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

~~~

Source:
“It’s Hard To Be Optimistic”: Political Ideology Blocking Good Policy, Michael Spence Says
Aaron Task
Daily Ticker – Fri, Sep 23, 2011
http://finance.yahoo.com/blogs/daily-ticker/hard-optimistic-political-ideology-blocking-good-policy-michael-174729136.html

“This is a big new front. This case is scary because if Dallas wins then there are a lot of other counties around the country that are going to follow.”

-Christopher L. Peterson, associate dean and professor at the University of Utah S.J. Quinney College of Law.

>

In all of the market mayhem of last week, this article may have slipped by unnoticed: Merscorp, Bank of America Sued by Dallas District Attorney.

We’ve discussed Mortgage Electronic Registration Systems (aka MERS) repeatedly over the years, including its quasi-legal standing and how it illegally failed to pay lawful recording fees to states and counties. (Back in March ’11, we discussed that County & State Litigation vs MERS was coming soon).

The Dallas DA action may be the largest major City/County litigation versus MERS. This may break open the flood gates for other such suits by counties and states around the country.

The politics of this are quite fascinating: The bankers may own the corrupt US Congress, and they may have intimidated or bought off many of the more cowardly State Attorneys General, but there simply are too many counties and District Attorneys representing local interests throughout the country to all be bought off. Buying/intimidating/controlling all of the local country District Attorneys may be like herding cats — nearly impossible.

I am going to stand by my original prediction: The early litigants may get something, but the latter lawsuits will likely result in bankrupting MERS.

An interesting legal question is whether the banks that created MERS — Bank of America, Countrywide, Fannie Mae, Freddie Mac, et. al. — can be reached beyond the corporate shield. Unless someone can demonstrate intentional fraud by design, I tend to doubt it.

Stay tuned . . .

>

Source:
Merscorp, Bank of America Sued by Dallas District Attorney
Businessweek, September 21, 2011, 5:46 PM
Margaret Cronin Fisk and Thomas Korosec    http://www.businessweek.com/news/2011-09-21/merscorp-bank-of-america-sued-by-dallas-district-attorney.html

BofA Case May Be Followed by More Mortgage Suits by Counties Margaret Cronin Fisk and James Sterngold
Bloomberg, September 23, 2011
http://www.bloomberg.com/news/2011-09-22/bank-of-america-filing-fee-case-may-open-new-front-in-mortgage-lawsuits.html

See also:
Craig Watkins Makes Good on Threat to Sue Mortgage Processor Over “Tens of Millions”
Robert Wilonsky
Dallas Observer, Sep. 20 2011 
http://blogs.dallasobserver.com/unfairpark/2011/09/craig_watkins_makes_good_on_th.php

Dallas County DA Sues MERS, Says Shadow Recording System Confused Title and Cost Money
Martha Neil
ABA Journal, Sep 20, 2011
http://www.abajournal.com/news/article/dallas_county_da_sues_mers_says_shadow_recording_system_confused_title_and_/

Homeowners’ Rebellion: Could 62 Million Homes Be Foreclosure-Proof?
Ellen Brownposted
Yes Magazine Aug 18, 2010
http://www.yesmagazine.org/new-economy/homeowners-rebellion-could-62-million-homes-be-foreclosure-proof

~~~

On a related note, this embarrassing WSJ article — Niche Lawyers Spawned Housing Fracas — was not their finest moment . . .

The August turbulence in global markets saw New Home Sales, a measure of contract signings of new homes, fall by 7k to 295k annualized, the lowest since Feb and down from 302k in July. The figure was 2k above estimates and July was revised up by a modest 4k. The lowest since at least 1963 was seen in Aug at 278k. Sales did rise in the Midwest but fell in the Northeast and the South and West where the biggest foreclosure competition is occurring. Months supply rose to 6.6 from 6.5 as the absolute number of homes for sale fell by just 2k. The median home price fell by 7.7% y/o/y. Bottom line, this is more of the same at least in the new home market where competition from existing homes remain fierce at the same time more want to rent and those that want to buy have to deal with tougher lending decisions and inconsistent appraisals.

Dick Arms has spent nearly half a century following, trading and writing about Stock Markets. Best known for his Arms Index, or TRIN, his other major contributions to Wall Street methodology include Equivolume Charting, Ease of Movement, Volume Adjusted moving averages, Volume Cyclicality, and a number of volume based indicators. Reproduced here with permission of author.

~~~

Certainly it was a very sharp decline, the second worst week of the year, but it comes after the second best week of the year, and is indicative of the extremely nervous market we are in. The swings in the markets ever since the big slide began in early August have recently become almost commonplace. In fact, I am bothered by the fact that the politicians and media seem to be on a crusade to inform us of just how volatile the markets have been. The implication is that it is unprecedented, and somehow improvised by the villains that occupy the financial centers of America. One gets the impression that the next move will be an attempt to have further government intrusion in the markets. Yet it would seem that the observation about the unique volatility that is being blamed on the bad boys and girls of Wall Street is being generated by the very people who are doing the crusading; the politicians and the press.

But it is not unique! Big volatility is a valid market tool and a valid observation, but it has always been with us. Volatility represents, for the astute, an opportunity not a detriment. Big volatility comes into markets when the emotions are running high. When traders and investors are particularly afraid they tend to produce a volatile market. But fear is a valid and common emotion. The gazelle that smells the presence of a lion feels fear and flees. But he is not doing something unusual nor is he necessarily acting stupidly. The flight instinct is built into all of us. But long after the lion is left far behind, the gazelles that got the message without sensing the lion continue to run. The less fearful stop and graze. Carrying the analogy to the stock market, there are times to stop and graze when the majority of the gazelles are still running for the hills.

On the chart below we see the volatility, the upper red line, as measured using the APC, the Absolute Percent Change. Key here is the word Percent. The calculation is merely the ten-day moving average of the daily change in the Dow Industrials, regardless of the direction of change. But it is then divided by the level of the Dow, so that it does not matter whether we are looking at a Dow at 1200 or 12000, the change is observable within that context. Here we see that the volatility was, early in August, at a very high level compared to the prior two years. There was a big spike in volatility on the market low in mid-2010, but not as big as what happened recently. But please be sure to observe that the volatility invariably was higher on market lows than on market highs. In other words, fear is a much more disturbing emotion than is greed.

Just looking at this one would find validity to the recent complaints. But that is not the whole story. Lets, on the next chart, look at a really long-term picture:

Chart via ARMS Advisory

>

Here, again the red line is the APC, but now we are going all the way back to 1970, more than forty years. I have inserted a blue horizontal line to show where we were a few weeks ago, at the top of the spike. Hey! There have been times in history when the current volatility was child’s-play by comparison. As recently as the market lows in 2008 we saw much more volatility. Perhaps the critics could blame that too on manipulation, but what about 1998 or 1987? Going back further we do not see quite such extreme readings, but remember that the period from the early eighties to the late nineties was a huge secular bull market, punctuated by only one period of extreme fear, and that was the aforementioned 1987.

Chart via ARMS Advisory

>

My point is that the volatility in early August, and the still high volatility we are seeing now, are not unique. They are, in fact, normal and informative. The spike in early August told us the fear was overdone. The gazelles were panicking. It was a time to go against the crowd. Some grazing should have been quite nourishing. And it did not justify the government coming in and building a huge lion-proof fence around the gazelles. They would soon starve and so would the lions.

Source:
A Weak Week But Not Unique
Richard W. Arms Jr. September 26, 2011

~~~

Dick has received many of the highest awards in Technical Analysis, including the Market Technicians Association award for lifetime achievement. He has been inducted into the Traders Hall of Fame. Located in Albuquerque, New Mexico, Dick advises a select group of institutions with his weekly letter and personal consultation package, priced at $8000 per year.

Some interesting reading to start off your week:

• If It Looks Like a Bear, and Moves Like a Bear … (NYT) see also Pivot Point: Investors Lose Faith in Stocks (WSJ)
• Martin Wolf: What do the banks’ target returns on equity tell us? (FT.com)
• Volcker Rule May Lose Its Bite (WSJ) see also Volcker Rule May Extend to Overseas Banks (Bloomberg)
• The upside of economic worries: Lower gas prices (Associated Press)
• Thomas Friedman: Help Wanted: Leadership (NYT)
• JPM: Apple Trims Orders for iPad Parts (Bloomberg) see also The Bulls Pull Their Goalie (Reformed Broker)
• U.S. Household Worth Falls for First Time in Year (Bloomberg) see also Poverty pervades the suburbs (Yahoo Finance)
• Were Groupon’s and Overstock’s Management and Auditors Stupid or Did They Condone Improper Accounting Practices? (White Collar Fraud)
• Funk legend Sly Stone now homeless and living out of a van in LA (NY Post)
• CIA Says Global-Warming Intelligence Is ‘Classified’ (Wired)

What are you reading?

>

Source: Gapingvoid Gallery

Macro Factors and their impact on Monetary Policy
the Economy, and Financial Markets
MacroTides@macrotides1@gmail.com
Investment letter September 20, 2011

;
How Much Longer?

One of the standard family car trip experiences was children asking “How much longer?” Sometimes even before the car had left the driveway! If they waited for more than 30 minutes, it was a real sign they were growing up. Invariably, even a saint’s patience wears thin, and long before the destination was in sight, the question would be asked repeatedly, How much longer? A good parent would answer “Not much longer, sweetie”, no matter how many hours remained on the drive. It’s been three years since Lehman Brothers failed, and to say the recovery has been a disappointment would be generous. The rebound since the recession that was officially proclaimed over in June 2009 has been weak, with a number of statistics suggesting the recession never truly ended. It’s been a difficult three years for the majority of Americans and most want one question answered, “How much longer?”

Most politicians (especially if they fear their own job is at risk) would look into the camera and say “Not much longer.” Those politicians seeking office, would boldly proclaim, “Not much longer, if I am elected!” Unfortunately for the current crop of politicians, their message is not being delivered to kids in the car’s backseat, but into family rooms throughout our country to millions of adults, who are simply disgusted with the leadership vacuum that promises more tough times. In the latest New York Times/CBS News Poll only 12% of respondents approved the way Congress is handling its job. The remarkable point is not that 88% of registered voters were unhappy with Congress, but that there were still 12% who approved! Only 33% felt their Congressperson deserved to be reelected.

We have stressed since mid 2009 that the myriad of structural imbalances we are facing took decades to build up, and, therefore, would not be unwound quickly. The interconnectedness between all the headwinds holding growth down suggests this trip is going to last years. (weak job and income growth, lower home values, soft consumer spending, inadequate tax revenues at all levels of government, underfunded private and public pensions, historically low interest rates which punishes savers and pension actuaries, an aging population bulge, trillions in unfunded liabilities in the Medicare and Social Security programs, unsustainable safety net expenditures that prevented a deeper contraction, and the need to cut government spending in the not too distant future) We probably missed something, but this list is long enough to discourage even the most stalwart optimist.

Job and income growth are the two most important drivers of the economy, since they fund consumer spending and government spending through personal income taxes and sales taxes. More than 84% of those wanting a full time job have one, but their incomes are not growing. According to the Census Bureau, median household income is 7.1% below its peak in 1999. After falling for three consecutive years, it was $49,445 in 2010, and roughly equal to its 1996 level when adjusted for inflation. Even as middle class Americans have been squeezed for more than a decade by a lack of income growth, they have also been hurt by an imbalance of income disparity that has been gradually worsening since the late 1960’s.

The Gini index measures the extent to which the distribution of income among individuals or a household within an economy deviates from a perfectly equal distribution. A Gini index of zero represents perfect equality and 1.00 equals perfect inequality. According to the Census Bureau, the Gini coefficient totaled .468 in 2009, the most recent calculation available. This suggests income disparity has risen by 20% over the last 40 years.

The Gini index measures the fairness of income distribution, and not the absolute income of a country. Despite all our troubles, the average American worker still earns more each year than other workers throughout the world. However, in terms of income distribution, the United States sports a Gini index that is comparable to Mexico and the Philippines.

As we wrote in our July letter, “In the 1960’s, the average CEO was paid 35 times the average workers’ income. Last year, the CEO of a public company was paid 350 times the average worker’s pay. We don’t believe anyone is worth that much money to run a company. But, if the Board of Directors of a public company believes they must pay that much in compensation to attract ‘talent’, and shareholders don’t object, we see nothing wrong with it. At the same time, the gap in wages between the average working stiff and a CEO is just too large to ignore. The income for the top 1% reached 23.5% of total income in 2007, which is just a hair below the level reached in 1928. These income figures include capital gains and income from stock options. Although raising taxes on this elite group won’t raise that much in taxes, it will serve as an appropriate symbol. The austerity that must be imposed on government spending will prove a hardship on almost half of the 300 million citizens in this country. For most of those in the top 1% of income, higher taxes will be more of an inconvenience than an actual hardship.” Sooner or later, the income distribution gap will have to be narrowed.

In August, no jobs were created, and the unemployment rate remained unchanged at 9.1%. Another 8.8 million workers, or 6.7% of the labor force, are working part time, but would prefer a full time job. The number of hours worked fell as did hourly pay. Over the last year, the average worker’s pay increased 1.9%, well below the increase in the cost of living. Six million workers have been unemployed for more than 27 weeks. The US has not experienced anything like this since the 1930”s. The longer someone is unemployed, the more their skills erode and they fall further behind the curve.

Forty three months after the recession began in January 2008, almost 5% of the labor force remains unemployed. In 7 of the eleven recessions since World War II, all the jobs lost during the recession were filled within 24 months. What’s happening in this ‘recovery’ is simply unprecedented.

Another way of measuring the depth of job losses and the quality of the recovery is to look at a 4 month change in non-farm payroll employment. Since 1960, the only recession that equates to the magnitude of job losses experienced in 2008-2009 occurred in the 1973-74 recession. In the wake of that recession, employment growth virtually exploded with the 4 month change exceeding 2.2%. The deep recession in 1981-81 was also followed by a significant snap back in employment 2.2%. Based on this metric, the rebound in jobs to .5% is less than 25% as strong as the 1975 and 1983 recoveries.

Read the rest of this entry »

Now that the key to success for maneuvering thru the markets is being able to successfully parse the words of politicians and central bankers instead of analyzing the economy and a company’s fundamental prospects lets look at what was said over the past few days in Europe. Merkel seems to be finally coming around to the reality of a Greek default and is now focusing her mind to how to deal with the fallout. She said “I don’t rule out at all that at some point we will have the question whether one can do an insolvency of states just like with banks,” an expanded EFSF puts them “in a position to react,” “we have to put up a barrier,” “so we can in fact let a state go insolvent.” On the possibility of leveraging the EFSF to a greater size, another German official sees no need for it beyond its soon to be new size. European officials seem to be finally coalescing around a Greek default but with so many cooks in the kitchen, the pace of decision making is unfortunately glacial. From the ECB, Nowotny said “the ECB never pre-commits, and rate cuts cannot be excluded.” Another ECB official said a rate cut will be discussed next week but is not on the agenda. What is will be possibly restarting their purchases of covered bonds and reintroducing a 12 month loan facility. Germany’s Sept IFO business confidence figure fell to the lowest since June ’10 but was 1 pt better than expected. Italian consumer confidence was in line with estimates but at the weakest since July ’08.

Last week saw markets around the world hit turbulence, as concerns over European nations, and indeed, even the survival of the Euro, escalated.

One of our long term themes is that during an economic crisis, we find out who the Faux Capitalists are and who truly believes in Free markets. Like atheists in foxholes, the Faux Caps beg the government for assistance when under duress.

Last week saw strong rallies in Bonds and Dollars, and weakness in Stocks, Commodities and the Euro. That could set up a counter-move the next few days. The quality of the initial bounce today — breadth and volume especially — will help determine the subsequent intensity and duration of these moves.

Lets take a quick look at what might be in store for various asset classes:

Stocks: Suffered the biggest weekly decline since October 2008 (when TARP proposal failed). The Dow sank 6.4% for the week, and overall, the rout erased $1 trillion from U.S. equities. Year-to-date, the S&P500 is down almost 10%. Traders heading into the weekend expected the ECB and policy makers’ to throw money at Europe’s debt crisis. No real rescue plan emerged.

From the April 29 peak to Friday’s close, the S&P500 is down 17%.  The 105% bounce off of the March 2009 lows has been slashed to a 68% gain.

Traders should note that Nasdaq bounces are nearly double SPX or Dow, and that is where you want to play this next move.

Bonds: Treasuries remain the safe harbor, despite all of the problems in the US. We may depend upon the kindness of strangers in the US, but its the least unattractive global option.

Dollar: Most observers misunderstand the dollar. The collapse was form 2001-2008, where it plummeted 41%. Since then, the DXY has been mostly range bound. The technical picture has improved significantly for the greenback. Look for a bounce that could begin a lasting move in the dollar, with all the attendant impacts on other asset classes.

Commodities: Fell to a 10 month low last week. The GSCI Spot Index dropped 21% from April highs. Bloomberg notes that the “last time the index fell that much was in 2008 when the global economy sank into its worst slump since World War II.”

Commodities are now at their lowest levels in ~10 months. Expectations are that slowing global economies — including China — will curb raw-material demand. It is noteworthy that Dr. Copper, the metal with a PhD. in economics,  “plunged below $7,000 a ton for the first time in more than a year.”

Economy: As the FOMC statement last week made clear, risks to the U.S. economy have increased. Europe’s debt crisis is unlikely to be resolved in a positive fashion. Earnings are likely to be pressured off of their peaks — anywhere from 15-40%.

The bottom line is that some sort of a counter-trend move is coming, with a bounce in equities and commodities quite probable. But we have not yet seen a capitulation to mark the end of this downward move, and I put us only in the 4th inning.

If the bounce fails, look out below . . .

>

See also:
Commodities Drop to 10-Month Low as Silver Plummets on Debt, Growth Risk
Chanyaporn Chanjaroen
Bloomberg, Sep 26, 2011

http://www.bloomberg.com/news/2011-09-26/commodities-drop-as-silver-slumps-on-europe-debt.html

I am not sure I understand what Krugman means here:

“On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world.

On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.” (emphasis added)

Any country or region that has a free floating currency will have traders taking opposite sides of a trade. If you are going to float bonds to fund your operations, there will be sellers and buyers.

Blaming speculators for Greece or Italy’s woes is akin to blaming short sellers for Lehman, Bear Stearns and AIG’s collapse.

Companies and countries that “depended on the kindness of strangers” must take great care to ensure that generosity never goes away. LEH, BSC, and AIG failed at that, Greece, Italy, Portugal and Spain are failing at that (with Ireland right behind).

And the US? Our financial foolishness and embarrassing political theater suggests that if we are not careful, we may end up on the same list as well.

>
Source:
Euro Zone Death Trip
PAUL KRUGMAN
NYT, September 25, 2011
http://www.nytimes.com/2011/09/26/opinion/euro-zone-death-trip.html

Scott Pelley brings viewers on a personal tour conducted by Police Commissioner Ray Kelly of what may be the world’s most sophisticated terror defense forces – the New York City Police Department’s counter terrorism unit.

Excerpt:

Now, 10 years after 9/11, with an investment of billions of dollars, Kelly has created, what he believes, is the most powerful and technologically advanced counter-terrorism bureau that anyone has ever seen.

By air, land and sea – the nation’s largest counter-terrorism squad is on the beat in America’s largest city. One thousand officers – many of them armed like soldiers – are part of a presence that is meant to send a message: New York City is too tough a target. NYPD counter-terrorism is the creation of police Commissioner Ray Kelly.

Ray Kelly: We’re the number one target in this country. That’s the consensus of the intelligence community. We’re the communications capital. We’re the financial capital. We’re a city that’s been attacked twice successfully. We’ve had 13 terrorist plots against the city since September 11. No other city has had that.

Kelly is a classic cop. He started as an NYPD cadet and rose all the way to commissioner. He left the force before 9/11. But within four months of the attack, the mayor asked him to come back.

Story
Fighting terrorism in New York City