Tuesday, September 25, 2012

Today's links

1--Brace Yourself: 3rd Quarter Earnings Could Fizzle, Fiscal Times

If the analysts polled by Thomson Reuters have called it correctly, the third quarter of 2012 will be the first quarterly period since the economic recovery began in 2009 in which earnings growth rates for companies in the Standard & Poor’s 500 index will turn negative.

2--European Optimism Fades, naked capitalism
3--Wall Street Rolling Back Another Key Piece of Financial Reform, Rolling Stone
...
the Dodd-Frank Act among other things included a simple reform. It required the financial advisors of municipalities to do two things: register with the SEC, and accept a fiduciary duty to respect the best interests of the taxpayers they are advising.

Sounds simple, right? But Wall Street couldn’t have that. After all, if companies are required to have a fiduciary responsibility to cities and towns, how in the world can they screw cities and towns? The idea was a veritable axe-blow to the banks’ municipal advisory businesses.

4--Spain Recoils as Its Hungry Forage Trash Bins for a Next Meal, NYT

5--Canada New Home Sales Plunge 64 Percent; Lowest August on Record, Mish

6--QE3 enriches subprime mortgage bonds, Housingwire

The scarcity of agency mortgage-backed securities intensified by the Federal Reserve third round of quantitative easing is adding momentum to the non-agency subprime MBS sector rally.
Bank of America Merrill Lynch ($9.10 0%) MBS strategist Chris Flanagan says the impact of QE3 on securitized products is that the “rich get richer.” Portions of the market saw valuations stretched even prior to the Fed announcement, and “QE3 will suck out an enormous supply of bonds from the market,” he says.

Agency MBS spreads were already at historically tight levels, and one week later QE3 has dramatically enriched the agency MBS market: the current coupon spread to the 10-year treasury has declined by 54 basis points to an all-time tight of 6 basis points.
Unlike the significant tightening in agency MBS, the spillover to other sectors such as non-agency MBS was a less expected outcome of QE3. In fact, Flanagan points out, the non-agency MBS sector has been in major rally mode since May..

“Given our own belief that home prices will continue to recover, we think the housing data will continue to attract investors to the non-agency market,” says Flanagan, who maintains his preference for last cash-subprime, which “we believe offer attractive fundamental value given the improving housing picture.”

BofAML anticipates further tightening and that agency valuations will get richer as the Fed continues its buying spree for what he thinks will be up to two years.

Analysts expect $1.4 trillion in gross agency MBS originations in 2012 and that the Fed will buy agency MBS at a gross annualized rate of about $850 billion per year, or roughly 60% of all new originations.
Last week “showed us that it is officially game on in terms of access to supply,” Flanagan says

7--Obama's fiscal stimulus worked, Wa Post

if you look at the leaked memo that the Obama administration was using when they constructed their stimulus, you’ll find, on page 10 and 11, a list of prominent economists the administration consulted as to the proper size for the stimulus package. And there, on page 11, is Rogoff, with a recommendation of “$1 trillion over two years” — which is actually larger than the American Recovery and Reinvestment Act. So if they’d been following Rogoff’s advice, the initial stimulus would have been even bigger — not nonexistent.

As for Reinhart, I asked her about this for a retrospective I did on the Obama administration’s economic policy. “The initial policy of monetary and fiscal stimulus really made a huge difference,” she told me. “I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn’t fully appreciated.”

8--I.M.F. Praises Central Banks, but Sees Slowing Ahead, NYT

9--Currency war warnings follow US Fed’s “quantitative easing”, Nick Beams, WSWS

Following the latest decision, in which the Fed gave an indefinite commitment to purchase mortgage-backed securities to the tune of $40 billion per month, the Brazilian finance minister, Guido Mantega, repeated his earlier warnings of a currency war.

Interviewed by the Financial Times last Thursday, Mantega said the US move was “protectionist” and could have drastic consequences for the rest of the world. “It has to be understood that there are consequences,” he told the newspaper. The Fed’s latest move would have only marginal benefits, he said. There was already plenty of liquidity in the economy but it was not going into production. The real purpose of the measures was to depress the value of the dollar and boost US exports, he added.

Mantega pointed to last week’s decision by the Bank of Japan (BoJ) to intervene in financial markets with its own version of quantitative easing as another sign of global tensions. “That’s a currency war,” he said.

In a move clearly aimed at pushing down the value of the yen and lifting Japanese exports, the BoJ decided to add $128 billion to its program of asset purchases. It cited the effects of “financial and foreign exchange market developments” as one of the reasons for its actions...

The US Fed’s rationale for its actions is that the injection of liquidity will lower interest rates and encourage investment, resulting in the creation of more jobs and a lowering of unemployment. But a recent Duke University survey of the chief finance officers of 887 large companies found that a lowering of interest rates would have virtually no impact on their decisions.

According to the Duke University analysts: “CFOs believe that ... monetary action would not be particularly effective. Ninety-one percent of firms say they would not change their investment plans even if interest rates dropped by 1 percent, and 84 percent said they would not change investment plans if interest rates dropped by 2 percent.”

In other words, so far as the real economy is concerned, the Fed’s actions are equivalent to pushing on a string. Indeed this is recognised within leading financial circles...

While the Fed’s measures have almost no impact on investment and jobs, they do give a boost to financial markets. Since the collapse of September 2008, the Fed has followed a clear agenda. The banks and finance houses, whose speculative activities, some of them of an outright criminal character, triggered the crisis, have been given endless supplies of ultra cheap money. Profits are being made through the elevation of the price of financial assets resulting from the injection of more money from the Fed.

However, the stagnation and outright recession in the real economy means that this process cannot continue indefinitely and the house of cards must collapse. The interventions by the world’s three major central banks—the US Fed, the European Central Bank and the Bank of Japan—means that rather than being able to provide further bailout money, they will themselves be dragged into the maelstrom.

10--Home Prices Climb Again, NYT

11--Fannie and Freddie revamp repurchases, FT

The new policies were announced on Monday by the companies’ regulator, Edward DeMarco of the Federal Housing Finance Agency. They include giving lenders a reprieve from possible “putbacks” if borrowers have made their monthly payments for the first 36 months of a loan and earlier reviews of possible underwriting breaches.
Putbacks have been among the main sources of concern for mortgage lenders including Bank of America, which have argued that Fannie Mae and Freddie Mac’s practices have caused it to deny many loan applicants due to fears that the government-backed groups could later force them to buy them back.
Other US agencies, including the Treasury department, had been trying to persuade FHFA to alter Fannie Mae and Freddie Mac’s policies.
Over the past six months, Fannie Mae and Freddie Mac requested that lenders repurchase nearly $19bn in soured mortgages. About $17.5bn in requests were outstanding as of June 30, securities filings show.

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