Wed 2009-11-25 09:59 EST

Hussman Funds - Weekly Market Comment: "Should Come as No Shock to Anyone" - November 16, 2009

John P. Hussman

The big picture is this. There is most probably a second wave of mortgage defaults in the immediate future as a result of Alt-A and Option-ARM resets. Yet our capacity to deal with these losses has already been strained by the first round that largely ended in March. The Federal Reserve has taken a massive amount of mortgage-backed securities onto a balance sheet that used to be restricted to Treasury securities. The purchase of these securities is reflected by a surge in cash reserves held by banks. Not only are the banks not lending these funds, they are contracting their loan portfolios rapidly. Ultimately, in order to unwind the Fed's position in these securities, it will have to sell them back to the public and absorb those excess reserves, so to some extent, the banking system can count on losing the deposits created by the Fed's actions, and can't make long-term loans with these funds anyway. Increasingly, the Fed has decided to forgo the idea of repurchase agreements (which require the seller to repurchase the security at a later date), and is instead making outright purchases of the debt of government sponsored enterprises (GSEs such as Fannie Mae and Freddie Mac). Again, the Fed used to purchase only Treasuries outright, but it is purchasing agency securities with the excuse that these securities are implicitly backed by the U.S. government. This strikes me as a huge mistake, because it effectively impairs the Fed's ability to get rid of the securities at the price it paid for them, should Congress change its approach toward the GSEs. It simultaneously complicates Congress' ability to address the problem because Bernanke has tied the integrity of our monetary base to these assets. The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner's actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.

2009; comes; Hussman Funds; November 16; shocks; weekly market comments.

Dr. Housing Bubble Blog Fri 2009-11-20 08:25 EST

Fannie Mae and Wells Fargo Announce Creative Mortgage Solutions: A New Thing Called Renting. Option ARM Scenarios, Lease for Deed, and Delaying the Financial Future.

Last week, foreclosure Hall of Fame member and government stepchild Fannie Mae announced a stunning $18.9 billion loss. Remember last year when we were told that bailing out the enormous Government Sponsored Entities that we would be turning a profit? Well that didn't exactly pan out and both Fannie Mae and Freddie Mac have been a vortex for taxpayer money. With that said, Fannie Mae announced a ``lease for deed'' program that will essentially convert struggling homeowners to that feared word, renters. In the same week after Attorney General Jerry Brown sent his letter to the top option ARM wheelers and dealers in California, Wells Fargo came out with its ingenious solution. Wells Fargo has decided, at least as it stands, to convert their Pick-A-Pay option ARMs into glorious interest only loans for periods of six to ten years.

deed; delays; Dr. Housing Bubble Blog; Fannie Mae; financial future; leased; New Thing Called Renting; Option ARM Scenarios; Wells Fargo Announce Creative Mortgage Solutions.

naked capitalism Thu 2009-11-19 10:33 EST

Guest Post: Herding the Sheep

George Washington of Washington's Blog

Financial insider and commentator Yves Smith wrote an essay last week entitled ``MSM Reporting as Propaganda'' arguing that the government has been using propaganda to make people think that things are getting better, no one is angry, and -- therefore -- no one should get upset...Is Smith right? And even if she is, isn't ``propaganda'' too strong a word?...Even if true, propaganda is too strong a word for attempts to convince people that important issues are boring, that no one else is angry about them, and that everything is normal. Perhaps ``herding the wayward sheep'' would be better . . .

Guest Post; Herd; naked capitalism; sheep.

New Deal 2.0 Tue 2009-11-03 20:07 EST

Roosevelt Institute Director and Senior Fellow Rob Johnson will lead Soros' $50 Million Effort

Rob Johnson, Director of the Economic Policy Initiative of the Roosevelt Institute, has been pegged to lead financier George Soros' $50 million effort to create an ``Institute for New Economic Thinking'', which will fund research, convene symposiums, and establish a journal -- all in the name of promoting free market skeptics and creating a new economic paradigm. To this end Soros is gathering market-skeptics this week, including Roosevelt Institute Braintruster and Nobel Prize-winner Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees to start the conversation. ``Economics has failed not only to predict and explain what happened but has also failed to protect society,'' said Johnson in an article in Newsweek. ``That's what the crisis revealed. The paradigm has failed. There is no guidance.''

0; 50; effort; lead Soros; new dealing 2; Roosevelt Institute Director; Senior Fellow Rob Johnson.

zero hedge Wed 2009-10-14 12:12 EDT

Why Did U.S. SDR Holdings Increase Five Fold In The Last Week Of August?

...The big question mark at the end of August is when the U.S. International Reserve Position increased by almost 50%. The reason for this: a near quintupling of S.D.R. holdings on the U.S. balance sheet in the span of one week... By purchasing $40 billion in SDRs virtually overnight, what the Fed has done is to increase the value of the entire basket pro-rata, while in the process reducing the actual value of the dollar (which is a weighted constituent of the SDR basket). This was an operation to reduce the dollar's value: pure and simple. In many ways it explains why the DXY has continued its straight one way decline since the beginning of September, when many pundits assumed the market was finally going to tank on profit taking after Labor day. By performing this dollar adverse transaction, the Fed sent a loud and clear signal what the Fed was going to do going forward vis-a-vis the i) dollar and ii) its derivative, the stock market.

August; Folding; U.S. SDR Holdings Increase; weekly; Zero Hedge.

Dr. Housing Bubble Blog Tue 2009-10-13 20:03 EDT

No Country for Old Jobs: 10 Charts Showing the Fragile Recovery. Home Sales, Buying versus Renting, Unemployment, and Real Economy Data.

...Until jobs start showing up, any talk of a rebounding housing market is moot especially with this entire artificial stimulus still bouncing around the economy. And collapsing tax revenues are not a good sign. I don't buy the jobless recovery argument and the government tends to agree. If all is well, why is the U.S. government and Fed buying $1.25 trillion in agency debt to lower mortgage rates, putting in place an $8,000 tax credit, boosting car sales with gimmicks, encouraging risky low money down loans with FHA insured products, and extending unemployment insurance to a record 92 weeks in states like California? Do these things sounds like policies of a booming economy?

10 Charts Showing; Buying versus Renting; country; Dr. Housing Bubble Blog; Fragile recovery; home Sale; old job; Real Economy Data; unemployment.

The Guardian World News Mon 2009-10-12 10:04 EDT

Kaupthing chief named as suspect

Iceland's most controversial banker, Sigurdur Einarsson, the former executive chairman of failed bank Kaupthing, has been made an official suspect by fraud prosecutors examining alleged market manipulation relating to an investment in the bank by Qatari royal Sheikh Mohammed Bin Khalifa al-Thani weeks before its collapse a year ago.

Guardian World News; Kaupthing chief named; Suspected.

naked capitalism Thu 2009-10-08 16:47 EDT

Latvia in Crisis; Threatens to Stiff Swedish Banks With Mini-Jubilee

Latvia and to a lesser extent Estonia and Lithuania had a massive and unsustainable current account deficit...Foreign benefactors have just put the choke collar on Latvia. The government was unable to roll over its debt this week...Sweden on Tuesday put pressure on the tiny Baltic nation to fulfill required spending cuts, threatening to withhold payments [from a] euro rescue loan put together by Nordic countries...But Latvia does not appear to be ready to accede to Sweden's demands. The immediate cause for concern is that Latvia will simultaneously devalue its currency and provide a mechanism for its consumers to partially default on mortgages held by foreign banks.

Crisis; Latvia; Mini-Jubilee; naked capitalism; Stiff Swedish Banks; threatens.

Tue 2009-09-29 11:33 EDT

How Bad Will It Get?

Mike Whitney, CounterPunch

In the two years since the crisis began, neither the Fed nor policymakers at the Treasury have taken steps to remove toxic assets from banks balance sheets. The main arteries for credit still remain clogged despite the fact that the Bernanke has added nearly $900 billion in excess reserves to the banking system. Consumers continue to reduce their borrowing despite historically low interest rates and the banks are still hoarding capital to pay off losses from non performing loans and bad assets. Changes in the Financial Accounting Standards Board (FASB) rules for mark-to-market accounting of assets have made it easier for underwater banks to hide their red ink, but, eventually, the losses have to be reported. The wave of banks failures is just now beginning to accelerate. It should persist into 2011. The system is gravely under-capitalized and at risk...The economy cannot recover without a strong consumer. But consumers and households have suffered massive losses and are deeply in debt. Credit lines have been reduced and, for many, the only source of revenue is the weekly paycheck...The current recession has exposed the fault-lines dividing the classes in the US. Neither party represents working people. Both the Democrats and the Republicans are supportive of "social engineering for the rich"; regressive taxation and economic policies which shift a greater portion of the wealth to the richest Americans. The question of inequality, which has grown to levels not seen since the Gilded Age, will dominate the national conversation as the recession deepens and more people slip from the ranks of the middle class...After Obama's stimulus runs out, consumer spending will again sputter and the economy will slide back into recession.

bad.

zero hedge Mon 2009-09-21 14:35 EDT

Atlanta Fed On Federal Reserve Monetization Activities; $1.1 Trillion In USTs And Agency MBS Purchased To Date

The Fed now has $15 billion in purchasing power left under the Treasury component of QE. Of the $1,250 billion in MBS projected to be bought by the end of the year, the Fed was already purchased $840 billion, leaving $410 billion in budgeted purchases over the next three and a half months: about $125 billion per month. On September 15, the Fed purchased $2.05 billion in Treasuries, roughly in the 10-17 year sector; on September 16, it purchased $1.799 billion in the one-to-two year sector. It has purchased a total of $285.2 billion of Treasury securities through September 16.The Fed plans to purchase $300 billion by the end of October, or about six weeks from now, which makes for a pace of about $2.5 billion in purchases per week.

1; 1 Trillion; Agency MBS Purchases; Atlanta Fed; date; Federal Reserve Monetization Activities; ust; Zero Hedge.

Mon 2009-09-21 13:47 EDT

The Hole in the FDIC

John Mauldin

This week we continue to look at what powers the forces of deflation...This week we look at one more factor: bank lending. I give you a sneak preview of what will be an explosive report from Institutional Risk Analytics about the problems in the banking sector. Are you ready for the FDIC to be down as much as $400 billion?

FDIC; holes.

The IRA Analyst Thu 2009-09-17 10:22 EDT

Back to Basis for Securitization and Structured Credit: Interview With Ann Rutledge

To get some further insight into the world of securitization and cash flows, we spoke last week to Ann Rutledge of RR Consulting...The difference between a futures contract for T-bonds and a credit default swap is that the former is a real contract for a real deliverable, whereas the CDS trades against what people think is the cash basis, but there is no cash market price to discipline and validate that derivative market. Rutledge: a contract or structure without a cash basis should not be allowed at all. You cannot have a derivative that is honest and fair to all market participants without a true cash basis. ...derivatives markets such as CDS and CDOs that have no cash basis tend to magnify speculative excesses, while derivative markets where there is a visible cash basis market to discipline investor behavior seem less unstable in terms of systemic risk. Rutledge: If the cash market were visible and could be examined by all participants, then it would give away the ability of the dealer banks to tax participants in the market and extract these abnormal returns. So how do we fix the problem... Rutledge: These originators play this game over and over again and they don't get caught, in part because we do not have a common, standardized set of definitions for governing the most basic aspects of the securitization process. The buyers don't do the work and the accounting framework is a counterparty-oriented framework, not one that is focused on the underlying assets. So banks like Countrywide and WaMu originated and sold some truly hideous structures during the bubble, but the buyers only diligence was reliance upon recourse to these banks. It costs maybe 50bp for a buyer to get the data and grind the numbers to really diligence a securitization based on cash flows, even a complex CDO. But the cost to the buyer and the system of not doing the diligence is an order or magnitude bigger. If the Congress, the SEC and the FASB, and the financial regulators only do one thing this year when it comes to reforming the world of structured credit, then it should be to impose by law and regulation common standards for the definitions used in the marketplace.

Ann Rutledge; basis; interview; IRA Analyst; securitizations; structured credit.

zero hedge Thu 2009-09-17 09:42 EDT

Excess Liquidity Game Is Coming To An End

David Rosenberg notes M1, M2 and MZM have commenced contracting at an alarming rate: M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure -- off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend -- contracting at an epic 9% annualized pace over the past four weeks. So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.

comes; ending; Excess liquidity game; Zero Hedge.

Jesse's Café Américain Sun 2009-09-13 12:28 EDT

H&S Top and "Iron Cross" on Weekly Dollar Chart Targets 66

Jesse

The weekly chart on the US Dollar Index has rather awful technicals, as it has dropped to a recent low, and set the 'iron cross' in the moving averages that is generally the hallmark of a sustained decline...The ultimate objective of this formation remains 66. It is difficult to square this with a technical outlook that includes a major decline in the US equity indices, since the pairs have been running inversely, that is, dollar down, and stocks up.

H; Iron Cross; Jesse's Café Américain; s Top; Weekly Dollar Chart Targets 66.

Bruce Krasting Sat 2009-09-05 11:50 EDT

A Metro NYC Real Estate Horror Story

Bruce Krasting

In 2006 a house not too far from mine came on the market at a very rich price. $2.7mm for a five bedroom home on four acres. It was a nice place...The house was sold this week. It was a short sale. The sale price was $600,000. Less than 25% of its asking price three years ago...There are hundreds of $1 million homes within a few miles of this property. This morning they are all worth 40% less.

Bruce Krasting; Metro NYC Real Estate Horror Story.

Bruce Krasting Fri 2009-09-04 19:39 EDT

On Fed Intervention and the Blogs

Bruce Krasting

A week ago a great debate was stirred in the financial blog world. As is often the case Zero Hedge was in the middle of the fracas. Mr. Durden penned a piece that suggested that the Fed was manipulating the auctions in such a way as to benefit the primary dealers. It got to be a very sophisticated discussion that brought in some thinking from Yves Smith at Naked Capitalism and John Jansen at Across the Curve. The debate is over is far as I am concerned. The Treasury had another successful auction today of the 30 year. But in order to make it a success the Fed bought $27 billion of 15-30 year mortgage paper. The curve is the curve...This is timed intervention. That is a polite way to say manipulation. Federal Reserve manipulating Treasury auctions; quantitative easing.

Blog; Bruce Krasting; Fed intervention.