Sunday, August 28, 2011

notes on the week ended august 27th

obviously, the east coast hurricane has been the big news of the week, but the focus all week in both the financial MSM and the econoblogs was speculation about what bernanke might have to say at the annual central banker shindig in jackson hole wyoming, as it was at that meeting last year that he announced QE2...with the economy again showing weakness, and it being actually weaker than it was last year at this time, consensus seemed to be that another $500 trillion of easing would be in the offing; in that respect, bernanke's speech, which offered nothing specific, disappointed those who believe quantative easing could help, although having already seen two larger rounds of it peter out, we could question how much good it would do us (if you recall, the originally stated objective of QE2 was to lower interest rates across the benchmark treasury curve and thereby encourage business & housing borrowing, with the end target of reducing unemployment; when rates rose immediately after QE2 started, bernanke changed his tune to target to the stock market, insinuating that the wealth effect would trickle down on us)...it's hard to imagine how much good any more easing can do now; the 2 year treasury is already down to a record low .22%; this week's 5 year note auction went at a yield of 1.0279%, ten year interest rates are around 2%, and mortgage rates remain at record lows across the board...banks are already complaining that they're saddled with too much money they cant put to use; a high level of deposits increases their FDIC insurance and will eventually contribute to their need for more capital...

at any rate, bernanke did suggest that there might be some action forthcoming from the Fed at their next FOMC meeting in september - to that end, he announced that another day would be addded to that scheduled meeting; he also took the opportunity to admonish congress for having created conditions that put the economy on hold while the country faced default during the debt ceiling debate...retrospectives on the speech as well as those blog posts suggesting what the Fed might do differently are right near the beginning of this weeks blog post...

based on my correspondence, there was quite a bit of interest in warren buffett's $5 billion purchase of BankofAmerica preferred; to my mind, with their heavy investment in RMBS (bundled mortgages), BofA has always bordered on insolvent, even though their liquidity & slight of hand accounting has kept that disguised from the market...this recent spate of trouble, however, seems to have had its origins in the foreclosure fraud investigations & the lawsuits by the NY Fed, Pimco, & Blackrock and the more recent suit by AIG over misrepresentations of MBS that BofA had sold to them…about 3 weeks ago yves smith at naked capitalism started a “Bank of America Death Watch” & had been updating it periodically with exposes' of their liabilities & financial statements, & the death watch had also been picked up elsewhere in the blogosphere...the foreclosure fraud settlement with the state attorney generals for a paltry $20B, which the administration had been pushing, included a "get out of liability free" clause, so 4 attorney generals, Schneiderman of NY, Beau BIden of delaware, Coakley of massachesetts, and kamela harris of california balked at signing on...early this week the administration pushed back against schneiderman, apparently taking him to be the ringleader, to settle with the banks; that corruption was in turn exposed by the NYTimes, who editorialized against the settlement…with the "get out of liability free" settlement thus stalled, BofA started sinking fast, and there was even talk of it failing & precipitating another financial crisis…so by midweek the bailout rumors were flying, & there was ever a rumor that geithner was discussing a BofA takeover by JP Morgan with Jamie Dimon, & it even got so bad that the Financial Times reported that BofA had moved to counter more blog rumours; it seems it finally came to to a head after henry blodget at business insider editorializd that BofA must raise more capital rather than try to sell assets; then, shortly after obama was reported to be consulting with buffett, the deal was announced...buffett gets 6% in perpetuity, and more than likely a bailout if anything should go wrong later...and it aint over till its over; shortly after the BofA/Bufffett deal closed, Charles Schwab, the nations biggest broker, sued banks, including BofA, for manipulating Libor rates, a claim which may be tripled under antitrust law...

MBA in Foreclosure by Statethere were also more mundane reports regarding the ongoing mortgage crisis, as the MBA released their 2nd quarter mortgage delinquency report, showing that total delinquencies increased to 12.87% of mortgages; ie, more than one in 8 homeowners have missed one or more house payments…bill mcbride at calculated risk broke that report out in a series of posts with graphs which explain what has been going on better than words can; first, the overview on the MBA report, then “Comments and State Data”. then Mortgage Delinquencies by Loan Type, and finally Delinquencies by State: Range and Current…i found his graphs by state most interesting, because they show how the foreclosures and delinquencies are heavily concentrated in a few states; the first one here is just foreclosures, with the red bars judicial states and clearly showing florida as the outlier with over 14% of the homes there in foreclosure; the second graph below adds the lengths of time loans are delinquent to arrive at the total homes in trouble in each state...you should be able to click on either graph to have it open in a new window...
MBA Delinquency by Period
the FHFA (housing finance agency) introduced a new home price index this week; previously their index only included prices for govt agencies such as fannie & freddie; theyre now including state prices and census divisions in their national report, which showed a home price decline of 5.9% for the 2nd quarter in their initial expanded index...we also had the monthly new home sales for july released this past week, and they declined to a 5 month low at 298,000 after june’s sales were revised downward to 300,000…at the rate they’re now being sold, this is shaping up to be the the worst for new-home sales on record, dating back at least 50 years, when obviously the number of households was significantly smaller...new home construction, though a small part of the economy, is important because its said that each home built creates an average of three jobs and generates $90,000 in taxes...the administration did float another housing proposal(s) this week, which has been variously reported as applying to homeowners with government backed mortgages or something more general whereby homeowners could their loans at today's lower interest rates; obviously, with a lower rate, homeowners could pay off their loans easier and free up household cash for other uses...but nothing is cast in concrete yet; as reported, it's still "they were weighing a range of proposals"..so dont hold your breath... 

as everyone anticipated, GDP for the second quarter was revised downward to an annual growth rate of 1.0% this week, which is better than guestimates i'd seen earlier but still lousy; we knew the surprisingly high trade deficit would be a drag; also contributing was a greater shrinking of the government sector than originally estimated; in fact, the decline in government spending now practically matches the rise in personal consumption spending, and essentially the growth in the economy is coming from business investment alone, which cant go on by itself indefinitely...with the .4% rate for the first quarter unchanged, cumulative growth for the first half was at 0.7%, where a growth rate of 2.5% to 3% is needed to put a dent in unemployment...and ominously, there's already a forecast (from Nomura) that the economy lost jobs in August...first time claims for unemployment also came in at a higher than expected 417,000, so our brief flirtation with the 400K level seems to be over...

we have another political debate over taxes shaping up, with the parties switching their positions; this time is the republicans who want to let the payroll tax cut expire at the end of the year, & the administration wants to extend it; if you recall, this tax cut — which reduces workers’ contributions to social security from 6.2% to 4.2%, was part of the mcconnell-obama tax deal which i panned last december, & its said to put an average of $1000 extra annually in to worker’s paychecks…i dont have a strong feeling about this expiration, as i’ve become increasing skeptical of the stimulative value of tax cuts, and leaving it in place undermines the ongoing contributions to the social security trust fund, which will likely come back & bite us on that safety net later…

a few other notes of interest; the S&P Board fired the CEO responsible for the US downgrade & replaced him with an exec from citigroup, and said the downgrade had nothing to do with it...power plants in texas, which are dependent on fresh water, may be forced to curtail operations or shut down completely if the state’s severe drought continues into the fall; the keystone XL pipeline from the alberta tar sands, from the same conglomerate responsible for recent spills, seems set for approval, as the state department believes it will have minimal environmental impact even though it crosses the ogallala aquifer, the primary source of water for states in the middle third of the country, and the Japanese government is preparing to declare a large zone around the Fukushima plant uninhabitable, probably for decades, due to radioactive contamination at unsafe levels...

it also looks like the greek bailout is unraveling, even though the feared contagion to italy & spain has been contained by the ECB buying of their debt; finland has insisted on collateral for their participation, moody's warned that would cause a greek default, and greek interest rates subsequently hit new highs, with their 10 year bonds over 18% and two year debt hitting 46%...the finnish deal would need eurozone approval, and if they get it, then austria, slovenia, slovakia & the netherlands want the same...a greek trade group reports that the imposed austerity will force the closure of 100,000 small businesses by the end of the year, and as much as twice that many by next year...meanwhile, it's reported that cutbacks stemming from the austerity imposed in italy will likely make their deficit worse instead of better, so france is going to try the same tactic..

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me

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