Bear Market

BofA’s `Sloppy’ Prime Mortgages Add to Pressure for Buybacks

November 30, 2010 by · Leave a Comment 

“Bank of America Corp., battling demands for almost $13 billion of refunds from mortgage investors, reported that the fastest-growing group of claims involves loans to people with the best credit scores.”

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British Housing Market Faces a `Tough Year,’ Countrywide Says

November 30, 2010 by · Leave a Comment 

“U.K. home prices may fall by as much as 5 percent next year as the government raises taxes and cuts jobs to reduce the record budget deficit, the country’s largest property broker said.”

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Refinance Apps Down Sharply. Purchase Demand Up as Rates Rise

November 30, 2010 by · Leave a Comment 

“The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending November 26th, 2010”

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Red Flags Raised Over Consumer Protection Bureau’s Funding Method

November 30, 2010 by · Leave a Comment 

“Federal Reserve Bank of St. Louis President James Bullard expressed concern on Monday that the newly created Consumer Financial Protection Bureau (CFPB) may not be funded appropriately to handle the responsibilities that will be required of it. Bullard made the remarks at a panel discussion hosted by the Bank on “The Direction and Implications” of the new bureau.”

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Ireland’s Debt Servitude

November 30, 2010 by · Leave a Comment 

“It is harder to justify why the Irish should pay the entire price for upholding the European banking system, and why they should accept ruinous terms.”

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Ireland is Bailed out at Eur85 Billion, Next is Portugal

November 30, 2010 by · 1 Comment 

By Michael Trinkle, ForexTraders

Today the widely anticipated bailout of Ireland has had little impact on market action or sentiment, on the argument that it is just another ring on a long chain extending from Greece to Spain and perhaps even Italy and Belgium. Some Eur85 billion has been committed for the Irish issue, and Germans have relented as well, finally agreeing to withdraw their case on the forced participation of private creditors in Eurozone bailouts.

Gold has held out once again as Euro was sold across the board to come close to the 1.31 level. As we stated previously, the latest bout of risk aversion may not fail to reach an end without the capitulation of gold buyers, which would indicate that the risk market has still some way to sell off before the final capitulation occurs. Global stock markets, meanwhile, were generally weaker, with European bourses suffering the sharpest losses.

Among interesting reports, we have the comments of Nouriel Roubini about the consequences of Spanish bailout which we quote from Bloomberg briefly:

HSBC Holdings Plc estimates Spain may need 351 billion euros over three years. The E.U. may be able to deploy only 255 billion euros of the 440 billion-euro European Financial Stability Facility, according to Nomura International Plc. That’s because the bailout fund is financed by bonds, and governments agreed to set aside cash and link lending to the creditworthiness of donors to secure a AAA rating.


Spanish lenders have 181 billion euros of “troubled exposure” to construction and real estate after a decade-long property boom collapsed, according to the Bank of Spain. Five Spanish lenders failed stress tests in July.

In Spain, in my view, the eventual fiscal costs of cleaning up the financial system are going to be much larger than have been so far estimated by the government,” Roubini said. “As we saw, the stress tests were not stressful enough, if not a total fudge.”

As the number of countries needing bailouts or financing help grows, Roubini said sovereign debt, and in turn “supranational debt,” will increase as well.

Our note is that, in spite the limits, red lines, and vetoes that are touted, the E.U. will probably choose the path of bailouts in each of these cases even if it means monetizing some of these bailouts, through bond purchases, or other, perhaps more creative methods. Regardless of the financial costs involved, the cost of a E.U. or Eurozone breakup is far greater, because the fruits of a 50-60 year long process would be lost if the common currency were to be allowed to disintegrate. At the same time, the bailouts may yet fail to save the currency because the electorate is extremely unlikely to accept these new costs without a reaction. The Europeans had been demonstrating a strong tendency for national isolationism/xenophobia long before the sovereign debt crisis, and expecting a deepening of these attitudes is not irrational in light of the recent events.

We quote the latest numbers in the CDS market from the related Bloomberg article:

Credit-default swaps on Portugal jumped 37 basis points to 539, and contracts on Spain climbed 28.75 to 351.5, according to CMA. The [Sov X index of West European CDS] on 15 governments increased 9 basis points to 197, a record based on closing prices.

Swaps on Italy rose 28 basis points to 244, the highest level in almost six months, as the nation’s borrowing costs increased at a sale of 6.8 billion euros of bonds.

The cost of insuring the subordinated bonds of European banks also rose as investors bet Ireland’s precedent for making junior bondholders share the cost of a rescue will be followed. Finance Minister Brian Lenihan told state broadcaster RTE the government needs to impose “big haircuts” on junior bondholders after the bailout.

Financial Swaps

The Markit iTraxx Financial Index of swaps on the junior debt of 25 European banks and insurers soared 16.5 basis points to 294.5, after earlier rising to the highest level since April 2009, according to JPMorgan Chase & Co. The senior index was up 1 at 165, after earlier falling as much as 9 basis points.

And if you like to see how the situation in the Eurozone bond market looks like, here are a few fearsome charts via the Financial Times blog.

The above shows the yield movements in Spain’s 10yr bonds on a minute-by-minute basis. The graph doesn’t leave much need for comments, and the sharp 250+ bps movement in yield in about five hours tells a lot about market sentiment.

This is the yield of Spain’s 2yr bonds on a 1-minute scale, and the below chart is Italy’s yield since November, via Bloomberg.

It is worth noting that the three Italian government auctions of today went reasonably well, at least in comparison to preceding rumors and speculation.

In the U.S., while the E.U. keeps enlarging the size of its bailouts, news sources report that the Obama Administration is freezing public pay for federal workers for the next two years, making some wonder if the U.S. will consider reversing the existing “non-stop pump” approach to fiscal and monetary policy. This is unlikely however, since, in spite of the government’s limited spending cuts, the Federal Reserve, especially the Governor appear committed to increasing the emission of dollars for as long as the danger of deflation persists. Recent data has been encouraging to some extent, with today’s local PMI release showing some improvement in the manufacturing sector, but the key risks relating to employment persist, and we find it hard to see how the consumer can be made to spend if worries about this sector persist.

We’ll conclude by noting that after many months of denials, the Iranians have admitted that the problems at their nuclear facilities are being caused by a computer virus, the Stuxnet, which is widely believed to have been developed by Israel, and transmitted to its target by some kind of covert operation. It is the first time in history that a strategic target in a nation has been disabled by the use of information technology, a development which opens up many new economic and strategical possibilities for governments and corporations around the world.

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The Showdown On Tax Cuts for the Rich

November 30, 2010 by · Leave a Comment 

By Robert Reich, Robert Reich

The President met with Republican leaders at the White House this morning to talk about whether the Bush tax cuts should be extended to top taxpayers, at Republicans want.

No decision has been reached, but this is the first test of the President’s resolve with the new Congress — and he should be tough as nails. The economics and politics both dictate it.

Taxpayers in the top 1 percent don’t need it (they are now getting almost a quarter of all national income, the highest percent since 1928).

They don’t deserve it (they got the lion’s share of the benefits of the 2001 and 2003 Bush tax cuts, and have had no reason to expect a continuation of their windfall).

They won’t spend it to stimulate the economy (top earners save a much higher proportion of their income than the middle class).

And giving it to them blows a giant hole in the budget (the Joint Tax Committee estimates the cost of extending the Bush tax cuts for the top 1 percent to be $61 billion in 2011 alone.)


In political terms, a strong stand enables the President to clearly demonstrate who’s side he’s on (the working and middle class that’s still bearing the brunt of this lousy economy) and who’s side the Republicans are on (the powerful and privileged who brought much of this on, and who are now doing just fine).

The only compromise he should be prepared to make is to extend the Bush tax cuts to the bottom 99 percent (rather than the bottom 98 percent), and for two years rather than ten. The top 1 percent begins at around $500,000 rather than $250,000.

This would allow the President to even more sharply illustrate the extraordinary concentration of income at the top, while robbing Republicans of their debating point about small business (just about all small business owners with payrolls earn under $500,000).


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Dow Jones Industrials 9,240, Here We Come

November 30, 2010 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS
Six charts illustrate a weakening stock market.

Nobody knows what will happen in the future, but it’s fun to predict anyway. With that caveat: Dow Jones Industrial Average (DJIA) 9,240, Here We Come. That’s about a 16% decline from its current level around the psychologically important 11,000 level.

What is the basis of my foolhardy prediction of a 16% decline in the stock market?Let’s start with a 10-day chart of the DJIA, which clearly shows the Plunge Protection Team’s rapid backfilling of any decline. But alas, the downtrend is painfully obvious:

If we look at a 5-year chart of the DJIA, we see unmistakable signs of weakness. Despite a nominal new high in November, RSI and MACD are both showing major divergence, declining even as price hit new highs.

The bands of support and resistance are clear as well, and the 9,240 target is solidly within the lower band. The resistance-support between 11,000 and 11,300 goes back to 2006 and even earlier to 2001 (not shown).

If the DJIA busts through 11,000, it’s look out below.

As I have noted here numerous times, the US dollar (DXY) and the US stock market have been on a see-saw: when the dollar drops, stocks rise, and vice versa. Here we see the US dollar in a breakout mode, with a bullish cross of the 20-day moving average through the 50-day MA:

Though the Volatility Index (VIX) has been muted compared to its rampage higher in the Eursozone Debt Crisis Part 1 in May, we can discern a rising MACD and other evidence that volatility may not stay low.

The megaphone pattern suggests an increase in uncertainty as the swings up and down get more violent: the volatility of volatility is rising.

The S&P 500 certainly looks like it’s traced out a big fat double top, and the indicators are diverging massively from the “happy story” rally. Price won’t stay trapped between the 20-day moving average and the 50-day MA for long, and thre probing below the 50-day that occurred yesterday looks like the skirmish line of a full assault.

Meanwhile, the QQQQ (ETF of the NASDAQ 100) has more gaps than a 5-year old’s front teeth. Bulls may argue that the rally from September 1 is just so powerful and unique that all those pesky gaps around 44 will never be filled, but old-time chartists have seen too many euphoric rallies retrace to fill those multiple gaps left behind to believe the Bull’s happy story of a market that will race ever higher even as corporate profits are set to roll over, China is tightening its bubblicious credit expansion and the Eurozone is in a controlled-demolition phase with no Hollywood ending in sight.

A return to 44 by the Qs works out to about a 16% decline–a number that aligns rather neatly with the lower band of support on the DJIA (9,240).

OK, so maybe the US market will suddenly reverse its polarity and start rising alongside the dollar. Maybe all those divergences will stay divergent. Maybe the VIX will simmer down to complacency again–and maybe lemmings will leap into the air and form a squadron of flying miracles.

Anything’s possible, but not everything is probable.

DISCLOSURE: I am short the market via inverse ETFs and put options.

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This Time Is Different

November 30, 2010 by · Leave a Comment 

The Daily Reckoning

Well, so much for the supposed confidence-building announcements from the EU over the weekend. European equity markets fell heavily when trading resumed on Monday. Bond yields in Portugal, Spain, Belgium and even Italy continued to rise to new highs.

The bureaucrats in the EU are losing their already tenuous grip on the situation. Despite assurances that senior bondholders will not take ‘haircuts’ on their investments (not on lending before 2013 anyway) markets are imposing their own form of ruthless discipline.

For years the concept of risk was ignored. For years countries like Greece, Ireland and Portugal could borrow on terms almost identical to Germany, despite massive differences in economic structures.

Now, at a time when EU officials are desperately trying to convince markets that risk still doesn’t matter – that you can still have reward without risk – the markets are not buying it.

This puts mounting pressure on the European Central Bank (ECB) to ‘do something’. It meets on Thursday European time to discuss monetary policy. Bond investors will be sweating on the bank to open the liquidity floodgates and buy up peripheral European debt big time.

Whether it will do this is questionable. But even if it does, such action would only push the problem a few months down the track. We’re dealing with a problem of solvency here, not a liquidity problem. Such problems cannot be dealt with by temporarily monetising debt.

We wonder how Ben Bernanke is feeling about all this. On the one hand, he’s probably relived that some other central banker is the centre of attention for a change. On the other, he’s probably gutted that his QEII plans seem to have backfired.

Check out the chart of the US dollar index below

The dollar has rallied strongly since Bernanke announced his money printing scheme in early November. Things haven’t exactly gone according to plan for Ben. He’s trying to lower the value of the dollar to generate inflation and boost export competitiveness.

But he’s forgetting the minor point about the US dollar being the world’s reserve currency. In times of economic stability, the US dollar will generally trade according to domestic fundamentals. In times of turmoil though, it retains its safe haven status.

Because the euro is under all sorts of pressure, capital is now flowing back to the US dollar. It’s all relative in the world of currencies and as bad as the US dollar looks, it’s not as bad as all the other major currencies.

If there’s one lesson to be learned from the euro crisis it’s that problems begin at the core. The US dollar is at the epicentre of the global economy. The peripheral currencies (euro, yen) will likely come under major pressure before the greenback faces its day of reckoning.

But one thing is for sure, the dollar is not as good as gold. Gold is in a consolidation phase at the moment and just doesn’t seem to want to put in a decent correction. Dips are bought with gusto. It’s a sign of a powerful bull market when everyone seems to be waiting for a correction and it doesn’t happen.

The bull market in gold is the mirror image of the bear market in government policymaking and fiat currencies. The trend has a long way to run yet.

Closer to home, RBA governor Glenn Stevens was out last night talking about the terms of trade again. Unusually for a central banker, this was a thoughtful speech about how Australia should think about managing the recent jump in the terms of trade.

As you can see from the graph Stevens presented in his speech, the recent spike in the terms of trade is up there with past historical increases. The question he raises is whether it’s a permanent or temporary shift in our fortunes.

The terms of trade, by the way, measures the value of our exports in terms of imports. As Stevens puts it, ‘when the terms of trade are high, the international purchasing power of our exports is high.’

Stevens correctly points out that history suggests the huge increase in the terms of trade will be temporary. He just doesn’t know when the temporary bit will kick in.

If it is, he says that ‘it would probably not make sense for there to be a big increase in investment in resource extraction if that investment could be profitable only at temporarily very high prices’In other words, Australia’s resource sector could ‘probably’suffer from overinvestment if it turns out that China’s insatiable appetite for iron ore and coal is more a product of its massive credit boom than anything else.

Has Glenn Stevens been reading a bit of Ludwig von Mises lately?

Of course you don’t have to have studied Austrian economics to come to that conclusion, you just need common sense. Surprisingly for a central banker, Stevens seems to have plenty of it.

But let’s not get too excited. There is always ‘the other hand’.

‘On the other hand, experienced people seem to be saying that something very important – unprecedented even – is occurring in the emergence of very large countries like China and India. If the steel intensity of China’s GDP stays where it is already, and China’s growth rate remains at 7 or 8 per cent for some years to come, which appears to be the intention of Chinese policy-makers, then the demand for iron ore and metallurgical coal will rise a long way over the next couple of decades.’

Translation: ‘This time is different.’


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Cutting Expenses to Borrow More Money

November 30, 2010 by · Leave a Comment 

The Daily Reckoning

It is very cold in London. “This is the coldest it’s been in 25 years,” said a colleague.

People are bundled up in scarves and hats. There are patches of ice on the sidewalk. Heck, it could be Baltimore or New York.

London is usually milder. It snows occasionally, here. But rarely do you get such a severe cold snap.

Still, we take the world as we find it.

So, let’s see… What do we find in the financial world this morning…


The prime minister of Spain gave speculators a little advice. Don’t sell short Spanish debt, he said.

As far as we know, government officials give investment advice that is at least as unreliable as the advice you get from anyone else. But that doesn’t mean Jose Zapatero will be right.

As we go to press, investors are not paying much attention. They seem to think they can find a better place for their money than Spanish bonds.

But how cometh the elected chief of a major European government to be giving financial commentary? That’s our job. Here at The Daily Reckoning nobody pays us for it. But we do it anyway.

The other night, we had a dream…that we had been elected to Congress. It was a nightmare really. We wanted to demand a recount. We arrived in Washington to take our seat and we couldn’t figure out how the voting machine worked. The other members were voting on expensive, preposterous bills. We wanted to vote “no.” But we couldn’t make the voting machine work. We’ve never been very good with gadgets, but this was maddening. Hour by hour, they were proposing and disposing…while we couldn’t do anything about it. They were running up trillions in new financial obligations…more wars…more health care benefits…more farm subsides… More meddling. More world improvement. More intervening.

The US was already broke. Still, they kept on spending.

Hey, wait a minute… This was no dream. This was no nightmare. This was real life!

The difference between Europe and the US is that the Europeans have begun to get their voting machines to work properly. The latest news is that the Irish have committed themselves to lop another 20% off of state spending. The Greeks, Portuguese and Spanish are all headed in the same direction. They’re acting like responsible citizens. In order to convince investors that they’re good for the money, they’ve got to cut spending.

If investors lose confidence, they won’t be able to borrow money at low interest rates.

Hold on… Let’s get this straight. They’re cutting expenses so they can borrow money?


If they don’t cut expenses, they won’t be able to borrow at decent rates, right?

And then what? Then they’ll have to cut expenses even more.

So why not just balance their budgets now, so they don’t have to borrow at all?

What, are you some kind of nut, dear reader? Balance the budget? Spend only what they can raise in taxes? Don’t make us laugh.

In America, federal deficits are projected from here to eternity. There is no plan to balance the budget ever again.

At least the Europeans are trying to get their budget deficits down – to 3% of GDP. Ireland pledged to do so as part of its rescue deal. And to cut 25,00 jobs from the payroll – 10% of its entire workforce.

That was enough to bring out the protestors – even in this bitter cold.

And more thoughts…

Let’s look at how the European debt situation developed.

When Europe brought out the euro in 2002, it changed everything. All of a sudden, you could lend money to Ireland or Greece without having to worry about the Irish pound or the Greek drachma. They were all using the euro, which was managed by the Germans. So why not lend to one of these peripheral states of Europe and earn a little more interest?

Things began to change fast. Interest rates in Spain and Ireland dropped. People started buying houses. Builders began putting them up all over the place. Prices were going up. It was similar to what happened in the US, but amplified. Ireland, for example, had always been a relatively poor country. But by 2007, rising house prices had turned the Irish – on paper – into the richest people in Europe.

Bust follows boom. Always has. Always will. And when the bust came to Europe, its banks were holding a remarkable amount of mortgage debt. The trouble was, debtors didn’t have enough income to pay it. In a panic, investors dumped bank stocks…figuring the banks would go bankrupt.

But in stepped governments. They tried to halt the correction. They gave guarantees. They made commitments. The told the world that they would make sure senior lenders got their money. But how? The governments were deeply in debt themselves. But that didn’t stop them. They went ahead – to varying degrees – and guaranteed bank debt.

And so here we are. Ireland guarantees its bankers’ debt. Europe guarantees Ireland’s debt. And who guarantees Europe’s debt?

And why do they bother?

Why not just let the speculators take their losses?

“There will be no haircut on senior debt,” said Olli Rehn, EU commissioner for economic and monetary matters.

They made the decision to invest of their own free will. It’s gone against them. Shouldn’t they be permitted to learn from their mistakes? Why not?

We have never heard a good explanation. And we have a suspicion that no one else ever has either. Instead, it is more of an implied threat…whispered…too terrible to think about. “Pssst… They’re TOO BIG TO FAIL.”

Oh yeah? Why? What, exactly, would happen? Weak banks would fail. They’d be quickly taken over by stronger banks. Government debt that was too closely connected to the weak banks would fail too. Paper currency may even collapse, if people feared “the whole system” was coming down.

Governments may have to come out with a gold-back currency – one that people could trust. Then, unable to borrow more, they would have to live within their means. And the surviving banks would know better than to take risks bigger than they could cover. Would that be so bad?

*** Well, this is a first. Danny Ortega, president of Nicaragua, has given casus belli to Costa Rica, on the basis of Google maps. He looked at Google and realized that part of what is now Costa Rica should really be Nicaragua. So he sent armed Nicaraguan forces to claim the land.

At least, that’s how we heard the story on CNN en Espagnol. Our Spanish is far from perfect, so we might have gotten the details wrong. But the gist of the story was confirmed for us at Thanksgiving dinner.

“Hey Dad,” said one of the boys, “I hear you’re going to Nicaragua for Christmas.”


“Uh… And you’re going to fly into Costa Rica, and then cross the border?”


“Do you realize that you could be going into a war zone? Danny Ortega is getting a lot of flack in the country, because his policies don’t work very well. And people don’t like the fact that he is twisting the constitution to suit his own purposes – just like his pal Chavez. And he has an election coming up next year. So he’s stirring up trouble with Costa Rica in order to get the yahoos behind him.”


Bill Bonner,
for The Daily Reckoning Australia

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