2/21/13……gold, volatility, mortgages and more – updated adding commentary!

Due to lateness, the commentary will be posted later. Markets are in turmoil so I wanted to get this out quickly! TB

From the Friars Club Encyclopedia of Jokes: “There’s a phrase we live by in America: “In God We Trust.”  It’s right there where Jesus would want it: on our money. – Stephen Colbert. Yeah, it replaced ‘payable in gold/silver! Trust is the operative word here! TB

Bloomberg Quote of the Day: “It’s easy to make a buck. It’s a lot tougher to make a difference.” – Tom Brokaw …who out there is WILLING to make a difference? TB

Bloomberg Top Stories:

*First-Time Jobless Claims in U.S. Increase for First Time in Three Weeks – sequestration fears…you rock, GOP!!!

*Stocks Slide With Commodities on Economic Data as Euro Weakens, Bunds Rise

*Wal-Mart Forecasts First-Quarter Earnings Below Estimates, Boosts Dividend – ??? – as noted yesterday: what happens when net inflows to stocks stop and earnings drop?

*European Economy Gauge Shows Deepening Contraction as Germany Decelerates – what, you didn’t see that coming? Hello, stock bulls!!!

*Consumer Prices in U.S. Little Changed in January as Fuel Costs Decreased – stop looking in the rear view mirror as we approach $5 a gallon gas!!!

*No Panic in Volatility Bests While Currency Intervention Rhetoric Amplifies

*Linn Energy Will Acquire Berry Petroleum in $2.42 Billion Deal With Linnco

*UBS-Arranged $76M Coca-Cola Femsa Trade Said to Be Probed by Mexico – UBS!!!

*Banks Turn U.S. Punishment Into Chance to Ditch Troubled Loans – we can’t win!!!

*Corn Below $6 Seen by Farmers Planting Most in Eight Decades – ah but weather???

*Americans in Poll See Housing Market Rebound Boosting U.S. Economic Growth – Ha!

*Stealing $7.4 Million in Miami Brinks Job Was Easier Than Keeping the Cash

*Obama Rated at Three-Year High in U.S. Poll as Republicans Get Lowest Mark – if it goes to sequestration, they will get the blame and it will be a death knell to their hopes!

*Brussels Diamond Heist Spurs Drive to Plug Vulnerable Airport Perimeters – makes you feel so safe from terrorists doesn’t it? It could have been people not diamonds!!!  

Total NYSE Volume rose sharply to 4.2B shares yesterday – highest for 2013 –  from 3.74B shares vs 3.82B on the options expiry. The range is now 2.67B-4.2B so far in ’13.. Real NYSE volume rose but not as much as retail continues to be a non-event while the high freaks determine where we are going. It was 816M shares vs 734M shares vs 940M shares –  two decent volume days in 13 sessions! The low last week: was 497M (lowest since 12/26). There have been only FIVE 800M plus share days this year, with a high of 1.07B shares on 1/18 – the Jan. options expiry! Average volume this year is just 697M shares (12 mo. ave. 746M)! Now for the bad news – a double whammy: the market was WEAK – bad news on high volume, and worse VOLATILITY ROSE by 19% from the lowest (most complacent) since 12/29/06!!! Note that the markets were only off slightly until just before two hours from the close then they dove. It was a NEGATIVE day with all indices down by 0.8% (Dow) to 2% (Russell 2000). Dow Transports -1.7%, both Nasdaq indices -1.5%, with the best being Dow Utilities -0.3%. NYSE Financials declined by 1.4% – BofA most active, natch, -3.2% to $11.80 – first time below $12 since 2/11. BUT new 52 week highs only fell to 477 from 680!! vs 516 –  there were four straight sessions above $500, after ranging from 200-400 for the early part of 2013! BUT, New Lows rose to 80, highest since 12/13 vs 53 vs 54 vs 47 vs 33 – low ytd is 12!!! Hello??? Advance/Declines and Breadth were all very negative  -3+x and breadth was worse at -10.6x!!! and -5.1x!!!-Both had been weak for 6 of the last 7 days! The VIX exploded from 12.31 to 14.63, a 19% incrase from the 2013 low AND lowest since 2006! Note that it ranged from 9.70-13 from 11/15/06 to 2/22/07 an incredible run but then hit 20, 38, and finally the record high of 89.53 on 10/24/08 as all hell broke loose! Just 11 sessions ago it hit 14.67, highest since Jan.2 Do you think there is ANY similarity to the economy or global stability since then? Now add into it the growing problem with China hacking government and business computer systems, stealing proprietary information and worse, and you remain bullish? This is all about NEW INFLOWS to equity mutual funds and will end at some point! Now Wal-Mart has warned of lower Q1 earnings! Look out below!

What sparked the reversal in stocks and surge in volatility: the release of the Fed Minutes from the last meeting. Question: is the Fed wrong or is the market wrong?…and don’t give TB the old saw “I’m wrong, your wrong, but the market is never wrong.” Hah!!!

Global equity markets are being slammed by more than 1.5%, ex-Korea, after three mixed sessions: UK -1.6% vs +0.5% vs +0.5% vs -0.2% vs +0.1%; France -1.8% vs -0.2% vs +1.3% vs +0.2% vs flat; Germany -1.8% vs +0.2% vs +1.1% vs +0.5% vs -0.2%; Japan -1.4% vs +0.8% vs -0.3% vs +2.1% vs -1.2% vs +0.5% vs -1% vs +1.9%, Hang Seng -1.7% vs +0.7% vs -1% vs -0.3% vs +0.1%; Kospi -0.5% vs +2% vs +0.2% vs flat vs +0.1%; India -1.6% vs flat vs +0.7% vs +0.2% vs -0.2%. U.S. stock futures weaker: DOW -13; SPX -1.60; NDQ -8.75.

Bonds benefited only slightly from the equity selloff (+3/16/+1/4) but are strong overnight with the breaking out of the 10 yr Treasury range of from 2.06% to 2% over the last five sessions, now 1.97% +5/16, and the 30 yr’s 3.23% to 3.15%, now 3.17% +5/8 – wow! The long Tip is 0.57% +5/8 from a high of 0.61%. Libor update: 0.245% 3 mos., 0.461% 6 mos. – dropping again! Foreign bond yields sharply lower generally: Germany 1.58% -7; UK 2.10% -9!!!; Italy 4.49% UP 8!!!; Spain 5.18% +1; Portugal 6.16% +9!!!; Greece 10.89% +6. Japan 0.73% -.1.

Gold closed lower yesterday but on a generous fix at $1578.00 -$26.20, with a low of $1558 – not seen since 7/13/12! Worse, it is now $1570.40 -7.60 with an o/n low of $1554.30. lowest since 5/30/12!!! It is off $130 (7.6%) from the peak on 1/17, $1699.90 Feb. 7 At the peak the price of the Gold ETF (GLD) was $185.85 on 9/1/11, up from $70 on 10/21/08. It has now dropped back to $156. For reference the peak size was equal to NINE years of gold production! It has ‘gapped down’ three times since Feb. 8th  – a total breakdown through the 40/50/200 day m/a’s, now major resistance $1663-1669, as well as $1600, a double bottom from 8/14-15, with critical support now at $1550 – at least!!! From there $1526.70 is next support. Other metals are weak but not THAT weak – due to the size of the Gold ETF’s ??? Last time it was below $1500 was Sept. 2011!!! Crude is now breaking down negating a week ago Monday’s key reversal. Yesterday it closed at $94.46 -$2.20 below the 40 day ($94.69), with support at $93.18, the 50 day. Overnight it took out the 50 day (93.18), creating another layer of resistance and support at the 200 day, $90.52. It is currently $93.14 -$2.09 with a low of $92.95 – lowest since 12/28/12.

Bonds benefited only slightly from the equity selloff (+3/16/+1/4) but are strong overnight with the breaking out of the 10 yr Treasury range of from 2.06% to 2% over the last five sessions, now 1.97% +5/16, and the 30 yr’s 3.23% to 3.15%, now 3.17% +5/8 – wow! The long Tip is 0.57% +5/8 from a high of 0.61%. Libor update: 0.245% 3 mos., 0.461% 6 mos. – dropping again! Foreign bond yields sharply lower generally: Germany 1.58% -7; UK 2.10% -9!!!; Italy 4.49% UP 8!!!; Spain 5.18% +1; Portugal 6.16% +9!!!; Greece 10.89% +6. Japan 0.73% -.1.

Gold closed lower yesterday but on a generous fix at $1578.00 -$26.20, with a low of $1558 – not seen since 7/13/12! Worse, it is now $1570.40 -7.60 with an o/n low of $1554.30. lowest since 5/30/12!!! It is off $130 (7.6%) from the peak on 1/17, $1699.90 Feb. 7 At the peak the price of the Gold ETF (GLD) was $185.85 on 9/1/11, up from $70 on 10/21/08. It has now dropped back to $156. For reference the peak size was equal to NINE years of gold production! It has ‘gapped down’ three times since Feb. 8th  – a total breakdown through the 40/50/200 day m/a’s, now major resistance $1663-1669, as well as $1600, a double bottom from 8/14-15, with critical support now at $1550 – at least!!! From there $1526.70 is next support. Other metals are weak but not THAT weak – due to the size of the Gold ETF’s ??? Last time it was below $1500 was Sept. 2011!!! Crude is now breaking down negating a week ago Monday’s key reversal. Yesterday it closed at $94.46 -$2.20 below the 40 day ($94.69), with support at $93.18, the 50 day. Overnight it took out the 50 day (93.18), creating another layer of resistance and support at the 200 day, $90.52. It is currently $93.14 -$2.09 with a low of $92.95 – lowest since 12/28/12.

 

Some not so random thoughts on banking and mortgages:

The following story was a top story on Bloomberg yesterday. The banks are destroying us and no one is even attempting to stop them. Paul Volcker isn’t even talking anymore as it has fallen on deaf ears. The sad policy of ‘too big to fail’ has wrought nothing but pain as bankers strive for maximum return on equity that is not commensurate with the risks they are taking. Why not? These guys will only be there a few more years and so they manage from year to year and quarter to quarter…the long run be damned!

This is not banking and banking is not rocket science. It is one of the most basic of businesses yet every time some wunderkind comes to the fore (John Bunting, Jamie Dimon, etc.), they throw away the basic principles and to advise them differently costs the knowing veterans promotions…or even their jobs. Welcome to Ayn Rand’s world.

THEY, not the irresponsible buyers that have been blamed, created the financial crisis. There was very little fraud, instead there were loan originators that were:

  1. blinded by their commissions and bonuses
  2. creators of products like ‘pick a pay’ and egregious terms on floating rate mtgs
  3. top management that was either ignorant or just closed their eyes to fraud
  4. incessant demand from big brokers for product that could be sold to unsuspecting investors while only requiring one month of ‘recourse’ from lenders
  5. lenders didn’t give a damn about loan quality as it was not their problem
  6. dealers didn’t give a damn about loan quality as it was not their problem
  7. it was obvious to those in the industry beginning in late 2006 that problems were developing but rather than cut it off, they raced to get the last deal done
  8. not only originators but realtors and even appraisers were on the take
  9. regulators, including Greenspan, turned a blind eye and said they could do nothing…the only hero, and he failed was the late Fed Gov. Edward Gramlich
  10. then when it all came crumbling down the banks were bailed out – including both stock and bondholders while homeowners were punished
  11. foreclosure became rampant…often illegal foreclosure with law firms using forms, often improperly filled out and then signed by bank officers who didn’t even check them for accuracy. In some cases, a form was sent out with: Insert name here!
  12. housing prices plummeted…for the first time since 1945 for the entire nation
  13. people couldn’t sell and couldn’t refinance, ah but wealthy investors formed pools and bought up homes at foreclosure sales for just the mortgage value…adding to the wealth gap that was created by the Bush tax cuts.

None of this should have come as a surprise to regulators…we had had an S&L crisis and two banking crises within a span of just 25 years. Instead, the destroyed Glass-Steagall which had served us well for over fifty years and which was less than 150 words, replacing it with several thousand words that lawyers could pick apart with ease. This is the downside to word processors. By the way, whether laws or Credit Default Swap agreements of several hundred pages, no one read them…until it hit the fan, then they used a fine toothed comb and that has brought us to where we are now: not even taking the least of steps to protect the banking system and the nation!…in fact, the world.

Prior to the Euro, the Bundesbank was held out as the strongest central bank in the world. The Fed was the next best regulator. It failed miserably. Not only to protect the people but to do even minimal due diligence on the banks. Glass Steagall’s removal also prevented regulators from examining the top five banks – the one’s most likely to have problems…note that the Fed had been trying for two decades to reduce the number of small banks…a stupid decision. Also, since 1984 when Reagan created ‘too big to fail’ and moral hazard by bailing out Continental Illinois (later acquired by BofA), the top EIGHT banks now had the implied backing of the U.S. government and as a result became a magnet for global funds seeking safety! This was also at the expense of the regional and local banks.

Only one major industrialized nation’s central bank did its job properly…an unlikely one given our disdain for that country: Canada. Yes, the ‘loonies’ and lest you forget in the 1980’s they were in a mess but by austerity measures solved their problems in just three years (as did Sweden). Their central bankers did not cave to the insanity that the banks were creating elsewhere. As a result, not one Canadian bank had to be bailed out!

How many of you have even heard of MERS? TB hadn’t until a lawyer friend doing some pro bono work told him of getting several calls a day from lawyers representing holders of securitized mortgages trying to find out who owned their properties. How could this be?

First, here was the problem: the real estate boom and ‘flipping’ of properties had become a burden for local property recorders. They were having to pay huge overtime expenses and still could not keep up with the paperwork. So…Wall Street to the rescue…directly it was Fannie and Freddie but there had to be prodding from the big banks and brokers.

So they created the Mortgage Electronic Recording System, or MERS. A terrific idea, similar to the one the Fed forced the brokers in that created the Depository Trust Company (DTC) to handle securities transfers. Volume in stocks had caused slowdowns in trading and even shutdowns to catch up. Runners were physically taking the shares from one firm to another so the Fed required each firm to provide employees to aid in setting up DTC  The Fed’s major concern was fails which were creating huge levels of ‘float’ in the system and this was an ideal way to prevent it as well as minimize fraud. It worked great and by reducing physical securities also aided in tax reporting. A win-win.

But MERS had a major problem. The only thing the brokers cared about was getting the mortgages qualified for the rating agencies (you all know about that mess), so they convninced the locals that they would register property in nominee names, thus reducing the urgency and allowing the recorders to make changes over a longer period of time, thus reducing their costs. All well and good…so far!

Then these nominee named mortgages were bundled into pools and sold to investors. The pools had a loan servicer, such as Wells Fargo (who, through their wholly-owned subsidiary, Wells Fargo Mortgage was the number one creator of subprime mortgages, even though the bank held none on its books). All went swimmingly – until the crisis destroyed the economy and created delinquencies.

Among the problems:

  1. securities poolholders trying to find out who to proceed against
  2. loan servicers being ‘assumed’ to be the lender, which they were not, even though they may have been the originator. A common misperception
  3. original notes being sent by the banks to the securitizers with just a copy kept in the file. Some judges refused to allow foreclosure without the original doc.
  4. some of these original notes have never been recovered as they went through so many hands.

People were blamed for losing their homes for incurring too much debt. This was true in some cases but not most. More frequently it was minorities especially being told they could not qualify for conventional mortgages and being steered into subprime floating rate mortgages with exploding resets that had terms that could not be met. If questioned, they were told they would just refinance the loan (generating more fees), which worked – until it didn’t!

So, the banking industry succeeded in creating the biggest transfer of wealth in history, and no one went to jail…or was even prosecuted. Contrast to the S&L crisis in which over 1,000 people went to jail! This despite Sarbanes-Oxley (where not one CEO has been prosecuted), and now Dodd-Frank which has been rendered impotent by the banking lobby.

All this for the benefit of a few banking executives and their traders and commissioned salesmen. It is believed that less than 2% of financial services employees received any benefit from these actions but those few became millionaires and more, much more.

But the banks are not done yet. No sir! Jamie Dimon continues to lead the charge along with the strong banking lobby…the biggest and most powerful lobby. But Dimon may have blundered when he opposed and defamed Elizabeth Warren as Obama’s appointee to head the Consumer Financial Protection Bureau, as she then was elected to the U.S. Senate and placed on the Senate Banking Committee where she can hit hard!

As for the CFPB, it is headed by a former Ohio Attorney General who has an interim appointment since the Senate refused to give an up or down vote. Now a bad ruling by a Federal Court of Appeals is saying interim appointments except under very strict, short terms is unconstitutional which has far reaching ramifications. In other words, one party can tie up the entire government without even providing a reason…and they continue to do so with the latest cabinet appointments on absurd grounds. It is imperative that the Surpreme Court decide quickly…something they are loath to do and could well support the decision or refuse to hear the case resulting in utter chaos including releasing convicted felons on appeal.

Lastly, the link below shows just how much more powerful the big banks are than most people knew. Read it and then you decide. bloomberg.com/banking riskl

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