Financial market report for the week ending September 10, 2010.
Fidelity Capital And Income, FAGIX, which contains investment securities similar to those held by the US Federal Reserve which it accepted in exchange for US Treasuries under its Quantative Easing, QE, TARP Facility, rose 1.3%.
Peak credit was attained August 31, 2010, when Bonds, BND, closed at 82.66.
September 1, 2010 marked the transition from “the age of neoliberal Milton Friedman and Alan Greenspan based credit liquidity” to “the age of the end of credit”. September 1, 2010, also marked ”the end of entitlements” and “the beginning of world-wide austerity”.
The 30-10 yield curve,$TYX:$TNX, began to flatten on August 11, 2010, reversing a trend that goes back to early 2000. This signals risk aversion to sovereign debt. The flattening of the yield curve came as a result of the Federal Reserve Chairman’s announcement of August 10, 2010 of the purchase of mortgage-backed securities. Then on August 27, 2010, the Federal Reserve Chairman stated the possibility of an even larger purchase of debt.
The Fed Chairman’s announcement of purchase of mortgage-backed securities caused the bond rally in US Treasuries, TLT, and Zeroes, ZROZ, HIgh Grade Corporate Bonds, LQD, that began April 6, 2010, to fail September 1, 2010, sending bond prices lower and interest rates higher as traders saw the announced purchase of mortgage-backed securities as a monetization of debt.
The safe haven rally in debt, and the low-interest rates available to corporations, that began with the onset of the European Sovereign Debt Crisis is over, repeat over and done, through and finished. Investors see Mr Bernanke’s plans as monetization of debt; and have gone short US Treasuries, especially the longer out ones such as ZROZ.
Those who bought the 300% inverse of the 30 Year US Government Bond, TMV, on August 31, 2010, have seen a 18.6% return.
Those who bought the 200% inverse of the 30 Year US Government Bond, TBT, on August 31, 2010, have seen a 11.2% return.
One can view debt ETFs BND, TLT, ZROZ, MUB, JNK, LQD, EMB, CMF via a Finviz screener and portfolio. The ZROZ, being the furthest out on the yield curve, saw the greatest loss of value this week falling 2.16%.
Stockcharts.com shows the 30 10 Yield curve, $TYX:$TNX, fell this week and month.
Sapna Maheshwari and Kate Haywood of Bloomberg report on September 10, 2010: “Global high-yield bond sales are poised to exceed 2009’s record issuance as the riskiest companies take advantage of plunging borrowing costs and investor demand for greater returns to refinance debt. Ally Financial Inc., the lender previously known as GMAC Inc., and the lending arm of Ford Motor Co. led $206.9 billion of speculative-grade debt sales in 2010 through yesterday, compared with $208.1 billion for all of last year … Junk-rated companies are accelerating issuance amid rating upgrades and average borrowing costs that have plummeted from a high of 21.6% in 2009 to 8.4% as of yesterday.”
Doug Noland of Prudent Bear reports on September 10, 2010 that after jumping to a seven month high of 695 bps in June, junk bond spreads (IBOX) ended the week at 554 bps.
Paul Armstrong of Bloomberg reports on September 8): “The global default rate on … junk, debt will fall to 2.7% by the end of this year before dropping to 2% a year from now, according to Moody’s … Defaults worldwide declined to 5% in August from 5.5% in the previous month. A year ago, the rate was at 12.3%.”
Joe Brennan and Louisa Fahy of Bloomberg report on September 8, 2010 : “Anglo Irish Bank Corp. will be broken in two as Ireland’s government seeks ‘finality’ on the bailout of the nationalized bank and tries to calm investor concern that the cost will continue to mount. Anglo Irish will be split into a so-called good bank, which will retain the lender’s deposits, and an asset recovery bank which will run down its loans over time.”
Alan Katz and Elisa Martinuzzi of Bloomberg report: “Four months after the 110 billion Euro ($140bn) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt. ‘We have not seen the real documents,’ Walter Radermacher, head of the European Union’s statistics agency Eurostat, said. Eurostat first requested the contracts in February. Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a ‘solid estimate’ of the total value of debt hidden by the opaque contracts. ‘This is a new era,’ he said.”
The US Dollar, $USD, rose 0.8%, the Australian dollar, FXA, 1.2%, the New Zealand Dollar, BNZ, 1.1%, the South Korean won 0.8%, and the Brazilian Real, BZF. 0.8% and the Yen, FXY, rose 0.24%, to close at 117.56 iin a dark cloud cover on an ascending wedge. The euro, FXE, fell 1.4%,
Australia, EWA, laden with banking shares, is strongly recommended for those interested in short selling; it rose 1.2% on the higher Australian Dollar, FXA. The currency traders have taken the AUD/JPY quite high as seen in the chat of FXA:FXY.
Gold, $GOLD, closed at $1,246.
According to ETFdb60, Gold, GLD, has risen 13.4% year to date; the junior gold mining shares, GDXJ, 14.78%; and the S&P, SPY, 0.04% gain year to date.
The chart of both world stocks, ACWI, and the S&P, suggest that an Elliott Wave 3 of 3 of 3 down is about to commence. These are the most destructive of waves and result in destroying most all of the wealth stored in the investment vehicle being attacked.
In as much as peak credit has been achieved and stocks are headed down; wealth cannot be preserved by investing long in fiat investment vehicles.
Debt deflation commenced April 26, 2001, in stocks, when the currency traders sold the major currencies off against the Yen, FXY, DBV:FXY and also sold the developing currencies off against the Yen, CEW:FXY. Debt deflation commenced September 1, in bonds.
For those interested, I provide a list of stocks and ETFs to sell short for a debt deflationary bear market which includes EWA, KBE, EUFN ,ITB, EIRL ,GDXJ, LVS, EWW ,PGX, PMR ,IWN, XSD, XLYS, EWP ,EWD ,JJT ,HHH, TAN, REZ, NNI, LCAPA, EXPD, PPD, CMG, KME, BZ, PXN, N, DE, FDN, FIO, PSR, BRF and can be seen in this Finviz Screener for one’s download into a trial portfolio.
In today’s debt deflationary world, I’ve chosen to be invested in gold bullion. Mining stocks, GDXJ, relative to gold, GLD, GDXJ:GLD, appears to be in a spike top off; the HUI precious metal stocks generally make market turns lower with debt at market turns, as is seen in the chart of $HUI:$USB.
In today’s news
EconomicPolicy Journal in article European Bank Exposure to EU Government Debt relates that according to WSJ, European Banks hold $1.9 trillion in debt from the governments of EU countries. Most alarming is that this is not a stagnant number, deficits are climbing at most EU countries. At some point the system will be stuffed with EU debt, just like U.S. debt will totally overload the system. It is difficult to see anyway out other than a major globall government debt restructuring (i.e. bankruptcy) or a huge inflation. Global debt restructuring is, of course, the way to go. History teaches, however, that government leaders will choose inflation.
Tiho reports the chart of the Put Call Index Ratio, which measures option sentiment, has recently jumped. There is above average buying of puts compared to calls in the last few sessions. Index options, unlike equity options, are usually used by managers as hedging tool to protect previous gains within the portfolio.
Risk aversion to investing long in stocks took a step forward on September 7, 2010, as EuroIntelligence relates that the Wall Street Journal reported that the European Financial Institutions, EUFN, stress tests were essentially a fraud. This revelation sends bond spreads to new records, the latest ten year spreads: Ireland 372 bp, Greece 9 44 bp, Portugal 355 bp, all up substantially yesterday, in the case of Portugal and Ireland to new record levels. The FT reports that Portuguese banks borrow a record amount from the ECB in August because they could not access capital markets.
Tiho reports reports the Peripheral European (PIIGS) bond spreads over (German) bonds have risen since the August Federal Open Market Committee meeting. Irish and Portuguese bond spreads are currently at all-time highs, while the spread for Greek bonds remains extremely elevated. The 10-year Greece-to-German bond spread has risen by 146 basis points since the Greek bailout package was introduced. Similarly, with other European peripherals’ spreads, Portugal’s is higher by 99 bps during the period.
WSWS.org reports: The OECD report was followed by a statement from the Organization of Petroleum Exporting Countries (OPEC) anticipating limited growth in the demand for oil. OPEC expects that oil demand will actually fall in Western Europe over the final six months of the year. “The present economic condition in most developed countries is discouraging”, OPEC declared.
“The fact that some OECD countries can no longer afford stimulus plans is likely to pressure their economies in the second half of this year, leading to weaker oil demand compared to the first half”.
The slowdown in US economic growth predicted by the OECD was corroborated on Wednesday by the release of the Federal Reserve Board’s “Beige Book” reports from its twelve regional bank districts, which reported mainly negative economic prospects. According to summaries of the reports, in the New York region the economy “showed signs of decelerating”. In Cleveland, “factories reported that production was either mainly stable or down”. In the Richmond, Virginia, region, “Signs of slowing or contracting economic activity became more prevalent”, and in the Atlanta bank district, “Economic activity slowed”. The bank regions reported uniformly negative trends in the housing market, and most reported stagnant or negative developments in manufacturing and retail sales.
The US Labor Department report Thursday that the number of first-time unemployment benefit seekers in the US fell by 27,000 to 451,000 from the previous week was greeted as evidence that the economy might not be entering negative growth. The more statistically reliable four-week moving average fell less, by 9,250 to 477,750. However, economists believe that for the weekly jobless claims statistic to indicate job growth, it would have to fall below 400,000. The average for the entire year is 454,000 new jobless benefit claims per week.
Michael David White in HousingStory reports Pending Home Sales Reconfirm the Market is Crashing
The TOWERreport relates in article Record foreclosures, Record Bankruptcies, Fannie and Freddie Hurting: “Foreclosures are continuing to set new records each coming month. Home foreclosures set another record for the second consecutive month in May … The number of Americans falling behind on their mortgage payments continues to increase … Many banks are now increasing their efforts to repossess homes that are in default.
Fannie Mae has announced a policy of loss mitigation which imperils the Banking industry’s shadow inventory of homes and the squatters entitlement of payment free living.
IrvineRenter in article Government Expedites Foreclosures, Threatens Banking Cartel writes: “The end of the banking cartel is being signaled by coordinated efforts at a variety of governmental agencies to expedite the foreclosure liquidation.”
IrvineRenter references the John Prior REOInsider article FDIC sells another $760 million in REO which describes the FDIC’s Public Private Investment Partnership with Mariner Real Estate Management, MREM, a real estate investment and management firm based in Kansas. MREM is part of Mariner Holdings, a $7 billion wealth and asset management company. The portfolio includes roughly 1,100 loans and properties from 20 banks the FDIC has taken into receivership. The properties are located across 24 states. Earlier in August, the FDIC sold a similar $1.7 billion portfolio to PMO Loan Acquisition Venture, a partnership of other investment firms.
IrvineRenter relates: “These guys are going to keep what cash-flows and liquidate the rest.” I state that the relationship that the FDIC has with asset management companies is one of state corporatism; capitalism is an economic way of life of a bygone era.
IrvineRenter relates: “One of the barriers to liquidation is the write downs required by “solvent” banks (we all know most of them are not solvent). A huge problem within the GSE portfolios is that the services of delinquent loans are intentionally delaying foreclosure when the parent bank holds the second mortgage.The GSEs are going to start charging servicers who fail to properly follow their loss mitigation procedures” as related in Al Yoon Reuters article Fannie Mae Gets Tougher On Mortgage Servicers: “A compensatory fee not only compensates Fannie Mae for damages but also emphasizes the importance placed on a particular aspect of a servicer’s performance,” Fannie Mae said in an announcement to servicers. “In some cases, a compensatory fee will relate to the action a servicer took, or failed to take, in handling a specific mortgage loan,” it said. Fees will be applied in various instances, including failure to provide access to records and delays on completing foreclosures and selling foreclosed properties.”
IrvineRenter states: "These comments are aimed directly at the practice of avoiding foreclosure on properties that have second mortgages on the servicer's books. That is the primary reason a servicer fails to foreclose and dispose in a timely manner."
The Reuters article continues: “More aggressive action by mortgage servicers could help ease burdens on Fannie Mae, whose losses on loans it guarantees or owns forced it into regulator’s hands in September 2008. It has required some $86 billion in taxpayer funds since then. Fannie Mae, which uses hundreds of servicers, did not specify any that might have prompted the announcement but has identified rising stress at the firms. A spokeswoman declined to comment beyond the announcement. “The growth in the number of delinquent loans on their books of business may negatively affect the ability of these counterparties to continue to meet their obligations to us in the future,” Fannie Mae said in its quarterly filing with the Securities and Exchange Commission last month.”
IrvineRenter relates: “If the GSEs are not forced to back down from this policy due to pressure from lenders, this change in policy and incentives will signal the end of the banking cartel because this will push product on the market whether or not the market is capable of absorbing it. That will push prices down.“
My belief is that the GSE loss mitigation policy will push prices down and extinguish bank capital as short selling and credit default swaps will quickly and progressively pressure the capital of banks downward, because they have a legitimate claim that the banks will now be taking losses on foreclosed properties that are pushed out of shadow inventory.
The GSE announced policy of loss mitigation and loan management is the antithesis of FASB 157; it will effectively extinguish banks and transform them into property leasing organizations.
Furthermore in addition falling bank, KBE, prices, I expect PowerShares Real Estate, PSR, and Residential Real Estate, REZ, to fall. I believe there is a time to be invested in the Proshares 200% inverse, SRS, and Direxion 300%, DRV, inverse ETFs, that being when volatility picks up such as now.
The GSEs loss mitigation policy announcement, documents that we have passed from the age of entitlement to mark property at manager’s best estimate, to the age of administrative announcement where property is marked at market. And, we have passed from the age of entitlement to living payment free, to the age of austerity.
In this new age of Government Administration, Government Administrators, that is Government Ministers, announce economic, banking, lending, housing, and investment policy; and the people and businesses follow …. “there is the new matrix” … “we ain’t in Kansas no more” .... On September 1, 2010, we from the era of GSE provided entitlement into the new era of GSE loss mitigation. The "age of government economic adiministration" commenced September 1, 2010, with the Fannie Mae polilcy announcement of loss mitigation.
On September 10, 2010, I wrote that the FX currency traders took both the major currencies, DBV, and the developing currencies, CEW, higher against the Yen, rallying the European Financial, EUFN, and the banks, KBE, but stocks manifested bearish. And the world stocks, ACWI, and the S&P failed to rally significantly, and closed manifesting a lollipop hanging man candlestick. We are likely to see a significant fall in stock value of banks, which will compel banks to transform from lending and mortgage servicing into property leasing.
Finally, I leave you with the DrHousingBubble article, Real Homes of Genius – Culver City foreclosures focus on lower priced homes. Banks moving on lower priced homes in mid-tier markets: 175 homes distressed in Culver City yet only 3 show up on the MLS: The foreclosure solution, if we can even call it that, is based on banks foreclosing on lower priced homes and allowing higher priced delinquent borrowers to sit in their homes payment free. The tragic aspect of this all is that agencies like the FHA, Fannie Mae and Freddie Mac were specifically designed to help lower to moderate income home buyers yet the opposite is occurring. In mid-tier markets like Culver City, what you see is a handful of foreclosures on the MLS while higher priced foreclosures sit hidden in the shadow inventory. While inventory is growing on the MLS docket, the properties that enter view for public consumption are usually handpicked lower quality homes for that specific market. It is interesting to note that a market like Florida, where home prices have absolutely collapsed, there is now a McDonalds like court system to clear foreclosures as fast as possible.
Disclosure: I am invested in gold bullion