by ilene - November 13th, 2010 10:43 pm
Courtesy of The Pragmatic Capitalist
- Many on Wall Street believe that net interest margin or NIM among U.S. banks is at record levels. They are right, but not in the way that many investors and analysts expect.
- Unfortunately, measured in dollars, gross interest revenue of the banking industry has been cut by a third over the past three years due to the Fed’s zero interest rate policy. Banks, savers are literally dying from lack of yield on assets due to QE/ZIRP.
- In the post WWII period, Fed interest rate cuts resulted in significant reduction in average mortgage borrowing costs for households — until 2008, when mortgage rates implied by the bond market fell significantly but households were not able to refinance.
- Fees charged by Fannie Mae and Freddie Mac, and a mortgage origination cartel led by the big four
banks(BAC, WFC, JPM, C), are now 4-5 points on new origination loans vs less than 1 point during housing boom. Huge subsidy for largest zombie banks effectively blocks refinancing by millions of households.
- These fees, which can add up to 7 to 10% of the face value of the loan, raise mortgage rates to borrowers by hundreds of basis points. Banks and the housing GSEs, however, saw significant benefits in declines in funding costs thanks to low fed funds rates.
- For banks and investors, one of the biggest opportunities for gain is to invest in the stronger regional banks that are acquiring troubled or failed institutions. Resolution results in losses, but also creates value for investors andsociety.
- Acquiring failed banks from
by ilene - November 7th, 2010 1:09 pm
Courtesy of Tyler Durden
The following chart prepared recently by JPMorgan demonstrates something rather scary, and makes it all too clear how the Chairman’s plan to "assist" the US population via some imaginary "wealth effect" due to QE2, is about to backfire. As is now becoming all too clear, the prices of energy and food products are about to surge, and in many cases have already done so, but courtesy of some clever gimmicks (Wal Mart selling what was formerly 39 oz of coffee as a 33.9 oz product for example) the end consumers haven’t quite felt it yet. They will soon.
There is a limit to how much every commodity can open limit up before it appears on the SKU price at one’s local grocer. And while a marginally declining "core CPI" is irrelevant for this exercise as it measures only items that are completely outside of the scope of everyday life, what will be far more important to end consumers will be the push higher in food and energy costs. The problem, however, is that for the lowest 20% of Americans, as per the BLS, food and energy purchases represent over 50% of their after-tax income (a number which drops to 10% for the wealthiest twenty percentile). In other words should rampant liquidity end up pushing food and energy prices to double (something that is a distinct possibility currently), Ben Bernanke may have very well sentenced about 60 million Americans to a hungry and very cold winter, let alone having any resources to buy trinkets with the imaginary wealth effect which for over 80% of the US population will never come.
Here is how JPM explains the phenomenon:
When the Fed considers the possible consequences of a falling dollar resulting from QE2, it should perhaps focus on food and energy prices as much as on traditionally computed core inflation. First, the food/energy exposures of the lower 2 income quintiles are quite high (see chart). Second, the core CPI has a massive weight to “owner’s equivalent rent”, which suggests that the imputed cost of home occupancy has gone down. Unfortunately, this is not true for families living in homes that are underwater, and cannot move to take advantage of it (unless they choose to default and bear the consequences
by ilene - November 6th, 2010 4:24 pm
Courtesy of John Mauldin at Thoughts from the Frontline
I am in London finishing my new book, The End Game, which will be out after the first of the year, as soon as Wiley can make it happen. Working with my co-author, Jonathan Tepper, we are making good progress. We intend to quit (a book like this is never finished) tomorrow afternoon.
I am going to beg off from personally writing a letter this week, but will give you something even better. Dr. Lacy Hunt offers us a few cogent thoughts on the unemployment numbers. The headline establishment survey came in much better than expected, but the household survey was much weaker. In addition, Dr. John Hussman wrote a piece last week that I thought was one of his best, on liquidity traps and quantitative easing, and that’s included here, too. We are embarking on a course through uncharted waters. No one (including the Fed) has any idea what the unintended consequences will be.
I remarked a few weeks ago that the Fed is throwing an inflation party and not sure whether anyone will come. Last night at dinner, Albert Edwards of Societe Generale noted that not only do they not know whether anyone will come, they do not know what they will do if they do come, how much they will drink, or when they will leave.
My quick takeaway is the $600 billion is not all that much, and the buying is concentrated in the middle of the curve, where it is likely to do the least in terms of lowering rates (they are already low!), so also likely to do the least damage. Mohammed El-Erian thinks that if nothing happens the Fed will be forced to continue, which is a dangerous thing. I wonder whether they might just shrug their shoulders and say, "We tried, and now it is up to the fiscal side of the equation." We shall see. It will be important to listen to the speeches of the Fed governors to get some idea.
Before we jump in, let me give you a few thoughts I am picking up in Europe. The yield spreads on Irish and Spanish bonds are blowing out even as we speak, as well as those on the rest of the periphery. While all eyes are on the Fed, the real action…
by ilene - October 19th, 2010 11:56 pm
The mortgage fraud cost estimates for banks are a bit like QB Ryan Leaf - all over the place and without any accuracy whatsoever.
We’re hearing estimates of anywhere from a few hundred million bucks to as much as $200 billion! And in the meantime, Bank of America ($BAC) is telling us that they’ve found nothing wrong in their foreclosure process and that after halting all activity in 50 states, they are now back in business in half the country.
There are currently 7 million foreclosures in the housing market that need to be worked through and any delay will be costly for large lenders like B of A.
Should the states or the courts decide that many of these securitized mortgage-backed bonds are structured fraudulently (no one knows which mortgage is owned by whom), there is a possibility that the banks may have to buy them back due to a clause on most of this paper called the Put-Back.
In the absence of anything even resembling a consensus on how big the costs of mortgage put-backs may be, the temptation is to simply say, Who Cares? Well, I’ll tell you who cares…
For starters, how about hedge fund manager John Paulson? With a stake in Bank of America of 167 million shares, Mr. Paulson has about 2 billion reasons to care about how big their put-back exposure is.
Mutual fund monster Bruce Berkowitz (Fairholme) has about 667 million reasons to give a damn (54 million shares held).
Hedgie David Tepper of Appaloosa Management, no slouch himself in the "reflation trade", has about 337 million reasons to care (27 million shares).
These three investors make up the Triumvirate of the Reflationista Trade. These are the ultimate Don’t-Fight-The-Fed-ers.
That they are all in the same trade, BAC, is not a surprise – it is the quintessential call option on housing and employment. But they may not have bargained for the foreclosure mess that has hit the media with the gale-force wind of 2007′s sub-prime storm. Whether or not this particular storm blows over – or spills over – is very much of interest to Paulson, Berkowitz and Tepper, make no mistake.
by Phil Davis - September 23rd, 2010 7:51 am
"I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
Fortune’s always hiding,
I’ve looked everywhere,
I’m forever blowing bubbles,
Pretty bubbles in the air."
We shorted TLT again yesterday ($105) as I sure wouldn’t lend the US money at those rates and neither, it seems, will the "smart money" guys anymore. The cost to hedge against losses on U.S. government debt rose to the most in six weeks as investors bet the Federal Reserve will put more cash into the economy. Credit-default swaps on U.S. Treasuries climbed 1.7 basis points, the biggest increase in more than three weeks, to 49.4, according to data provider CMA. The Fed said Tuesday that slowing inflation and sluggish growth may require further action. The statement positioned the central bank to expand its near-record $2.3 trillion balance sheet as soon as their November meeting – just in time for a Santa Clause boost for the markets.
So why does this not make us bullish? Well, as I said to Members on Tuesday, it was an anticipated statement with no immediate action and we’re at the top of a 10% run for September so, as I said in yesterday’s post, we anticipate a pullback of 2%, back to our 4% line (see post). Also in yesterday’s post, I mentioned our IWM 9/30 $67 puts ($1.10) and the DIA Oct $105 puts (.89) both of which were good for a reload on yesterday’s silly spike, where I said to Members in the 9:56 Alert:
I like the same IWM and DIA puts as yesterday as we test 10,800 on the Dow – I don’t think it’s going to last. Tomorrow we lose the usual 450,000 jobs for the week and we have Existing Home Sales at 10, which can now disappoint as Building Permits were a big upside surprise yesterday. We also get Leading Economic Indicators at 10 but they are expected up just 0.1% and I doubt they go negative. Friday we have Durable Goods, which should be down 2% and New Home Sales at 10, also now set up to disappoint even
by Phil Davis - September 20th, 2010 7:55 am
Congratulations to 440,000 of us!
That’s how many people became Millionaires in the past 12 months (ending in June). According to a new survey from Phoenix Marketing International’s Affluent Market Practice, the number of American households with investible assets of $1 million or more rose 8% in the 12 months ended in June. The survey says there now are 5.55 million U.S. households with investible assets of $1 million or more. That follows two years of declines and brings the Millionaire count back to 2006 levels. Of course, that is still below the peak of 5.97 million in 2007 and the current growth rate is well below pre-financial crisis levels, when the Millionaire population increased as much as 35% a year.
Still, the numbers offer further evidence that the wealthy may have decoupled from the rest of the economy, as we expected would happen in "A Tale of Two Economies," my 2010 outlook. The study’s authors say high salary growth, rather than investments, are the main drivers of the Millionaire expansion. As we who play the markets are painfully aware, $1M in assets doesn’t leave a lot of room for investments. The very wealthy, on the other hand, had a much better year than the mere Millionaires. The population of American households with $5 million or more in investible assets surged 16%. The population of those with $10 million to invest increased 17%. The rich have never been getting richer than they have been in 2010!
Of course, in order for someone to get rich, someone has to get poor and, this year it took 4M Americans falling below the poverty line ($22,000 for a family of 4) to provide the cash for our 440,000 winners. That’s pretty much right in line with the numbers I’ve been citing over and over again – it takes 1,000 poor people to make one rich one!
The Census Bureau found that the fraction of Americans living in poverty rose sharply to 14.3% in 2009, up from 13.2% previously. This is the highest level since 1994. In total, 43.6 million Americans were living in poverty last year. Even the median family is getting the shaft in America with 2010 inflation-adjusted salaries barely keeping pace with 1980 inflation-adjusted salaries – making 3 full decades without improvement for the average American family. According to the WSJ, the bottom 40% (120M people) have dropped from having 14.5% of the nation’s income in 1980 to having 12% in…
by ilene - September 19th, 2010 2:25 pm
Courtesy of Gordon T. Long of Tipping Points
The United States is facing both a structural and demand problem – it is not the cyclical recessionary business cycle or the fallout of a credit supply crisis which the Washington spin would have you believe.
It is my opinion that the Washington political machine is being forced to take this position, because it simply does not know what to do about the real dilemma associated with the implications of the massive structural debt and deficits facing the US. This is a politically dangerous predicament because the reality is we are on the cusp of an imminent and significant collapse in the standard of living for most Americans.
The politicos’ proven tool of stimulus spending, which has been the silver bullet solution for decades to everything that has even hinted of being a problem, is clearly no longer working. Monetary and Fiscal policy are presently no match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD drop in Shadow Banking Liabilities has become an insurmountable problem for the Federal Reserve without a further and dramatic increase in Quantitative Easing. The fallout from this action will be an intractable problem which we will face for the next five to eight years, resulting in the ‘Jaws of Death’ for the American public.
The ‘Jaws of Death’ is the crushing squeeze of a shrinking gap between incomes and a rising burden of the real cost of debt burdens. Many may say there is nothing new in this, but I would respectfully disagree. There is a widespread misperception of what is actually evolving that stops voters from forcing politicians to address America’s substantial underlying dilemma. It also stops investors from positioning themselves correctly.
Any solutions of real substance are presently considered political suicide. It is wiser to wait for a crisis event to unfold. As White House Chief of Staff and a primary Obama political strategist, Rahm Emanuel has said on numerous occasions: “You never want a serious crisis to go to waste”. It doesn’t take much intelligence to understand this also implies looking for a crisis as a political shield, for example from an almost insurmountable political problem such as a generational reduction in the US standard of living.
by Phil Davis - September 15th, 2010 8:22 am
As we discussed yesterday, it was meet the new boss, same as the old boss in Japan as Naoto Kan’s re-election sent the Yen to new highs as he was considered the least likely candidate to back intervention. Well surprise, surprise this morning as Japan officially intervened in the FOREX markets and sent the Yen down a full 2.5% as they used their Yen to purchase an undisclosed basket of currencies.
Since the Dollar is up today against both the Pound ($1.55) and the Euro ($1.29), we can assume the dollar is one of those currencies and demand for Dollars means upward pressure on rates so that should be the end of the TLT bounce for the moment. Stock boys want bonds to die so the money can come this way and bond boys want you to fear the stock market so you will let them hold your money (and charge you fees) at ridiculously low rates of interest. That’s they Yin and Yang of the markets.
“Investors were starting to doubt the government’s commitment to its pledge that it would take bold action,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. Kan and Noda in recent weeks repeatedly said that Japan was ready to take “bold” measures to stem the currency. The Japanese government official said European and U.S. officials were informed of the move in an effort to avoid a negative reaction. It took a while to convince Europe because authorities there didn’t like the idea, the person said.
We’ll see if the stronger Dollar today puts pressure on commodities but we’re in pretty good shape as this rally, for a change, has not been led by commodities as the market is now flat to the August despite an 8% drop in oil prices (see USO on chart):
I often complain about rallies that are led by Financials and Commodities as those are things that suck money OUT of the economy and are not long-term drivers of growth. The entire 2006-7 rally was this kind of rally and I bitched about it all the way up. We also had housing back then, another type of commodity, but that’s so dead now it’s hardly worth mentioning, is it? Actually housing is where we used a lot of commodities like lumber and copper etc. 33 months after the onset of the Great Recession, new home sales are still down 70% and non-residential construction is down 36% – that market is dead, dead, dead.
by Phil Davis - September 10th, 2010 8:27 am
Was this a "good" week for the markets?
Yesterday morning I put out an Alert to Members regarging our level watch: "Keep in mind that our 2.5% levels represent a 5% run from the bottom since last week so it’s natural that we get a 1% pullback from there so the key is to hold the 1.5% line – THAT will be our bullish indicator:"
- Up 2.5% (we hope): Dow 10,455, S&P 1,100, Nas 2,255, NYSE 7,000 and Russell 650
- Must hold at 1.5%: Dow 10,353, S&P 1,086, Nas 2,233, NYSE 6,902 and Russell 644
- Middle Range (MUST hold): Dow 10,200, S&P 1,070, Nas 2,200, NYSE 6,800, and Russell 635.
As you can see from David Fry’s SPY chart, it was an interesting day and we did pull an aborted stick into the close which kept us over 1,100 on the S&P and 7,000 on the NYSE and , as you can see, our 1.5% lines did pretty much hold up as a bottom test, other than the Russell, which we had already given a pass to in the morning post as they’ve been so pathetic we’re just proud of them if they try.
We had shorted PCLN in the same Alert (congrats to all who took that one!) and the inventory report chased us out of our upside oil plays (but not nat gas) at 11 and that initiated the market slide along with, as Dave notes, a poor Treasury Auction that finally got TBT back over $33 (I had also mentioned shorting TLT several times in the past few weeks). Is this the beginning of the end of the free money express - stay tuned for more action next week!
This week’s action isn’t done yet and we still need to hold our levels. As I said yesterday, the best time to take disaster hedges is when we’re testing our 2.5% tops, as we were in the morning. The Dow topped out just over 10,455, tested it until about 12:45, then failed BEFORE the auction, the S&P topped out at 1,110 and held its 2.5% floor, the Nasdaq hit 2,255 on the button at the open, the NYSE also held their 2.5% line as a bottom, and the Russell fell hard but then played around the 635 line in the afternoon…
by ilene - August 31st, 2010 3:59 am
Courtesy of The Pragmatic Capitalist
Over the course of the last 18 months I’ve been adhering to a macro view that can best be summed up as follows:
1) The explosion in private
sectordebt (excessive housing borrowing, excessive corporate debt, etc) levels would reveal the private sector as unable to sustain positive economic growth, de-leveraging and deflation would ensue.
2) Government intervention would help moderately boost aggregate demand, improve bank balance sheets, improve sentiment, boost asset prices but fail to result in sustained economic recovery as private sector balance
3) Extremely depressed estimates and corporate cost cutting would improve margins and generate a moderate earnings rebound, but would come under pressure in 2010 as margin expansion failed to continue at the 2009 rate.
The rebound in assets was surprisingly strong and the ability of corporations to sustain bottom line growth has been truly impressive – far better than I expected. However, I am growing increasingly concerned that the market has priced in overly optimistic earnings sustainability – in other words, estimates and expectations have overshot to the upside.
What we’ve seen over the last few years is not terribly complex in my opinion. The housing boom created what was in essence a massively leveraged household sector. The problems were compounded by the leveraging in the financial sector, however, this was merely a symptom of the real underlying problem and not the cause of the financial crisis (despite what Mr. Bernanke continues to say and do to fix the economy).
As the consumer balance sheet imploded the economy imploded with it. This shocked aggregate demand like we haven’t seen in nearly a century. This resulted in collapsing corporate revenues. The decrease in corporate revenues, due to this decline in aggregate demand, resulted in massive cost cutting and defensive posturing by corporations. This exacerbated the problems as job losses further weakened the consumer balance sheet position. Consumers, like, corporations, got defensive and began cutting expenses and paying down liabilities. Sentiment collapsed and we all know what unfolded in 2008.