor system to detect problems but failed to take action.

HSBC executives brushed off complaints from other bank employees, so that the problems persisted for eight years, the report says.

In addition, some HSBC bank affiliates skirted US government bans against financial transactions with Iran and other countries, according to the report.

And HSBC's US division provided money and banking services to some banks in Saudi Arabia and Bangladesh believed to have helped fund al-Qaeda and other terrorist groups, the report said...

The bank used its US operation as a "gateway" into the US financial system for other HSBC affiliates, Senator Carl Levin, the subcommittee's chairman, told reporters Monday. Because of lax controls against money laundering, HSBC Bank USA "exposed the United States to Mexican drug money" and other suspicious funds, Levin said

23--Economic crises turn into Russian ally against missile defense, RT

Firstly, in case of a Mitt Romney victory, all discussions on strategic stability will be abandoned. Republicans certainly come back to George W. Bush position that all these issues are irrelevant and any talks with Russians don’t make sense at all. Let Americans and Russians just do what they want on this field.

This approach is, in a way, easier for both sides, but pretty dangerous. We already witnessed that in late 2008, when escalation in a strategic area, including missile defense plans of the US, led to some sort of “proxy war” between Russia and the US in Georgia.

Secondly, Obama’s reelection will most likely mean that the administration will be keen to continue talks and come up with new initiatives on arms control and related issues. For Russia it may create a difficult dilemma, because there is no chance that Washington will abandon the missile defense project, while Moscow clearly stated that any further talks on reduction of arms can resume only after settlement of the AMD issue.

Obama promised to be flexible after the election, but limits of this flexibility are clear – an antimissile shield is seen by the majority of America’s political class as something almost religious, a symbol of both US might and security. The complicated issue of the interaction between offensive and defensive elements of the strategic system and its impact on strategic stability is fully unknown to most US senators and members of Congress. They just don’t understand what all this is about and why Russians would have something to say about a purely “defensive” missile shield.

24--Putin's Prepared Remarks at 43rd Munich Conference on Security Policy, WA Post
(from the archive)

25--Russia Lowers the Boom on NGOs and other ‘Foreign Agents’, global research


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