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

Rubik’s Cube embedded inside brain sculpture. Fully functional puzzle

via Moist Productions

Here is another one of our favorite charts, courtesy of Jim Stack and Investech Research. It shows how leadership shifts over three stages of a Bull run:>

Stages of Sector Rotation

• Stage I:   The transition from bear market to bull. Cyclical sectors — Financials, Technology and Consumer Discretionary — outperform.

• Stage II:  Mid-to-late bull market.  Materials and Industrials outperform, as do  Energy and Telecom stocks;

• Stage III:  Nondiscretionary sectors — Health Care, Consumer Staples and Utilities — Recession proof products and services — are the most resilient as the bull begins to die.

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Three Stages of Sector Rotation

Chart courtesy of Investech Research

William Ackman, Pershing Square Capital Mgmt, and Michael Porter, Harvard Business School professor on strategy, management and fair stock prices

Airtime: Wed. Feb. 9 2011 | 7:00 AM ET

The onset of the recent financial crisis in late 2007 created an intellectual crisis for conservatives, who had been touting for decades the benefits of a hands-off approach to financial market regulation. As the crisis quickly spiraled out of control, it quickly became apparent that the massive credit bubble of the mid-2000s, followed by the inevitable bust that culminated with the financial markets freeze in the fall of 2008, occurred predominantly among those parts of the financial system that were least regulated, or where regulations existed but were largely unenforced.

Predictably, many conservatives sought to blame the bogeymen they always blamed. In March of 2008, Sen. Jon Kyl (R-AZ) blamed loans “to the minorities, to the poor, to the young” as causing foreclosures. Not long after, conservative commentator Michele Malkin went so far as to claim that illegal immigration caused the crisis.

This tendency to shift blame to minorities and poor people for the financial crisis soon developed into a well-honed narrative on the right. Swiftly and repeatedly many conservatives blamed affordable housing policies—particularly the affordable housing goals in place for the two government sponsored mortgage finance giants Fannie Mae and Freddie Mac and the 1977 Community Reinvestment Act that applies to regulated lenders such as banks and thrifts—for the massive financial crisis that occurred. This despite the fact that as recently as 2006 prominent conservatives, including FCIC Republican member and American Enterprise Institute Senior Fellow Peter Wallison, were arguing that Fannie and Freddie needed to do more lending to low-income communities and minorities.

Last week, the Republican minority on the congressionally created Financial Crisis Inquiry Commission continued this tradition of willful blindness, issuing their own self-described nine-page “primer” on the financial crisis—one that attempts to lay the blame once again on Fannie Mae, Freddie Mac, and the Community Reinvestment Act. The picture they paint is reflective of a mindset they displayed last week when all four Republican members tried to ban the phrases “Wall Street,” “shadow banking,” “interconnection,” and “deregulation” from the final report.

These terms are important to understanding what happened in the 2000s. But equally damning is this—the minority members of the FCIC got their facts wrong, their time frames jumbled, and their selection of relevant facts skewed to reflect their libertarian biases. The ideological imperative to blame the government, and more importantly to avoid the culpability of laissez faire economics, have overridden all other considerations, including those of actually looking at the facts.

As the FCIC staff reports released so far in the run up to the final report have demonstrated, the primary fuel of the financial crisis was a hands-off approach to regulation. This ideologically driven lack of regulatory oversight allowed tremendous growth of the “shadow banking system,” a largely unregulated web of complex financial transactions that essentially served the same functions as the existing banking system—attracting short-term funds from those seeking safe, liquid investments and using these to finance long-term loans, particularly residential mortgages—but without government oversight to ensure that these activities were being done safely and soundly.

As the FCIC staff reports demonstrate fairly conclusively, it was the shadow banking system’s unregulated private securitization of mortgages that caused the financial crisis, not affordable housing policies. The FCIC staff has done an excellent job of compiling the facts, and we encourage you to check out the FCIC’s comprehensive reports to date. In our view, below are their most persuasive arguments.

Read the rest of this entry »

Evidence shows that as far back as 2006, Mortgage Electronic Registration System (“MERS”) knew the legality regarding foreclosures was at best tenuous. As you can see, the First American Agent Bulletin memo informed agents and lawyers that MERS.

I posted the full memo in the Think Tank, but the short version is:

•  MERs admits it is not the Owner & Holder of the Note

• The Note must be in members’ possession to foreclose in MERs name

• Members could not conduct foreclosures in the name of MERS in Florida.

I find it intriguing that for at least 5 years, and probably a whole lot longer, MERS was aware that their legal fiction was starting to unravel . . .

It’s interesting to watch the Fed try to blow up the inflation bubble at the same time other countries around the world are trying to deflate it. Last night Chile raised interest rates by 25 bps to 3.5%, the highest since Mar ’09 and China this morning raised reserve requirements again by 50 bps. The Yuan also appreciated to a new high vs the US$. In their decision, the Chilean central bank said “private inflation expectations are showing increases, particularly in the short term.” ECB member Smaghi hinted that they would have to raise interest rates if inflation becomes more of a problem after German PPI rose twice expectations m/o/m and the y/o/y gain is now 5.7%, the most since Oct ’08. Canada’s CPI rose 2.3% y/o/y, .1% less than expected but 2%+ for a 4th straight month. Portugal’s 10 yr bond yield is at a new record high at 7.57%, up 11 bps on the day and higher by 50 bps over the past two weeks. A bailout for them looks more likely with funding rates at these levels. The pound is at the highest since Nov after a good UK retail sales report.

Today’s must read MSM piece is the WSJ discussion of Inflation:

“The pace of consumer price increases in the U.S. is quickening after being dormant for months. But a tug of war between the prices of goods and the prices of services, playing out beneath the surface, could keep inflation from becoming the worry it is in China, Europe and many emerging markets.”

Prices rose 1.6% in January 2011 vs 2010 — the biggest increase in eight months. The key has been commodities — gasoline, cotton, wheat, coffee, and oil are all higher.

Labor, on the other hand is not. Wages are flat, unemployment is stubbornly high, and hence, prices for Services are flat to lower. That is keeping a lid on inflation.

Hence, the dueling deflation versus hyper-inflation commentaries:

“Soaring commodities costs world-wide are pushing up prices for many goods, while a slowly recuperating U.S. economy, soft housing market and a persistently high unemployment rate are holding down prices for U.S. services.

Goods prices were up 2.2% from a year earlier, paced by jumps in food and energy prices, according to the Labor Department’s January consumer-price index, and are rising faster than they did before the recession. But services prices were up only 1.2% from a year earlier, far below the 3.4% inflation rate registered for services between 2000 and 2008.

The opposing pull of prices for goods and services could have a big effect on the course of U.S. inflation. Federal Reserve Chairman Ben Bernanke is betting that rising prices for goods like gas and food will not spread into the broader economy. He and many private forecasters do not expect the U.S. to see the kind of rising inflation now plaguing China, India and other parts of the world.

Goods inflation has outstripped services inflation for long stretches since mid-2007, something that hadn’t happened since the 1970s. For most of the last 30 years, goods prices had been held down, in part, by cheap imports from low-wage countries like China. But recently, China and other developing markets have become huge consumers of commodities, which is putting upward pressure on American prices for many globally traded goods.”

Well worth reading in its entirety.

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Source:
Split in Economy Keeps Lid on Prices
JON HILSENRATH And JUSTIN LAHART
WSJ, February 18, 2011
http://online.wsj.com/article/SB10001424052748703312904576146500586838290.html

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Short answer: Not very well.

According to numbers crunched by ProPublica, more than half of the 1,426,833
mortgage mods — 54.3% — have failed.

The table below shows who are the leading mortgage modders are — and its exactly who you would expect. The four largest banks dominate — Bank of America (212,094), JPMorgan Chase, (137,765) Wells Fargo (122,732) and Citi (91,742) — followed by everyone else.

The 4 biggest big banks — despite their economies of scale and allegegded expertise – have a much higher failure rate than the entire group overall. They range from 59-62%, versus 54% for the average — a full 10% worse than the median.

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click for interactive table

Explanation to table:

This Treasury Department data, reflecting activity through November 30, 2010, shows how the largest mortgage servicers participating in the administration’s $75 billion foreclosure prevention program have been performing.

The program features a 3-month trial period for modifications before they’re eligible to become permanent. However, many trials have gone much longer. The “Aged” column shows how many trials have gone longer than six months at each servicer, while the “In Trial” shows trials that have not yet lasted that long.

The “Canceled” column shows how many trials and permanent modifications the servicer has canceled. Here’s how that number breaks down: 729,109 trials have been canceled, 44,972 homeowners have defaulted on the permanent modification, and 590 more have paid off the loan after getting a modification.

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See also:
Loan Mod Program Left Homeowner’s Fate in Hands of Dysfunctional Industry
Olga Pierce and Paul Kiel
ProPublica, Feb. 17, 2011
http://www.propublica.org/article/loan-mod-program-left-homeowners-fate-in-hands-of-dysfunctional-industry

MERS Bulletin