The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Even before the Discount Rate was hiked, I had been exploring ways to take advantage of the current ultra low rates. Mortgages are under five and half percent, and are likely to rise once the Fed QE and MBS purchase programs end. We should be expecting modestly higher rates sooner rather than later, perhaps by the second half of the year.

There are lots of modification programs for those people who bought more house than they could afford and are now delinquent on their mortgages. What about those of us who made prudent purchases and actually are paying our mortgages on time?

Despite generally tight credit conditions, there are some ways you as a homeowner can use the current rate environment to your advantage. For homeowners who are current and have a good payment history, there are specific cost-effective ways to lower your monthly mortgage payments. Whether it makes economic sense to do so depends upon how long you plan on staying in that house — and the state you live in.

A comparison of closing costs by state can be found online (here and here). I live in New York State, which has the most expensive closing costs in the country, closely followed by Texas, Florida, Oklahoma, New Mexico, New Jersey, Pennsylvania, Alaska, Colorado and California.

Consider a hypothetical NY ReFi with a prime, non-jumbo mortgage. The biggest costs are going to fall into 3 categories:

1) Mortgage Recording Tax (varies by county) (0.8-1.925%)
2) Title Insurance
3) Property Tax & Escrows

Let’s assume a $417k conforming mortgage. Shop around for rates, and you can find major banks offering ~5.25%.

The factor that determines if a Refi makes sense are typically the Recording Tax (~$3350 -$4900) and the Title insurance ($3000-$5000). If a homeowner can save $300-$500 per payment by doing a ReFi, they can eventually recoup the costs after about 2 years (based upon the numbers above).

However, New York State has recognized what a burden these taxes are to those who want to a basic ReFi. The State has created what are known as CEMAs — Consolidation, Extension and Modification Agreements.

CEMAs are a form of mortgage refinance that you can only do with your existing lender. They have one very specific advantage: They do not require a new mortgage recording tax — that is the biggest chunk of taxes paid at closing. Further, CEMAs do not require a full title search and reinsurance — rather, just a search since the property was originally purchased by the refinancer. This represents another substantial savings at closing.

The last factors are the Property Tax & Escrows. These can amount to a substantial sums of money, but they are not fees. They are taxes that would have to be paid regardless of whether you do a ReFi or not — so they do not count towards total closing costs when determining if a ReFi is economically worth it.

Given that I live in the highest closing cost state in the nation, the CEMA rules work for a ReFi for me. Without the massive closing costs, the math of a ReFi via CEMA changes dramatically. I come out ahead after just 6 months. To determine if a form of CEMA ReFi with your own bank is worthwhile, you will need to know what the taxes and rules are. You can verify the closing costs with an real estate attorney.

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See also:
New York State Taxes
Judicial Title Insurance Agency
http://judicialtitle.com/recbook.php

State-by-state closing costs
By Bankrate.com
http://realestate.msn.com/article.aspx?cp-documentid=13107766

State-by-state costs
http://www.bankrate.com/brm/news/mortgages/2008/closing_costs_map_a1.asp

An inordinate amount of pharmacy spam is coming my way from Yahoo.com.

Why aren’t they doing any spam filtering? And if they are, why are they doing what appears to be such a terrible job?

Is it that hard to screen for millions of various nonsense email address variations all carrying the same junk spam message?

The last entity to do this was Hotmail — years ago, I added that domain to my blacklist, and my spam went down tremendously. Yahoo will soon suffer the same fate . . .

Look who is back from vacay: Art Cashin, head of floor operations at UBS, has the buzz from the NYSE.

Mon. Feb. 22 2010 | 9:10 AM[01:26]

For the past several months I have been hearing a lot of complaints about the FDIC giving away “taxpayer money” in the sale of IndyMac last year and how the agency was encouraging foreclosures and short sales because of loss sharing agreements with the buyers of dead banks.  Now there is a video circulating in the matrix that purports to show that the FDIC gave away a lot of taxpayer money to George Soros and various other investors as part of the resolution and sale of IndyMac to OneWest.

The chief source of these reports is from TBWS, which supposedly reveals how Goldman Sachs worked an unreal deal with the FDIC. (Here http://www.thinkbigworksmall.com/mypage/player/tbws/23088/1559781)

Martin Andleman touched on this in his “Bringing Up the Rear” column highlighting George Soros back in October of 2009 (Bringing Up the Rear: Liberal Billionaire George Soros).

Unfortunately these reports are wrong. As is often the case with generalist writers, these people got most of their facts wrong or got no facts at all.

Last Friday, FDIC Director of Public Affairs Andrew Gray said:

“It is unfortunate but necessary to respond to blatantly false claims in a web video that is being circulated about the loss-sharing agreement between the FDIC and OneWest Bank. Here are the facts: OneWest has not been paid one penny by the FDIC in loss-share claims. The loss-share agreement is limited to 7% of the total assets that OneWest services, and OneWest must first take more than $2.5 billion in losses before it can make a loss-share claim on owned assets. In order to be paid through loss share, OneWest must have adhered to the Home Affordable Modification Program (HAMP).

The producers of this video perpetuate other falsehoods. The FDIC has not requested to borrow money from the Treasury Department. Indeed, we continue to be funded by the banking industry through assessments, not by taxpayers as claimed in the video.

This video has no credibility. Regardless of the personal or professional motivations behind its production, there is always a responsibility to be factually correct and transparent. The FDIC made available a fact sheet on the day that the sale of IndyMac was announced that details the terms of the contract. It’s too bad that the creators of this video opted to premise it on falsehoods.”

Supplemental Fact Sheet

Investing is such a competitive arena that no matter how good you think you are, it is important that you constantly develop new skills and improve your knowledge base. You cannot afford to simply stand still.

How can you do this? By learning as much as possible about how the markets operate, what makes the economy work, about new trading concepts and various schools of investing thought.

Don’t think of this as light reading. While digesting any investing-related material, you must do so actively, with a keenly skeptical eye. At the same time, you need to have an open mind. Doing both at once ain’t easy.

As part of my ongoing education regimen, I try to read 10 to 20 market/economic/trading-related books per year. This is on top of my regular research and media diet. If out of that list, I find three books that are truly worthwhile, it’s been a good year (this year was excellent). After 15 years of this, I’ve found quite a few books that are truly terrific, and should be of interest to any investor thirsty to learn.

Think of what follows as a course offering for those who want to improve their knowledge and skills. These were chosen for their readability, their wisdom, and their timelessness.

If this were graduate school, you would cover this reading in a year or two. But since you probably have a day job, family and other obligations, I suggest reading a book per month. Take notes — I jot down extensive notes in the margins — then a year later, go back and reread your annotations.

This is by no means a complete reading list. Many books were left off — some were simply too advanced, others obscure, rather inaccessible. And that’s not counting the pile of books I have queued up and haven’t yet read. In order to keep any bias out of the list, I purposefully excluded books written by my colleagues at TheStreet.com. The writers here have a broad body of excellent work — and none of it is included. So don’t take this list as the absolute gospel.

With that in mind, here is part one of my planned two-part introductory course in markets and investing — perfect for the Apprenticed Investor:

Introduction to Investing

Any one of these books will give you insight into investing and the markets. All three will make an essential base for future studies:

• Stock Market Wizards : Interviews with America’s Top Stock Traders by Jack D. Schwager

Schwager interviewed market legends at the height of their success. What makes the book so worthwhile are the consistent themes that evolve from currency traders, mutual fund managers, commodities traders, hedge fund managers. Regardless of what is being traded, there are related motifs that run throughout.

What results is not a “How to trade” book; instead, it is a book about “How to think about trading.”

This has become a seminal book on trading and investing. I actually re-read Market Wizards every five years — it is that good. Wizards was so well received by the financial community that the same author put out The New Market Wizards. Whether you read one or both of these books, you will have knowledge of the market from both the trader’s and the investor’s perspectives.

• The Investor’s Anthology: Original Ideas from the Industry’s Greatest Minds by Charles D. Ellis

Instead of interviewing famed investors, Ellis gathered their best writings into one collection. He ends up with a series of short chapters by luminaries of days gone by. There is something worthwhile on just about every page. This is another favorite worth rereading every few years.

• Bull: A History of the Boom and Bust, 1982-2004,  What drove the Breakneck Market — and What Every Investor Needs to Know About Financial Cycles by Maggie Mahar

The best book about the past 20 years of the market, bar none. Mahar does a terrific job weaving the long tale of how things eventually reached their penultimate top in 2000. She spares no one — the government, the Fed, Wall Street, her colleagues in the financial press — all are subject to a scathing critique for their complicity in inflating the bubble.

Bull! reads like a historical work, despite the recentness of its subject. There are a surprising number of lessons buried in these pages that will reward the careful reader. I found it both fascinating and informative.

Historical Perspectives

It’s astounding how little things have changed over the past century. Yes, information moves more quickly, and computing power has allowed for a more quantitative analysis of stocks — but human nature remains immutable.

• How I Trade and Invest in Stocks and Bonds by Richard Wycoff

This book will help you understand how your brain: processes randomness; overlooks evidence that is inapposite to prior beliefs; selectively perceives and reinterprets data; and engages in selective recall. It’s how we all create an artificial story line to help make sense of otherwise incomprehensible data.

Once you finish this book, you will never look at investing the same way.

Note: This is purely psychology writing; If you prefer a more specific investing-related analysis, consider Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics by the same author (with Gary Belsky).

Hard-core fans of cognitive biases and economic anomalies (and other similar type of analyses) will also appreciate Richard H. Thaler’s The Winner’s Curse. Thaler is one of the most influential researchers in the field of behavioral economics.

If you want to see how cognitive and reasoning deficits manifest themselves, then the seminal book on the subject is Extraordinary Popular Delusions & the Madness of Crowds by Charles Mackay. There have been a lot more booms and busts then you imagine. This book details how they came about and their impact throughout history. Fascinating and instructive stuff.

Once you understand how our brains fool us into occasionally doing idiotic things — funny, but it seemed perfectly reasonable at the time — then you can start looking for ways to avoid making those gaffes. Humphrey Neill’s Art of Contrary Thinking will show you the way. He explains why “When everyone thinks alike, everyone is wrong.” This intriguing thesis applies not only to markets, but to politics, academia, even sports.

What if human nature can never learn from its mistakes? What if we are doomed to repeat the aforementioned cognitive, reasoning and behavioral defects over and again? That provocative thesis is put forth by Robert R. Prechter Jr.: Prechter’s Perspective. This is the book that explains why our own nature leads to history repeating so often.

A few caveats: I am not a devotee of Elliot Wave theory (Prechter’s school of choice). Further, I hasten to add that many of Prechter’s market calls have left much to be desired. However, his overarching perspective of human nature, and of history’s cyclical tendencies, makes for utterly fascinating reading. Even though I found myself arguing with many of the premises in the book, I enjoyed this thoroughly. The cycle geeks out there will too.

In part 2 of the series we’ll look at books focused on economics, Wall Street, technical analysis, fundamentals, shorting, and miscellany.

Read the rest of this entry »

As I took a week in the desert (family vaca in Arizona) to ponder the markets and its future direction I became more confident that corporate America and many businesses around the world were well positioned for global economic growth but fearful that governments and central banks will screw it all up. The road to hell is paved with good intentions someone said someday. The gig of profligate fiscal spending and extraordinary easy monetary policy without consequence is up. As a result, the cost of capital is going higher, as the risk free rate (not so risk free anymore) goes up and risk premiums on everything else follows. In the short term, the tug of war between business and government (level of interest of rates) will intensify with the market action of late, both in stocks and commodities, telling us that for now business will overcome. An aside, the CFTC said euro net shorts rose to a fresh record high.

Today’s must read MSM piece is a fascinating front page WSJ article on Treasury Secretary Tim Geithner (Bailout Anger Undermines Geithner).

Ignore that misleading headline — the article itself is not so much about the anger over the bailouts, but instead details the policy decisions and political choices Geithner made as Treasury Secretary.

The litany is not pretty.

The headline misses the nuance of the story: That Geithner is very much a creature of the Banks he is supposed to regulate; that he continued the same ruinous bailout policies he was a part of when they began under Bush/Paulson; that he has stood as a speed bump preventing more aggressive regulation of the banks that caused the mess.

Perhaps the key sentence in the entire Journal article: “Interviews with dozens of government officials show that Mr. Geithner has acted as a brake on administration officials seeking punitive action against big financial firms.” No, we best not punish these banks, that would be terrible.

From the Journal article, here are a few of Geithner’s greatest faux pas:

• Resisted efforts to oust Citigroup Chief Executive Vikram Pandit as a condition for more government aid;

• Successfully argued against ripping up contracts that controversially allowed millions of dollars in bonuses to be paid to American International Group employees;

• Pushed for banks to repay government funds, thus freeing them from TARP regulation;

These factors are minor compared to the overall failure to enact any sort of comprehensive regulatory reform. That is what a stronger, less captured Treasury Secretary would have done. Only a year into his term, this failure to achieve any major reforms represents his biggest policy blunder.

Expect it to cost the Democrats dearly come November . . .

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graph courtesy of WSJ

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Source:
Bailout Anger Undermines Geithner
DEBORAH SOLOMON
WSJ, FEBRUARY 21, 2010
http://online.wsj.com/article/SB10001424052748703798904575069610953163620.html

The latest endorsers for the so-called Volcker Rule separating riskier trading activity form government insured depository banks have gone public. Five former U.S. Treasury secretaries have called upon Congress to implement rules limiting both the size and trading activity of these banks.

The Treasury secretaries are John Snow, Paul O’Neill, Nicholas Brady, George Shultz and W. Michael Blumenthal.

In a letter to the editor, published this morning in the WSJ, they wrote:

We who have served as secretary of the Treasury in both Republican and Democratic administrations write in support of the proposed legislation to prohibit certain proprietary activities of commercial banking organizations—the so-called Volcker rule, as part of needed financial reform (“It’s Time for Financial Reform Plan C,” by Alan Blinder, op-ed, Feb. 16).

The principle can be simply stated. Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services.

Hedge funds, private-equity funds, and trading for speculative gains are activities carried out by thousands of nonbanking firms. These firms and funds are and should also be free to compete and to innovate. They should, like other private businesses, also be free to fail without explicit or implicit taxpayer support. Those few nonbank firms that present systemic risk should be subject to reasonable restrictions on capital, leverage and liquidity.

We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform. It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities.

We urge the United States to take the lead in the forthcoming G-20 meeting and other appropriate forums to achieve broad agreement on this principle among the leading financial centers.

W. Michael Blumenthal
Nicholas Brady
Paul O’Neill
George Shultz
John Snow

As we have noted in the past, this rule would not have prevented the current crisis; rather, it addresses new taxpayer risks created by the bailouts. Under the Volcker rule, the firms that engage in leveraged speculation should no longer expect Uncle Sam being there to backstop them.

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Source:
Congress Should Implement the Volcker Rule for Banks
WSJ, FEBRUARY 21, 2010
http://online.wsj.com/article/SB10001424052748703983004575074123680183534.html

Here is an interesting little tidbit regarding Debit Card credit these days.

It seems that during the fat times, Chase Bank was automatically tacking onto their Checking/Debit Cards a form of overdraft protection. It was a simple line of credit that crept up over time (ours was $10k per account). If memory serves, there was no credit application, no credit request — it just was an option offered one day many years ago.

It worked as an automatic extension of credit — spend more than was in your account, and you did not bounce a check or get denied on a debit card purchase. You would be charged for an entirely separate line — a whole new account number, different invoicing and statements, etc. And, you could not pay it by depositing money into your checking account — you had to make a specific payment to that credit line.

Now, it seems, that Chase (part of JP Morgan) is becoming a bit tighter with their credit lines. You have to affirmatively request this line in person at a bank branch.

I assume the new credit card laws have something to do with this . . .