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Thursday, June 13, 2024

Thursday – Are We Thawing Out or Melting Down?

Greece is resolved!

Well, sort of, maybe – who knows?  The EU made some nice noises and it does seem there is an agreement which I detailed in my previous post so let’s move on and see what that’s going to do for us today.  We’ve been playing for a resolution in Greece giving us a boost back to test 10,300 but yesterday’s market movement was, as they say at Wharton, LAME and we’re going to have a tough time punching through 10,058 and 10,165 on the way to 10,300 today (see yesterday’s Dow charts), even if the Dow were so inclined

10,300 is 2.6% higher than yesterday’s 10,038 close but a little far away considering commerce is still shut down in about 1/3 of the US today as we sit under a massive amount of snow.  This kind of weather is bad for most retail but good for HD and LOW, who sell salt and shovels and other fun snow stuff.  Business people are stranded all over the country, moms are suddenly found unexpectedly with kids at home and people can’t park anywhere – a big problem when you have this much snow as you run out of places to push it to. 

Another problem with snow is it’s an unavoidable cost, like disaster spending, that couldn’t be hitting cities at a worse time.  Washington DC had already blown through their $6.2M snow budget for the year before yesterday’s storm, which may double the costs, adding to the city’s debt woes.  230,000 Federal employees are off for the 4th day in a row today, costing the US government $100M a day in lost productivity.  Public transportation is down and over 6,000 flights were canceled with travelers being told "maybe Sunday" for flights they missed on Wednesday – Greece’s national strike is nothing compared to the economic impact of this storm!

Speaking of coming storms.  We’ve been leery of getting back into SRS but I’m back to liking them (and the short IYR plays) as a report by the Congressional Oversight Panel shows nearly 3,000 small banks may have to dramatically cut lending as losses on commercial real-estate loans, which could reach as high as $200B-300B. Banks "are about to get hit by a tidal wave of commercial-loan failures."  This should finally push an issue we’ve been discussing since last Fall onto the front pages, where we can make some money

We’ve learned to be very cautious with SRS but I do like the July $6/8 bull call spread at $1.25, selling one Jan $10 put for $3 for each 3 of the bull spreads so your net entry is .25 per $2 spread if SRS hits the July target and expires over $10 in Jan for a nice 700% profit with a break/even at about $7.50 in July (now $8.50) as that would return $4.50 against the Jan $10 puts and you can net out of the trade. 

A duller way to play is simply shorting IYR, now $42.48 or buying the June $40 puts for $2.40, which is nice as you can sell March $40 puts, now .90, while you wait.  I’m torn on this one because I am trying to stay bullish on the markets but the possible collapse of CRE is one of the reasons I was bearish as the market went higher at the end of last year.  Now, at least, we’ll get a chance to see how much of this is priced into our indexes but I do think it’s important to offset bearish bets like this with bullish bets on the financials, like our well-hedged XLF and UYG entries as no CRE collapse = stronger banks.

Speaking of strong banks – Our beloved Fed is now backstopping $25Tn in Credit Default Swaps with, of course, YOUR MONEY.  You were obligated this week as the Fed approved an application by the Depository Trust & Clearing Corporation to operate "the Trade Information Warehouse (Warehouse) for over the-counter (OTC) credit derivatives."  The new Fed-endorsed organization will settle CDS obligations in all currencies and process credit events. It will also include all OTC credit derivatives traded worldwide, and will be regulated by the Fed and the NY State Banking Department and will be overseen by other US and International regulators.

As Zero Hedge points out: "What all this implies is that basis spreads will likely compress very shortly, once counterparty risk becomes a thing of the past and all systemic risk in the biggest derivative market out there (ex IR swaps) is fully backstopped by the Federal Reserve. It will also guarantee the DTCC monopoly status when it comes to CDS trading as nobody will desire to transact and/or clear elsewhere. We shudder to think if the Fed grants DTCC with exclusive status for IR and FX swaps as well, and the associated $600 trillion notional outstanding."  Oh come on, what can go wrong?

By eliminating step 3 entirely, the Fed/DTCC entity becomes the Freddie Mac of the CDS world and hedge funds are free to run out and write all sorts of nonsense papers knowing they have a rich sucker who will buy it all – no questions asked (except by Congress about 12 months AFTER it all falls apart).  Yes, it’s your tax dollars at work or, rather, all the tax dollars you are likely to pay as a nation for the next decade now obligated to keep the CDS scam going rather than forcing it to scale back by simply NOT supporting it when it fails

Speaking of kicking an explosive can down the road – CitiMortgage (C) announced that they will let some delinquent borrowers remain in their homes without making mortgage payments for six months if they voluntarily transfer ownership to the bank.  "We are concerned that if there is a foreclosure glut at some point in the cycle it would have to have a negative impact on house prices, and Citi’s pilot program should help prevent a build-up in foreclosed homes," said Sanjiv Das, the chief executive of CitiMortgage.  

The CitiMortgage pilot program provides incentives for more borrowers to use a procedure known as a "deed in lieu of foreclosure," in which the borrower voluntarily transfers ownership of the home to the lender, which then cancels the mortgage debt. Aside from letting such people stay in the homes for six months, CitiMortgage says it will give them at least $1,000 to cover relocation costs, an incentive sometimes dubbed "cash for keys."

Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, estimates 7.1 million of the 7.9 million households behind on their mortgage payments will lose their homes to foreclosure if nothing is done to improve current loan-modification programs. She believes banks should put much more emphasis on loan modifications that reduce the principal for people who are deeply under water.  315,716 brand new foreclosure notices were sent out in January, up 15% from last January, according to RealtyTrac.  That’s a rate of 1 in 34 homes over the year.  In Nevada, it was on in 95 homes, but that was for January ALONE – divide that by 12 and it’s one in 8 for the year. 

So how about shorting that Real Estate market?!?  OK then…   Oops, out of time.  Well the EU does NOT seem to have a definitive statement on Greece and may not until the weekend and that dropped us half a percent from what was looking like a nice open.  Greek mythology will still drive the markets until this matter is resolved.  Asia was up nicely this morning and Europe is mixed but also took a hit just now so we’ll have to wait and see – again – like we’ve been doing all week

 

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