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I am a molecular biologist that has worked in the biotechnology and pharmaceutical industry for over 10 years. While considering buying a home in the year 2004, I started to get the feeling that something was very wrong. Since then I have studied economics and all things financial to educate... More
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Economic Disconnect
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  • Now I am the One Asking Questions
    Well the Celtics really laid an egg last night! I went to bed at halftime knowing full well that game was over. I figured the Celtics were a 2:1 favorite going into last night's game but after the debacle of their performance would not put them about 3:1 underdogs to win game seven. Makes me think of that game 6 of the New York Knicks vs the Houston Rockets in the title series a long time ago. It was all there and they let is slip away.

    Now I am the One Asking Questions
    I was inspired by this post over at The Illusion of Prosperity last night which just asked simply:
    Q: What Do These Five Commodities have in Common?
    1. Gold (the ancient metal?)
    2. Silver (imaging?)
    3. Copper (wiring?)
    4. Lead (bullets?)
    5. Iron (swords?)
    There are many valid correct answers, but I have one particular answer in mind.
    You can check the post for the answer and the give and take in the comments section.

    I know this may be very hard to believe, but this author does not know everything. In fact I am well aware of the many things I either do not know or cannot predict. This may surprise you as in your daily reading it seems many KNOW almost everything and can predict what will happen in the future. It's a dirty little secret. All writers are pretty much just like you; doing the best they can with what they have. Some are more talented than others, but in the end all one has is their mind, their gut, and some kind of way to express their opinions.

    I had quite a few questions on my mind about several stories today and of course I have a few ideas about all of them. Then I figured, why not just ask the audience? Brilliant! The readers here are the best anywhere and so I will open up what I am puzzled about to the board and see what comes out.

    Fannie Mae and Freddie Mac Delisted
    Two wards of the state, both FNM and FRE have been sub dollar stocks for a long time. FNM was a HFT favorite, making the top 25 most heavily traded stocks for the high frequency crews. Why now? Even the Wall Street Journal had a hard time finding a reason:
    Many analysts for months have maintained that the companies’ shares aren’t worth anything because Fannie and Freddie have run up such spectacular losses as a result of the housing bust. To become profitable again, the companies would have to stop losing money and pay back the $145 billion that they’ve taken in government aid just to get back to a break-even point. From there they’d have to recapitalize themselves before shareholders could see any gains.
    Given that the companies’ circumstances haven’t changed much, “it somewhat raises the question why it wasn’t done earlier,” says Jim Vogel, an analyst at FTN Financial.
    You think so, Mr. Vogel? Thanks for the insight. Someone may have wanted to talk to Investment Technology Group Inc who in a Businessweek item mused:
    Two companies removed from the Russell 1000 last year because their share prices were less than $1 -- Freddie Mac and Sirius XM Radio Inc. -- are likely to rejoin the benchmark, according to ITG.
    Guess not.

    I have an idea as to what this is leading to and the WSJ piece even hints at it:
    The big issue now is what happens to the companies moving forward, and Wednesday’s delisting helps clear the pathway a bit towards doing something completely new as opposed to taking steps to restore the value of the current companies. And it’s also a sign that the common shareholders “don’t play a role in that future structure,” says Bose George, an analyst at Keefe, Bruyette & Woods Inc.
    I have a really bad feeling about this. What is the deal here?

    Euro Bank Stress Tests: What is with the Delay?
    Spain wanted banking stress tests to be made public, Germany was opposed but as they have been likely to do as of late, caved right in under any pressure and have agreed. But we will have to wait two weeks to see any results:
    ECB Says We Have To Wait 2 WEEKS For Any Stress Test Data
    Why the wait? Presumably these tests are done and should be ready to go. What is the hold up? Can you think of anything off the top of your head? It's more than the first thing that pops into your mind I think.

    Convoluted Court Ruling
    I am not a lawyer. I have zero understanding of cross-border banking regulations. I have no idea if one country can compel a business based in another country to do anything. That said, I am clearly puzzled by this news which Calculated Risk covered today:
    Iceland: Court Rules Foreign Currency Indexed Loans Illegal
    CR links this Iceland Weather Report site which offers:
    The Icelandic supreme court ruled this afternoon that Icelandic loans indexed to a foreign currency are illegal.
    This is hugely significant for thousands of people in this country.
    As many of you will know, the foreign currency loans were one of the most serious consequences of the economic collapse for normal people in Iceland. Thousands of Icelanders had taken out these so-called “currency basket” loans to buy homes and cars, and when the Icelandic currency plummeted, their loans doubled, tripled and even quadrupled in value, with disastrous effects.
    And now, they’ve been deemed illegal. Exactly what the implications of this are I’m not entirely sure [the World Cup dominates everything these days, so we don't even get Kastljós in the evenings, which might help shed some light on the matter] — but it’s sure to be big.
    Well that sounds big!

    I really cannot offer much on this one. In the CR comments section some voices (smart folks) thought maybe this would mean Icelandic borrowers would be given back money after being overcharged in this, now illegal, type of loan arrangement. I have no idea how this would work. If that is the case there will be more loan losses for banks that made these loans, though how large that number is is open to question. Any thoughts?

    England's Version of the SEC is Dissolved
    The very agency tasked with financial regulation was a failure, which in that it is hardly alone. From the Clusterstock piece:
    Last year David Cameron said that Gordon Brown's financial regulation system, the FSA, was to blame for the entire country's financial problems.
    He made plans do something about it: either get rid of the FSA or give someone the job of better supervising them.
    Now George Osborne is disbanding the FSA altogether and giving the job of supervising and regulating to the Bank of England, says the Guardian.
    The new king of regulation is Mervyn King, who will exercise ultimate control over the supervision.
    This is rich! Imagine the government getting rid of the inept SEC (great news!) and giving enforcement over to the FED (WHAT????). A puzzling move indeed. Again, any ideas?

    BP Going Down but PIMCO Likes The Odds
    Things are not looking good for oil spill culprit BP. To start they will have to set aside $20 Billion dollars in an escrow account for various payments. The CDS markets do not like their chances, but Bill Gross of PIMCO sure does:
    Bill Gross, the co-chief investment officer of PIMCO, said on Wednesday that he recently bought $100 million of short-maturing BP Plc (BP.L) (BP.N) notes and some Anadarko Petroleum (APC.N) paper.
    Gross told Reuters via email that he purchased BP paper and "some Anadarko, which is a 20 percent owner," in recent days.
    He earlier told CNBC television: "BP 5-year bonds yield 6 to 7 percent, BP 12-month paper yields 10 to 11 percent. This is either a double-A company or a triple-C company depending upon the caps and the ultimate cost."
    Gross said on CNBC: "At this point, if you can get 10 percent on one-year paper on BP, we think it's closer to double-A than triple-C. That's a significant (thing). We started to buy some."
    I will defer to Mr. Gross about the particulars but I think there is something else going on here. Remember, PIMCO likes to "shake hands with the government" and it is this line of questioning that I think leads to a better reason for the purchase. What do you think?

    Best Move of the Recovery?
    A nagging question after today is what has been the best move of the recovery? Your choices, amongst so many, are:
    A - General Motors (NYSE:GM) ramping up production, especially of SUV's, due to the Toyota scam, I mean boom in sales signaling a new long term uptrend and gas long term under $2.50 a gallon.
    or
    B - Toll Brothers (NYSE:TOL) getting back into land purchases and looking to expand as they "focus on growth" just last month and already they are thinking things over.

    Tough call!

    Last night in the LABEL line I left:
    Get up and get down financial reform is a joke in your town
    Which was a borrowed from the old Public Enemy song "911 is a Joke in Your Town". There, one question answered!

    Have a good night.

    Disclosure: No positions in any stocks mentioned
    Tags: BP, FNMA, FMCC, TOL
    Jun 16 8:31 PM | Link | Comment!
  • It is Easy to Get Sidetracked
    It is Easy to Get Sidetracked
    As I have written, on any given day there are a few stories that grab my attention that I set aside for a write up or just to think about. Of course in the headline hungry news cycle we have there is always plenty to find interesting. Here are a few stories out over the past two days that are all interesting. The exercise is to figure which story has the most to offer a reader in terms of importance and meaning. Here they are:

    1. Wait: Why Did Ron Paul Just Introduce An Extension To The Homebuyer Tax Credit?
    Ron Paul in favor of permanently extending the first time home buyer tax credit and expanding it to cover any home buy in disaster areas.

    2. A Tale of Irrational Premium (and Risk)
    Karl Denninger takes a look at the premium of the gold ETF PHYS.

    3. Treasury gets $6.2 billion from Citigroup sales
    The biggest hedge fund in the world, the US Treasury/FED/Willing partners ready to dump Citi shares.

    4. New $3bn Foreclosure Prevention Program Added to Wall Street Reform Bill
    More help for those that should walk away.

    5. Dow Closes Under 10,000 For First Time Since February 7
    A sub 10,000 close for the DOW. What to do with those hats now?

    These 5 stories all have aspects that can be interesting. Some serve as an entry point into thinking about things on a deeper level. Others are just side notes. My recap of 1-5:

    1. -A Libertarian having an ideology war with himself? All taxes are bad so any tax credit is good. Government intervention in markets is bad, but here it is ok? It is fun to see a politician tying themselves into a pretzel, but not much here.

    2. -I noted the other day the premium that the gold ETF PHYS was commanding and today a follow on offering was done for the fund. Karl Denninger (who usually stays away from anything gold related) had some nice charts showing the GLD/PHYS spread. Unless you are into gold then who cares? I am a big metals fan (gold and silver) and I wanted to watch the new PHYS fund for a bit to see how things went. Either the premium would vanish or it would continue to creep up as many find this fund more believable in terms of gold holdings than others. I am still watching. Gold has caught plenty of news as of late, here are a few more from tonight:
    -Huge Additions to GLD Inventory by Tim Iacono
    -Greek Scramble For Physical Brings Gold Price To $1,700 Per Ounce An overblown headline by Zero Hedge, but still an interesting read.

    Back to story 2.; should gold holders get ripped off or blow up gold somehow there will be no bailout nor any damage to the system. You could look forward with gold at $5 an ounce to gold Ipad/Ipod jacks and such at that point.

    3. The biggest volume traded stock, C, hits the open (?) market and the government makes some cake. Great job guys! This one will bear watching going forward and the government still has tons of C stock to sell.

    5. The DOW could cross back over 10,000 at the open tomorrow. Who cares.

    The biggest story to me was #4. This story shows just how wrong things are and how debt overhang cannot go away by pretending and extending.

    From the story:
    The Senate passed the Restoring American Financial Stability Act last week, approving a new program that would reduce mortgage payments for the unemployed.
    The program would provide $3bn from the Troubled Asset Relief Program (TARP) to lend up to $50,000 to unemployed homeowners, who could reasonably resume making payments again within two years. The program was modeled after the Homeowners’ Emergency Mortgage Assistance Program (HEMAP) in Pennsylvania.
    There is so much here.

    First off, I always said the TARP would become a permanent slush fund, and so it has. That was easy to see coming.

    The real story here is the disgusting stretch being made to extend debt no matter what no matter the situation.

    Now I know not every single applicant will take the full amount and all that. Say they did though. $3 Billion/$50k = 600,000 potential loans to unemployed. At $25k that would be 1.2 Million. These are not small numbers.

    Now if a person was unemployed for up to two years, but COULD make payments IF they found a job that could support it THEN they would not only have to continue to pay their mortgage but also repay this loan on top of that? Insanity anyone?

    Forget any interest rate (say 0%), just assume the repayment plan was a 10 year program, that would add over $400 debt service payment to the newly re-employed stress level. Of course it would probably be some long term repayment or just forgotten about at some point.

    This story right here leads to many great questions/thoughts:
    -Why would the plan be needed? Helping home-owers is good press, but it is really the banks that get help here.
    -How many loans can continue to be made to those is the same bad spots?
    -The FED is sitting on Trillions of mortgage paper that they really cannot sell. This paper is valued at far less than what the amount the FED issued treasuries for them, now they are an active position defender in the area. This is far beyond the scope of the FED.
    -If everything is great and getting better, why is this still going on?

    All these things and more have been covered on this blog over the years. This one story has many layers of important information and macro view changing data. I saw this story in ONE place all day.

    Another Tim Iacono item today on debt was the kind of far reaching, thinking sort of essay I find the best kind of work:
    In a Word, The Problem is "Debt"
    You need to read the whole thing. Probably the best essay I have read in some time.

    Have a good night.

    Disclosure: Long physical gold and silver
    May 26 8:41 PM | Link | Comment!
  • Dripping With Irony
    Dripping With Irony
    Tonight's visual fun comes courtesy of Time Magazine.

    From 1999, consider:
    The Committee to Save the World

    Three men who were wrong about almost everything at the helms of almost unlimited power posts. How did that work out?

    And from 2010:
    The New Sheriffs of Wall Street

    Three women who are mostly right about things in positions with next to zero power to do anything.

    Let me know how this works out.

    On a related note, we have Ratings Agency Reform! Are you excited? You should be, if you like the old way of doing things:
    Senate measure would lower boom on credit-rating agencies
    WASHINGTON — The Senate took strong steps Thursday to fix a key cause of the recent financial crisis, approving measures to limit the ability of Wall Street firms to shop around for favorable ratings from now-discredited credit rating agencies.
    Lawmakers approved two rating-agency amendments to a sweeping overhaul of financial regulation, despite objections from Senate Banking Committee Chairman Christopher Dodd , D- Conn.
    Moody's Investors Service , Standard & Poor's and Fitch Ratings were all key players in the nation's financial meltdown, giving blue-chip ratings to complex mortgage-backed bonds that turned out to be junk.
    A McClatchy investigation last October revealed how Moody's and its competitors sold out investors by trading their ratings for huge fees that came from rating complex deals.
    Sen. Al Franken , D- Minn. , offered an amendment aimed at putting an end to this Wall Street behavior that passed on a bipartisan 64-35 vote.
    "They shop around for their ratings. They select those agencies that tend to offer them the best ratings, and threaten to stay away from rating agencies that are too tough on them," Franken said.
    Not bad! This sounds like they finally get a key part of the whole debacle. So what's the new deal?:
    His amendment would instruct the Securities and Exchange Commission to create a credit-rating board, composed mostly of investors, that would assign rating agencies to rate asset-backed securities such as bonds backed by mortgages.
    WTF????
    And this is different how? No need to answer, the stocks of ratings agencies are moving up after hours. Nothing ever changes it seems. Remember I said we get what we deserve, and we do.


    Disclosure: MCO
    May 13 10:28 PM | Link | 3 Comments
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