Rudolph Giuliani is ahead of Hillary Clinton in every poll listed by ReaClearPolitics.com, as of 2-21-07, but the real question is why any of us should be this worked up about the election which is still almost two years away.
Peggy Noonan, of the Wall Street Journal, is always thoughtful, whether you agree with her views or not. And in a recent editorial, she pondered the subject, quite eloquently.
According to Noonan, in her 2-16 opinion piece for the Wall Street Journal's Opinion Journal section: "Part of the reason is structural: A technological revolution spawned a media revolution; new media is determined to win the day, old media is desperate to keep up. Large investments are at stake. Competition forces its own dynamism; everyone's filing, live, on cable, on the Internet, from Manchester, N.H., or Ames, Iowa. The chatter is everywhere."
In other words, we're inundated with data, opinions, facts, figures, and sound bytes from the time we wake up until we go to sleep. And in some cases, this stuff seems to weave its way into our dreams.
But, according to Noonan, there is a bit more to it than just the fact that we're exposed to media lunacy.
Now, it gets interesting. Noonan thinks that we're losing touch with reality, noting that you can't find any innocent people on T.V. to interview any more. Everyone seems to speak "in perfect sound bites," and to "cry on cue."
Stick with me here. Noonan's early conclusion is dismay because "it's another stepping away from the real. Artifice detaches us even from ourselves."
Noonan then writes that during a conversation with a minister, the holy man quoted a spiritual genius as saying: '"All the problems in the world are caused by man's inability to sit quietly in a room by himself."'
She then works her case further by noting that we are all becoming media fanatics because the media has fooled us into losing ourselves in the midst of the distractions that surround us, while taking us away from what's really important. We want the distraction "not because it's crucial but because it distracts us from the crucial. It takes our minds away from what is most important. Who you are, for instance, or what we are about. It's a great relief not to think about the important. It's a relief to focus on factoids."
So what does this have to do with the election? According to Noonan, it's all that's left to us. "By obsessing on the presidential race--and I mean here not only journalists and editors and professional schmoozers but normal humans--by turning our attention to the contests for the nomination and focusing on it and pondering how our neighbors experience Edwards or McCain, we help convince ourselves that the next guy can solve it all. The next president will save us. That's why it's so important, because the next president will turn it all around. We like thinking this. And I don't blame us. I like thinking it too. Even though I know it isn't true. Because our next president will not have magical powers."
Thursday, June 12, 2008
Payback: Big Money Gets Tough On Bad Mortgages
Small mortgage lenders, often specializing in high risk and highly convoluted mortgages are facing the dark side of Wall Street as major investment banks and brokers are demanding their money back on defaulting loan packages.One of the most traditional hedges in the real estate market, the reselling of mortgages, is delivering major blows to small firms, with bankruptcies in the sector rising. According to the Wall Street Journal: "As more Americans fall behind on mortgage payments, Merrill Lynch & Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006."According to the Journal: 'Merrill demanded in December that ResMae Mortgage Corp. -- which in 2006 sold it $3.5 billion in subprime mortgage loans, or loans to borrowers with poor credit records -- buy back $308 million of loans whose borrowers had defaulted. In a filing this week for bankruptcy law protection, ResMae said those demands "crippled" its operations. The Brea, Calif., company said that repurchase requests were "severe and unexpected."' And Resmae is not alone. According to the Journal: "Accredited Home Lenders Holding Co., a subprime mortgage lender based in San Diego, reported a loss of $37.8 million for the fourth quarter, partly due to heavy repurchases of dud loans from large loan buyers, compared with a year-earlier net income of $43.3 million."In effect, what is happening is that the chain reaction has begun, as "as home-price appreciation fell and borrowers faced rising interest rates, more people defaulted on their mortgages. That prompted Merrill Lynch and others to exercise their contractual right to demand the sellers buy back the loans. Under mortgage contracts, mortgage originators must often repurchase loans that default very early in their term or that come with underwriting mistakes, such as flawed property appraisals."Aside from exercising safety clauses in contracts, some investment banks are going further. The Journal reports that "HSBC, which last week added $1.76 billion to its bad-debt costs for 2006 to cover ailing mortgages, has sued several small lenders in federal court in Illinois after they refused HSBC's repurchase requests."what makes this most interesting, is that it is a rare occurrence for investment banks and others in the mortgage reselling market to go after the seller. The Journal noted: '"Nobody was doing this in earnest before late last year," says Kevin Kanouff, president of Clayton Fixed Income Services, adding that he expects the volume of putbacks "to trail off in the third or fourth quarter. The carnage that you are seeing...is not over."'Clayton Holdings is increasingly busy in the current situation and is "working with a half-dozen investment-banking firms to identify loans that should be repurchased. Clayton has also been hired by two hedge funds to review mortgage bonds they own for potential repurchases."
Housing: Loan Troubles Ahead
Housing loan delinquencies are near their all time highs, an economist told the Wall Street Journal. According to the paper: '"the total mortgage delinquency rate is the highest that it's been since the depths of the [2001] recession," says Mark Zandi, chief economist at Moody's Economy.com. He attributes the increase in part to the weaker housing market and the widespread use of adjustable-rate mortgages, many of which now are resetting at higher rates.'Although the big picture is now all about Iraq and its effect on the upcoming presidential election, the U.S. stock market still has to deal with economic data and the potential effect of the numbers on the Federal Reserve's actions at the end of the month.The thought of a rate cut has almost been erased. Yet, there is always the potential for the central bank to raise rates, although that has diminished over the last few weeks.One of the major reasons for a slowing economy, oil prices, has eased, although that could change, as oil seems to have made some kind of bottom in the last few days.That leaves Wall Street to fret about housing, at least for today, when December existing home sales will be released around 10:00 Eastern time.Expectations are for a decrease in sales of some 0.5%, according to the Wall Street Journal, and there might be a surprise to the down side, if the number of defaulted or in trouble mortgages rises far enough.According to the Journal, the number of delinquent or in trouble mortgages is on the rise, prompting banks to move faster to avoid foreclosures. The problem, as we have noted here several times, is the fact that adjustable rate mortgages are running out and new loans have higher interest rates. That means that monthly payments are on the rise, and homeowners who bought beyond their means are not able to make payments.The Journal added: "The increase in bad loans is broad based, with delinquencies rising in the past year in roughly 80% of the 250 local areas analyzed by Moody's Economy.com. Some of the biggest increases have come in California, where high prices have made it hard to afford a home, and in other once-hot markets such as Las Vegas and Port St. Lucie, Fla. Among the handful of major metropolitan areas where delinquencies have fallen: Salt Lake City, San Antonio and Albuquerque, N.M."Moody's Zandi, told the Journal that things could get worse: "What is more, as demand for loans softened, mortgage lenders loosened their standards and made riskier loans, Mr. Zandi says. He expects that nationwide delinquency rates could rise by as much as a full percentage point from current levels in the next year, but he doesn't expect the trend will have a significant impact on the overall economy."
Under The Surface
The current selling on Wall Street is not so much about subprime home loans going bad, but about the sudden realization that bad loans are everywhere and that they are linked through derivative networks.
According to Tod Harrison, founder of Mynyanville and who writes a nifty column for Marketwatch.com, the subprime problem "only scratches the surface of the structural risks in the system," as there may be as much as "$370 trillion in outstanding derivative contracts," out there waiting to do something.
But Harrison notes that although there is that estimated figure floating about "nobody knows" how much of a derivative web there really is, thus rendering the extent of its potential as another unknown.
Harrison further adds: "derivatives aren't evil products. They're fantastic risk management tools when managed correctly. Unfortunately, given the proliferation of hedge funds and the massive amounts of leverage in the system, the odds of a "tail event" (an outlier move that isn't factored into financial models) increase in kind. "
Admitting that he's not sure if the subprime issues are that "tail event" or not, Harrison wisely notes that "it is that possibility -- the percentage probability -- that is currently being priced into the system."
His discussion gets more interesting, though, when he writes: "You see, in a finance based economy, such as the one we currently have, the dependence on financial operations has never been more acute. General Motors, General Electric, Ford, to name a few, all feed their bottom line and buffer earnings through financing operations. We like to call these "financials in drag" because most folks don't view them through the same lens as traditional banks. But let's be honest, do you think GM makes money selling cars? No. They make money selling loans. And those loans are packaged and repackaged numerous times and passed amongst financial intermediaries."
Harrison's astute analysis notes that the passing off of loans to others is a good thing in a liquidity driven, stable market. And it's rarely questioned when companies beat their bottom line earnings estimates." But, he cautions that "The other side to that trade will come to bear, however, if a pebble falls into this" intricate global machination. The perception of that risk has diminished through the years as it failed to materialize."
In effect, "The unfortunate truth is that the risk, rather than dissipating, has actually increased on a cumulative basis."
According to Tod Harrison, founder of Mynyanville and who writes a nifty column for Marketwatch.com, the subprime problem "only scratches the surface of the structural risks in the system," as there may be as much as "$370 trillion in outstanding derivative contracts," out there waiting to do something.
But Harrison notes that although there is that estimated figure floating about "nobody knows" how much of a derivative web there really is, thus rendering the extent of its potential as another unknown.
Harrison further adds: "derivatives aren't evil products. They're fantastic risk management tools when managed correctly. Unfortunately, given the proliferation of hedge funds and the massive amounts of leverage in the system, the odds of a "tail event" (an outlier move that isn't factored into financial models) increase in kind. "
Admitting that he's not sure if the subprime issues are that "tail event" or not, Harrison wisely notes that "it is that possibility -- the percentage probability -- that is currently being priced into the system."
His discussion gets more interesting, though, when he writes: "You see, in a finance based economy, such as the one we currently have, the dependence on financial operations has never been more acute. General Motors, General Electric, Ford, to name a few, all feed their bottom line and buffer earnings through financing operations. We like to call these "financials in drag" because most folks don't view them through the same lens as traditional banks. But let's be honest, do you think GM makes money selling cars? No. They make money selling loans. And those loans are packaged and repackaged numerous times and passed amongst financial intermediaries."
Harrison's astute analysis notes that the passing off of loans to others is a good thing in a liquidity driven, stable market. And it's rarely questioned when companies beat their bottom line earnings estimates." But, he cautions that "The other side to that trade will come to bear, however, if a pebble falls into this" intricate global machination. The perception of that risk has diminished through the years as it failed to materialize."
In effect, "The unfortunate truth is that the risk, rather than dissipating, has actually increased on a cumulative basis."
Rally Launch Has Strong Potential
U.S. stocks delivered a strong trend reversal on Wednesday, March 21, 2007, backed by strong volume and several important technical characteristics that suggest that more gains are likely.
For the last few days, although we have remained cautious we have been noting that the charts of the major indexes had been displaying double bottoms, and our stock lists had been building cautious long positions in stocks showing relative strength.
On Wednesday in our technical summary we wrote: "It is possible that we may be getting close to a nice move to the upside. And such a made for TV moment might come as early as 2:15 Eastern time today, if the Fed says something that the markets interprets as a good reason to rally."
Indeed, that's exactly what happened, as the Fed left interest rates unchanged and Wall Street interpreted the Fed's statement as possibly saying that the central bank may be finished with the potential for higher rates in the near future.
Of course no one knows what lurks in the heart of Mr. Bernanke and his crew of Fed governors. So, it's better to look at the market for clues as to what's next. And the clues are fairly encouraging.
First, the major indexes rose above key resistance levels, with the Nasdaq and the S & P 500 (see charts below in technical summary) rallying back above their 50 day moving averages. That means that the intermediate term trend has turned back to the up side.
For the last few days, although we have remained cautious we have been noting that the charts of the major indexes had been displaying double bottoms, and our stock lists had been building cautious long positions in stocks showing relative strength.
On Wednesday in our technical summary we wrote: "It is possible that we may be getting close to a nice move to the upside. And such a made for TV moment might come as early as 2:15 Eastern time today, if the Fed says something that the markets interprets as a good reason to rally."
Indeed, that's exactly what happened, as the Fed left interest rates unchanged and Wall Street interpreted the Fed's statement as possibly saying that the central bank may be finished with the potential for higher rates in the near future.
Of course no one knows what lurks in the heart of Mr. Bernanke and his crew of Fed governors. So, it's better to look at the market for clues as to what's next. And the clues are fairly encouraging.
First, the major indexes rose above key resistance levels, with the Nasdaq and the S & P 500 (see charts below in technical summary) rallying back above their 50 day moving averages. That means that the intermediate term trend has turned back to the up side.
COMMODITIES: THE TERROR TRADE
Terrorist organizations are using the commodity markets as a money laundering vehicle, says the Wall Street Journal.
Increasingly, according to the report, food and medication aid packages, especially some financed by Islamic charities are vehicles for money laundering, with the proceeds being used to finance terrorist activities.
According to the Journal "terrorist supporters, narcotics syndicates and sanctions busters have adopted a new method of sneaking funds past the watchful eye of the law: the global commodity trade.
The Journal summarizes the practice, also known as "trade-based money laundering" as follows: "Instead of wiring money directly from one country to another, a would-be money launderer buys foodstuffs like sugar or vegetable oil or other goods. Those goods are far easier to deliver to restricted destinations like Iran and the Palestinian territories because they often look like legitimate aid. When they arrive, local merchants transfer the goods on, or simply sell them for cash. A portion of the proceeds end up with local terrorist groups or criminals."
Indeed, although the practice is believed to be widespread, there is no way to quantify how much money is involved.
Several interesting facts are known, however, such as the large amount of activity that involves Iran, through the United Arab Emirates and especially Dubai, a country in which the flow of capital is large and in which there are connections to international shipping.
According to the Journal: "Much of the money in question is laundered in the United Arab Emirates, the primary conduit for Iranian imports. Trade-based laundering in the Emirate of Dubai also helps finance the booming Afghan-Iran heroin trade, according to U.S., Italian, and U.A.E. law-enforcement officials."
In fact, "In February, U.A.E. officials arrested 40 people on charges of commodities-based money laundering for narcotics traffickers. Many of the trades were placed through at least 15 different accounts at Man Financial Inc. in New York, U.S. officials said. The firm wasn't accused of any wrongdoing."
The Journal describes an intricate web of activity in Europe, which is alleged to be involved in siphoning off capital from delivered aid to Palenstinians in Gaza.
At the center of the allegations is a company called "Abu Aker for Export & Marketing," described as "a commodities firm based in Gaza and headed by Fayez Abu Aker."
According to sources described by the Journal, Mr. Abu Aker has delivered commodity shipments to Gaza, from which proceeds have ended up in the pockets of "charities" run by Islamic Jihad. Abu Aker has denied links to terrorist organizations.
Increasingly, according to the report, food and medication aid packages, especially some financed by Islamic charities are vehicles for money laundering, with the proceeds being used to finance terrorist activities.
According to the Journal "terrorist supporters, narcotics syndicates and sanctions busters have adopted a new method of sneaking funds past the watchful eye of the law: the global commodity trade.
The Journal summarizes the practice, also known as "trade-based money laundering" as follows: "Instead of wiring money directly from one country to another, a would-be money launderer buys foodstuffs like sugar or vegetable oil or other goods. Those goods are far easier to deliver to restricted destinations like Iran and the Palestinian territories because they often look like legitimate aid. When they arrive, local merchants transfer the goods on, or simply sell them for cash. A portion of the proceeds end up with local terrorist groups or criminals."
Indeed, although the practice is believed to be widespread, there is no way to quantify how much money is involved.
Several interesting facts are known, however, such as the large amount of activity that involves Iran, through the United Arab Emirates and especially Dubai, a country in which the flow of capital is large and in which there are connections to international shipping.
According to the Journal: "Much of the money in question is laundered in the United Arab Emirates, the primary conduit for Iranian imports. Trade-based laundering in the Emirate of Dubai also helps finance the booming Afghan-Iran heroin trade, according to U.S., Italian, and U.A.E. law-enforcement officials."
In fact, "In February, U.A.E. officials arrested 40 people on charges of commodities-based money laundering for narcotics traffickers. Many of the trades were placed through at least 15 different accounts at Man Financial Inc. in New York, U.S. officials said. The firm wasn't accused of any wrongdoing."
The Journal describes an intricate web of activity in Europe, which is alleged to be involved in siphoning off capital from delivered aid to Palenstinians in Gaza.
At the center of the allegations is a company called "Abu Aker for Export & Marketing," described as "a commodities firm based in Gaza and headed by Fayez Abu Aker."
According to sources described by the Journal, Mr. Abu Aker has delivered commodity shipments to Gaza, from which proceeds have ended up in the pockets of "charities" run by Islamic Jihad. Abu Aker has denied links to terrorist organizations.
Wednesday, June 11, 2008
INFLATION NON-CENTS
When was the last time you actually bent down and picked up that penny you dropped? The U.S. penny is on its way to extinction so it’s time to bid farewell to the basic coin and share with you an inflationary “penny for your thoughts”.
The penny’s composition has changed over the 219 years it has been in circulation:
From 1787 to 1837 the composition of the penny was pure copper; From 1837 to 1857, the penny was made of bronze (95 percent copper and 5 percent tin and zinc); From 1857, the penny was 88 percent copper and 12 percent nickel; The Cent became bronze again (95 percent copper and 5 percent tin and zinc) in 1864 and stayed that way until 1962; In 1962, the cent’s zinc content was removed. Then, in 1982, the composition of the penny was changed to 97.5 percent zinc and only 2.5 percent copper. (This information was taken from the United States Mint website)
You may be wondering why the United States had to switch from a penny that consisted of mostly copper, to one that is almost all zinc. Well, before 1982 the old copper coin weighed 3.1 grams. 100 coins – or $1.00 worth – weighed 310 grams. Since a pound is about 453 grams, 100 pennies at 310/453 = .68 pound. Today, at $3.45 a pound for copper, 100 of those 1982 mostly copper pennies are worth about $2.35.
The U.S. government, which is in the business of “making money”, has done a fabulous job of profiting on this coin. Since 1982, they’ve used an inexpensive copper (zinc) as something of greater value (copper) in the minting of the penny. With inflation today, even the zinc in the penny is now worth more than the penny itself. It actually pays to take your paper money to the bank and exchange it for pennies, then sell them for scrap. I guess the time has really come to stop making these coins.
But the real story behind the now-worthless penny is, by far, the surge in inflation. If the core inflation rate is, indeed, only 2.6 percent, and the year-over-year increase in the CPI is 4.3 percent, I wish someone would explain why my household expenses have gone up so much.
Worse yet, global warming has lead to record heat in the Midwest and pushed up the cost of wheat to a ten-year high. Fruit is also shriveling and nuts are getting burned in their shells. It’s so hot, farm workers can sometimes work only half a day. This hasn’t helped the cost of food one bit so I’m stocking up before the middle class figures this out and there’s a mad rush at Costco to buy groceries cheap, especially cereal.
When the penny is retired and prices for goods and services are subsequently “rounded up”- an item that would ordinarily cost $1.97, may cost $2.00 – expect a little extra pop in inflation. (The Europeans saw a lot of this rounding up when they turned in their local currencies for the euro.)
For as long as I can remember, inflation has been with me, even as a kid when I bought penny candies. In the 1950’s, my father actually purchased a brand new modest two-bedroom house in the Midwest for $11,700 and a new car for $2,500. (Some suites at fancy hotels in Las Vegas can charge $2,500 for one night). Inflation also makes planning and saving for retirement a real issue. Unless you know how long you will live, I have to assume that the core cost of goods I need will be going up at least 10 to 15 percent in nominal dollars a year.
So, for the time being, our best recommendation for a long-term inflation hedge is to own real gold and silver and some I-Bonds in a rainy day fund. (Thank you, Federal Reserve, for a “fiat monetary system”.)
In years past, Americans would hoard dimes, quarters and silver dollars (before the silver was taken out of them). A silver dollar weighing one ounce would today be worth $11! Therefore, in the long run, stashing away zinc pennies may actually make a lot of cents. Any enterprising boy scout should be able to figure this out.
The penny’s composition has changed over the 219 years it has been in circulation:
From 1787 to 1837 the composition of the penny was pure copper; From 1837 to 1857, the penny was made of bronze (95 percent copper and 5 percent tin and zinc); From 1857, the penny was 88 percent copper and 12 percent nickel; The Cent became bronze again (95 percent copper and 5 percent tin and zinc) in 1864 and stayed that way until 1962; In 1962, the cent’s zinc content was removed. Then, in 1982, the composition of the penny was changed to 97.5 percent zinc and only 2.5 percent copper. (This information was taken from the United States Mint website)
You may be wondering why the United States had to switch from a penny that consisted of mostly copper, to one that is almost all zinc. Well, before 1982 the old copper coin weighed 3.1 grams. 100 coins – or $1.00 worth – weighed 310 grams. Since a pound is about 453 grams, 100 pennies at 310/453 = .68 pound. Today, at $3.45 a pound for copper, 100 of those 1982 mostly copper pennies are worth about $2.35.
The U.S. government, which is in the business of “making money”, has done a fabulous job of profiting on this coin. Since 1982, they’ve used an inexpensive copper (zinc) as something of greater value (copper) in the minting of the penny. With inflation today, even the zinc in the penny is now worth more than the penny itself. It actually pays to take your paper money to the bank and exchange it for pennies, then sell them for scrap. I guess the time has really come to stop making these coins.
But the real story behind the now-worthless penny is, by far, the surge in inflation. If the core inflation rate is, indeed, only 2.6 percent, and the year-over-year increase in the CPI is 4.3 percent, I wish someone would explain why my household expenses have gone up so much.
Worse yet, global warming has lead to record heat in the Midwest and pushed up the cost of wheat to a ten-year high. Fruit is also shriveling and nuts are getting burned in their shells. It’s so hot, farm workers can sometimes work only half a day. This hasn’t helped the cost of food one bit so I’m stocking up before the middle class figures this out and there’s a mad rush at Costco to buy groceries cheap, especially cereal.
When the penny is retired and prices for goods and services are subsequently “rounded up”- an item that would ordinarily cost $1.97, may cost $2.00 – expect a little extra pop in inflation. (The Europeans saw a lot of this rounding up when they turned in their local currencies for the euro.)
For as long as I can remember, inflation has been with me, even as a kid when I bought penny candies. In the 1950’s, my father actually purchased a brand new modest two-bedroom house in the Midwest for $11,700 and a new car for $2,500. (Some suites at fancy hotels in Las Vegas can charge $2,500 for one night). Inflation also makes planning and saving for retirement a real issue. Unless you know how long you will live, I have to assume that the core cost of goods I need will be going up at least 10 to 15 percent in nominal dollars a year.
So, for the time being, our best recommendation for a long-term inflation hedge is to own real gold and silver and some I-Bonds in a rainy day fund. (Thank you, Federal Reserve, for a “fiat monetary system”.)
In years past, Americans would hoard dimes, quarters and silver dollars (before the silver was taken out of them). A silver dollar weighing one ounce would today be worth $11! Therefore, in the long run, stashing away zinc pennies may actually make a lot of cents. Any enterprising boy scout should be able to figure this out.
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