Thursday, October 4, 2012

Today's links

“True compassion is more than flinging a coin to a beggar. It comes to see that an edifice which produces beggars needs restructuring.” Martin Luther King:

 1--QE running out of gas? Trim Tabs

Biderman points out that the Fed’s easing programs have had diminishing effects on the market.

“The first easing boosted the market value of all US stocks by about $4.6 trillion. The second easing raised values by about $3.5 trillion, as did the third easing. And the current easing raised market cap by just over $2 trillion. Subtracting the intervening declines, the market value of all US stocks is up by $10 trillion since the first easing in March 2009.”

“What’s worse,” says Biderman, “the Fed’s stimulus packages and huge increases in government spending have had only a marginal impact on the economy, the engine that ultimately determines market direction.”

Says Biderman, “The US government has borrowed and printed $5 trillion in deficit financing since the start of fiscal 2009. Over that same time frame, the Federal Reserve has grown it’s on and off balance sheet by $3 trillion. All that equals $8 trillion. But that $8 trillion has resulted in only a $550 billion annual gain in take- home pay in three years, or about a 3% annualized growth rate of $300 billion a year.”...

Public companies have sold $17 billion more shares so far in September then they have bought. That is even more than the $15 billion net shares sold in May of this year,” he says.

“What’s more, for the second consecutive month, insiders continue to sell 11 times more shares than they are buying. And, the last time insiders sold 11 times more shares then they bought over a two month period was in April and May of this year – right at the top,” says Biderman, adding:

“If stocks sell off even though the Fed has announced a perpetual easing, the decline could be brutal. What could stop it? Certainly not declining Q3 earnings and lower Q4 estimates, which major selling by insiders and companies, appear to be predicting.”

2-Corporate CEOs Unveil Obama’s Second Term Agenda: Cutting Entitlements and Endless Fracking, naked capitalism

In July, I pointed out that Obama’s second term agenda was to cut Medicare, Social Security, and/or Medicaid. And here comes the cavalry to make that a reality. This passage is from Politico’s Morning Money, which is a newsletter that spans the nexus between financial services lobbyists in DC and the financial sector in New York.
COMING POST-ELECTION: CEOs TO PUSH ON FISCAL CLIFF - In multiple conversations recently, top corporate executives have indicated to M.M. that following the election (and no matter the outcome) they will push hard for a broad tax and spending deal in Washington that will take the threat of the fiscal cliff off the table even if it means significant new revenues. The executives have said their efforts could help offer cover to Republicans afraid of signing onto any deal that might anger hard-core tea party leaders or anti-tax advocates such as Grover Norquist. “We don’t really care if our taxes go up a little if we can just get this done and take this threat away from the economy,” one top executive at a Fortune 100 company told MM this week.
These executives say either an Obama II or Romney administration could enlist them to sell a deal both inside and outside the Beltway. They all suggest the final package will look something like Simpson-Bowles. And many believe that coupled with a recovering housing market, a domestic energy boom and a lessening threat from Europe, a functional Washington could finally open the door to a significant economic expansion that would cut the jobless rate and slice into short term deficits and long-term debt.
So that’s the plan for 2013.

3---Despite record low mortgage rates, home sales volumes are weakening, OC Housing News

4--Flippers paradise, Dr Housing Bubble

The California housing market is back to being a flipper’s paradise. A combination of low mortgage rates and incredibly low inventory is providing a very fertile ground for current sellers. I was having a talk with someone about the Irvine housing market and how quickly homes are selling. Irvine is a very interesting market in that a large portion of sales come from the condo segment. You also have a good amount of international demand for the area. The current demand for housing in Irvine is very reminiscent of the days of the housing bubble. I’m reminded of some of the international buyers coming to new developments with cash in hand to buy places before they were even up. Bidding wars are common and buyers are now offering bids even over the asking price. Why? Inventory is very low and sales are increasing. So if you are looking to buy in this market expect insanity and gear up. ...

Flippers, bidding wars, and panicked buyers. It is beginning to feel like the 2000s again. What other examples of a mania are you seeing in the current market?

5--Burdened by Old Mortgages, Banks Are Slow to Lend Now, WSJ

(The stupidest article of the year? Maybe)

Mortgage credit is tighter than it should be," said Treasury Secretary Timothy Geithner at a Senate hearing in July. "And the main reason for that is because banks…feel much more vulnerable now to what people call 'put-back.' "
This play-it-safe stance by banks threatens to undercut the Federal Reserve's latest effort to push down mortgage rates by buying up mortgage-backed securities. Even if rates keep falling, many people will find it much harder to take advantage.
So far, Fannie and Freddie have asked banks to repurchase $66 billion in mortgages made between 2006 and 2008, according to an analysis of federal filings by Inside Mortgage Finance, an industry newsletter. The balance of outstanding demands from both companies at the end of July was up 37% from a year earlier. Most of these loans have defaulted, so banks face losses when they take them back....

Despite the sharp drop in rates, mortgage applications for new loans have been low in recent months. In April, senior loan officers indicated in a special Federal Reserve survey that put-backs were the leading reason for tighter underwriting standards....

New mortgage regulations set to take effect next year also could hold back any thaw. One provision of the Dodd-Frank financial-overhaul law, for example, may carry hefty penalties for failing to thoroughly document a borrowers' ability to repay a mortgage.
Banks, meanwhile, say the companies have recently stepped up scrutiny of older loans that have a longer record of making payments. Bank of America, for example, says $8 billion in outstanding put-back claims at the end of June were for loans on which borrowers had made at least 25 payments. That compares with just $3.7 billion in such loans at the end of last year. Bank of America stopped selling loans to Fannie earlier this year amid a dispute over which loans it should be forced to buy back. Both sides say they are in negotiations to resolve the matter.
Lenders can appeal put-backs by proving the loan didn't violate underwriting guidelines. But when Fannie and Freddie deny those appeals, lenders have little recourse but to comply if they want to keep selling loans to Fannie and Freddie.
Fannie and Freddie are operating with a "gotcha mentality," says Laurence Platt, an industry lawyer at K&L Gates in Washington. He says more loans are being put back for reasons that have nothing to do with why a borrower has defaulted. "But for their monopoly-like powers, they couldn't get away with that."
Mr. Mayopoulos, the Fannie CEO, dismisses such complaints. "This is about the fact that back at the time of origination, the manufacturer of that loan…did not do what they had represented that they had done," he says. As the housing boom turned to bust, "that was pervasive," he added.

6---Why QE will fail, credit writedowns

When it comes to the efficacy of Fed policy, there are a number of people you have to read. I like Stephen Roach for one. His column on the Fed’s Macro Malpractice was right on the money in my view. As controversial as his views are, I also like Marc Faber because he has been right on the money in saying that when economies turn down, central banks that can will always ‘print’. That is my view as well (though I disagree with Marc’s comments about hyperinflation). Then you have the MMT folks like Randall Wray, who told us QE2 was going to be a bust because it was just the equivalent of the Fed issuing treasury bills. He was right. These folks are telling you QE is bad for the economy and that QE will end in massive loan losses from inflated asset prices and distorted investment allocation. I agree and that’s not even considering the loss of interest income which I believe only reinforces the hoarding kind of psychology of the balance sheet recession.

7--Reports Show Small Businesses Are Reluctant to Hire, WSJ

8--The broken transmission mechanism, The Economist seems clear that current circumstances are causing these monetary policy actions to be far less effective than they otherwise would be. Marginal spenders are constrained by their desire (or need) to retrench. Most of the people who get the biggest benefit from central bank action are the people who already own lots of financial assets (the rich).

The fiscal authorities need to step up and do the job that the central banks cannot. Specifically, by running large budget deficits, governments can maintain the total level of spending in the economy while allowing households and businesses to repay their debts and accumulate savings. This is not a new insight, but it has gained popularity in the last few years thanks to the work of Richard Koo, the chief economist of the Nomura Research Institute who coined the term “balance sheet recession” to describe what happened to Japan after the collapse of its asset bubble in the early 1990s. (The paper is well worth reading in full.) Unfortunately, many governments across the globe seem more concerned with the abstract goal of balancing their budgets than with the important task of restoring their economies to health.

9--Iraq: Ten Years, a Million Lives, and Trillions of Dollars Later, Dennis Kucinich

10--Mortgage rates set more record lows, Housingwire

11--FHA will not participate in REO-to-rental, Housingwire

Acting Federal Housing Administration commissioner Carol Galante told a crowd of mortgage professionals her institution will not initiate an REO-to-rental program similar to Fannie Mae.
The Federal Housing Finance Agency recently completed many sales of REO and is now announcing winning bidders. HousingWire had that information more than one month ago.
"Looking at an REO-to-rental strategy, and while a rental strategy is very important, we decided it wasn't the best solution for the FHA, servicers, borrowers and their communities," Galante told the crowd at the HousingWire REperform conference underway in Dallas, Texas.
Galante added there are 700,000 delinquent mortgages in the FHA portfolio. A better solution to work through these loans, she said, is to sell the notes. DebtX will likely facilitate the transfers, she said.
For national buyers of the mortgages, the borrowers can not be foreclosed on in under six months.
Galante didn't give a time frame on when the sales will take place. And the FHA has sold portfolios of mortgages in the past. Galante said the aim is to offload about 10,000 delinquent mortgages per quarter.
There are other conditions, Galante said. For example, no more than 50% of the properties can be put on the market as a vacant foreclosure. The buyer needs to put in place another solution, and in such a case leaving the homeowner as a renter would be acceptable.
"This is the most innovative strategy we've utilized in the past year," Galante said, adding the FHA will announce more details soon.

12--Ready to take some pain? oil price

The president of the Federal Reserve Bank of Chicago, noted dove, Charles Evans, had the kindness to say that unemployment would not fall to 7% until 2014, and that the Fed could not reel back on monetary policy even if inflation becomes a threat. Kaching! One cannot imagine a higher octane gasoline to pour on the flames of the gold market.
To see where Evans is coming from, please examine the weekly jobless claims reported by the Department of Labor for the last two years. As long as we are stuck in the 350,000-400,000 range, recession is solidly on the table. Watch stocks track this chart tick-for-tick

13--The Devastating Economic Impact of Constantly High Oil Prices, oil price

As I see it, increasingly high oil prices weaken an economy because they reduce discretionary spending and indirectly cause people to be laid-off from work. They have many other adverse effects as well–they tend to raise food prices, with similar effect. The laid-off workers require unemployment compensation payments, and the same time they are contributing less tax revenue. All of this creates a huge imbalance between revenue collected by governments and expenditures paid out. If oil prices rise again, it will tend to make the imbalance worse

14--More Bank of America Putbacks Coming; Fraud Exposed, Mish (from the archive)

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