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HomeTwo Sets of Books Require Two Sets of Accounting Standards
Posted by Larry Doyle on December 8th, 2009 2:43 PM |
What was at the core of the current economic crisis?
The financial transactions embedded in the SIVs (structured investment vehicles) located off-balance sheet within our major financial institutions brought our country to its knees. As the securities housed in these SIVs plunged in value, Uncle Sam was forced to ride to the rescue and bail out Wall Street.
Uncle Sam’s bailing required not only billions in dollars but also the coordination and complicity of the accounting industry. The Federal Accounting Standards Board (FASB) knows that Congress, supported by Wall Street, jammed revised accounting standards in place in order to facilitate Uncle Sam’s bailout.
The FASB, in an attempt to save face and a degree of integrity, has pushed back on Wall Street by passing FAS 166 and 167 which would require investments in off-balance sheet vehicles to be brought on-balance sheet. The implementation of FAS 166 and 167 is imminent and would require financial institutions to set aside increased capital against selected assets.
(more…)
Obama Administration Ready to Admit Failure of Mortgage Modification Program
Posted by Larry Doyle on December 8th, 2009 11:19 AM |
Throwing good money after bad is not a practice that generates long term success and prosperity. In fact, the unintended consequences and costs of dysfunctional government programs should never be discounted. While intentions of certain programs may be noble, the practicality of Uncle Sam’s attempt to manipulate a market is not easily achieved. I am writing about the results of the Obama administration’s mortgage modification program.
I highlighted the state of this program in October in writing, “Mortgage Modifications: Statistically Insignificant”:
Status of Efforts
• 63 servicers had signed participation agreements for the first-lien modification program;
• More than 1.3 million solicitation letters for HAMP loan modifications to borrowers;
• More than 328,000 HAMP trial modification offers to borrowers;
• More than 209,000 HAMP trial modifications had started;. . . and of the 209,000 mortgage modifications (.3% of total homeowners) started in the country, how are we doing?
• 1,080 borrowers had successfully completed the trial period and received HAMP modifications.
Yep. A whopping 1,080 borrowers have successfully completed the trial period and received modifications. A full .5% of those modifications that had started. Yes, a full 1,080 homeowners. I am sure there are plenty of homeowners still in the trial period, but even 209,000 homeowners as a percentage of the overall housing market is hardly significant.
What have we learned about housing over the last few months? Servicers have little interest in this program. Homeowners who are more than 30 days past due also have little interest in this program. The number 1,080 is clear evidence of that and, in my opinion, renders the entire mortgage modification program statistically insignificant.
Today we learn the Obama administration will release details later this week indicating that 6% of those mortgages in the modification process have now or will ultimately be successfully and permanently modified. (more…)
Have Mortgage Delinquencies Peaked?
Posted by Larry Doyle on December 8th, 2009 9:43 AM |
This past May, I designated mortgage delinquencies as “The Most Critical Economic Statistic.” I wrote then and continue to believe now:
Which economic statistic is the most important? Unemployment? Housing starts? Trade deficit? Inflation? Retail sales?
Well, they are all important . . . but as I review the many statistics, the economic data that I believe most significant are loan delinquencies.
While assorted analysts and economists have called the bottom in housing numerous times, rest assured a true bottom will not be established until we see a meaningful decline in mortgage delinquencies. Why? There is a strong correlation between delinquencies, defaults, and foreclosures. Until delinquencies decline, the supply of homes coming onto the market through the foreclosure process will not abate.
While analysts and economists have been wrong in their calls to this point, I keep my eyes and ears open when another entity calls a peak in the rate of delinquencies. I witnessed another one again this morning. (more…)
David Levy Provides Sense on Cents
Posted by Larry Doyle on December 7th, 2009 2:50 PM |
I enjoy coming across individuals whom I have not previously met or read. Why? Individuals with new insights and perspectives provide real mental stimulus especially during challenging economic periods. I engaged just such an individual this morning in reading CFO Magazine. David Levy of the Jerome Levy Forecasting Center was recently interviewed and provided some fabulous insights on the economy, deflation, corporate earnings, bank balance sheets, and assorted other hot topics. This interview, entitled A Contained Depression, is a must read:
If you’re breathing a little easier because the Great Recession seems to be ending, consider this: the U.S. economy may remain in a “contained depression” for months or years to come. That warning comes from economist David Levy, chairman of the Jerome Levy Forecasting Center, an economic research and consulting firm. Levy originally coined the term to describe the recession of 1990–1991 and the subsequent halting, jobless recovery. Earlier this week, he talked with CFO about the prospect of a similar scenario unfolding today. An edited version of the interview follows.
What is the state of the economy today?
We’re in for a much longer period of contained depression [than we saw in the 1990s]. The single most overlooked observation about the U.S. economy in the postwar period is that balance sheets grew faster than incomes, decade after decade, both assets and liabilities. The problem is that asset values have to be justified by returns they can earn — or by expectations of future capital gains, and that’s where you get into bubbles. What went on in the postwar period couldn’t go on indefinitely. We were able to make it go on longer by dropping interest rates in the last two recessions, but we can’t do that anymore. We have to shrink the value of assets on balance sheets and shrink liabilities. And that makes it very difficult for the economy to operate. (more…)
Will China 2009 Repeat United States 1929?
Posted by Larry Doyle on December 7th, 2009 12:05 PM |
“Those who do not learn from history are doomed to repeat it.”
George Santayana (Spanish born American Philosopher, Poet and Humanist who made important contributions to aesthetics, speculative philosophy and literary criticism. 1863-1952)
The economic boom of The Roaring Twenties here in the United States was closely linked with the massive financing of debt provided to post WWI-Europe. The U.S. was the envy of the world given its economic engine and subsequent economic surplus. Economic historians are well aware that the excess capacity in the United States precipitated The Great Crash of 1929.
Fast forward 80 years. Is China 2009 the equivalent of the United States 1929? Is the United States 2009 the equivalent of Europe 1929? How will the relationship between the People’s Republic of China and the United States play out? I addressed this critically important dynamic this past January in writing, “Prisoner’s Dilemma.”
I recently read and reviewed a fabulous piece produced by Black Swan Trading addressing this topic. This short piece, entitled Currency Currents, is strongly recommended. I submit:
Therefore, I think the key macro event i.e. major sustained risk event, will likely flow from protectionism. Rebalancing is the trigger for protectionism in a world when the major player, China, suppresses its currency. (more…)
All Eyes on the U.S. Dollar Index
Posted by Larry Doyle on December 7th, 2009 9:22 AM |
What’s leading the market both up and down?
Regular readers here at Sense on Cents are fully aware of my focus on the U.S. dollar as the primary driver of our markets over the course of the last half year. This past summer, the BRIC nations regularly railed on our greenback as the international reserve currency. Japan jumped on that bandwagon, as well.
The pressure on the greenback supported by the Fed’s easy money policy served as the fuel that launched our markets from the intermediate pullback experienced in early July.
Check out the patterns in the U.S. Dollar Index versus the movement in the S&P 500 since early July. These indexes are almost mirror images of each other. While the order of magnitude is not exact, the direction is very highly correlated.
I certainly believe this correlation will continue and rest assured active traders on Wall Street are watching this relationship closely as well. In fact, what happened overnight? Equity markets traded off as the U.S. Dollar Index continued to firm. (more…)
“Open Mic Night” on No Quarter Radio’s Sense on Cents with Larry Doyle, Sunday Night at 8pm ET
Posted by Larry Doyle on December 5th, 2009 5:20 PM |
UPDATE: This episode of NQR’s Sense on Cents with Larry Doyle has concluded. You can listen to a recording of the episode in its entirety by clicking the play button on the audio player provided below. Once the audio begins, you can advance or rewind to any portion of the episode by clicking at any point along the play bar.
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Are we turning a corner on our economic landscape? Should we expect that 2010 will be a return to normal? What’s normal? The ups and downs of our economy and the resulting ebb and flow within our markets continue to present more questions than answers. On that note, what questions are on your mind? What would you like to discuss? Even if you don’t have questions but would like to share personal and professional experiences as you navigate your own economic landscape, please join me Sunday evening from 8-9pm ET for “Open Mic Night” on No Quarter Radio’s Sense on Cents with Larry Doyle. Additionally, if you’d like me to address a specific topic, please leave your request in the comments section.
As a reminder, all of my radio shows are archived and previous episodes can be listened to right here at Sense on Cents by clicking on the No Quarter Radio tab located under the page header. (FYI, I keep an audio player of my most recent episode in the right sidebar). In addition, all No Quarter Radio programming is available as a free podcast on iTunes. From the iTunes Store, type “NQR podcasts” in the search window.
Many thanks to Larry Johnson and the rest of the team at No Quarter USA blog for providing such a vibrant media vehicle as No Quarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!
LD
December 5, 2009: Month to Date Economic and Market Review
Posted by Larry Doyle on December 5th, 2009 10:41 AM |
Is our economy stabilizing? Is yesterday’s surprisingly strong employment report a harbinger of a trend toward better days? While I am not going to indiscriminately pooh-pooh economic reports which may be overly sanguine, I am also not going to blindly buy into them either.
Let’s return to the surprisingly weak employment report produced in November, combine that with the report released yesterday and realize that the economic road in front of us remains long, steep, and challenging.
Prudence dictates we neither get overly ebullient nor despondent as we manage our finances and navigate the economic landscape. In that context, I will caution readers here at Sense on Cents that news deemed positive for the economy may very likely generate negative returns across a wide array of asset classes. Why is that?
The fuel that has been driving the markets all year is provided by the Fed and Treasury. That excess liquidity has served to punish the value of the greenback while supporting virtually all asset classes via the dollar carry trade. If the economy shows signs of stabilizing and the fuel source is restricted via a Fed-tightening of credit, the U.S. dollar should rise and hedge funds, speculators, and selected investors will be forced to exit positions across these asset classes. That very phenomena played out to a small extent just yesterday. Will it continue? Watch the U.S. Dollar Index and expect that it will continue to be negatively correlated with the markets.
Let’s navigate. Prior to reviewing the month to date market returns, I’ll address economic data released this week.
ECONOMIC DATA
Unemployment Report: The only data that was truly meaningful. Rather than regurgitating my analysis of this report, I submit my comprehensive review from yesterday “Unemployment Report: December 4, 2009.”
Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis: 
U.S. DOLLAR
$/Yen: 90.51 versus 86.38, +4.8%
Euro/Dollar: 1.4856 versus 1.5007, -1.0%
U.S. Dollar Index: 75.75 versus 74.80, +1.3%
Commentary: the overall U.S. Dollar Index rebounded strongly after the surprisingly strong Unemployment Report. Why? Very simply, if the economy is starting to stabilize then the Fed will be faced with tightening its easy money policy much sooner than forecast. In fact, that is exactly what happened. While prior to yesterday’s release of the employment report, most market participants believed the Fed would be on hold for all of 2010. Now, however, the market is projecting the Fed may very well be forced to raise rates by mid-2010. If that occurs, the dollar will continue to firm. See that U.S. Dollar Index I linked to above?Watch it like a hawk. As the dollar goes one way, look for the markets to go the other.
I continue to reiterate my points from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.
I also would like to reiterate that although Fed officials play up the lack of inflation as a positive and an overriding reason for its easy money policy, they provide little to no commentary on deflationary pressures at work in large segments of the economy. I firmly believe these deflationary pressures are the Fed’s gravest concerns and they hope the weak dollar creates hints of inflation to offset these deflationary pressures. Can rising asset valuations support underlying economic fundamentals which provide little to no pricing power for many companies?
COMMODITIES
Oil: $75.78/barrel versus $77.33, -2.0%
Gold: $1162.1/oz. versus $1180, -1.5%….
DJ-UBS Commodity Index: 134.79 versus 136.49, -1.2%
Commentary: the red ink in this sector is directly correlated with the improvement in the dollar. A lot of hedge funds had sold the dollar, given the fact that it could be borrowed for next to nothing, and used the proceeds to buy commodities. As the dollar rallies, that part of these trades loses, and thus as entities cover their dollar shorts, they sell out their long positions in commodities, especially gold.
EQUITIES
DJIA: 10,389 versus 10,345, +.4%
Nasdaq: 2194 versus 2145, +2.3%
S&P 500: 1106 versus 1096, +.9%
MSCI Emerging Mkt Index: 986 versus 941, +4.8%
DJ Global ex U.S.: 202.0 versus 197.04, +2.5%
Commentary: I am overall fairly impressed with the the equity market performance this week. There were conflicting forces at work. Supporting the market, the situation in Dubai was somewhat alleviated by support from the UAE, and the employment report conveyed a sense of an improving economy. Pressuring the market, interest rates moved sharply higher and the dollar rallied. How will this play out going forward? For now, I remain fixated on the value of the dollar as the primary factor influencing equities.
I reiterate from last week, I think we are beginning to enter into a blowoff phase in which investors who have missed the market move to get in while those who are outright short the market are forced to cover. I view the current price action more akin to gambling than anything else.
BONDS/INTEREST RATES
2yr Treasury: .85% versus .67%, +18 basis points or .18% (rates up, prices down)
10yr Treasury: 3.48% versus 3.20%, +28 basis points or .28% (rates up, prices down)
COY (High Yield ETF): 6.58 versus 6.46, +1.8%
FMY (Mortgage ETF): 17.57 versus 17.79, -1.2%
ITE (Government ETF): 57.95 versus 58.52, –1.0%
NXR (Municipal ETF): 14.61 versus 14.80, -1.3%
Commentary: lots of red ink in this sector as questions about the Fed raising rates comes back into play. The fact is the deficit remains a MAJOR problem both economically and politically. The markets are also faced with a sizable amount of Treasury supply in the coming week. Can the economy improve if rates move higher? It will be a real challenge.
Summary/Conclusion
We live in a very fragile world, economically and politically. Our global economic risks remain deeply embedded in the debt burdens of nations, corporations, and consumers. These debts are disguised and covered by central bank liquidity. The water may appear fine, but it remains shark-filled. Remain on guard.
Our economy is so large and so complex that it is not possible to turn on a dime as some may like to project. When hotel rooms in prime Las Vegas hotels are offered at $49 a night, we are a long way from a stable economy.
Please join me tomorrow evening as we discuss any and all of the above on Open Mike Night from 8-9pm on No Quarter Radio’s Sense on Cents with Larry Doyle.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed. In addition, if you are doing some shopping this holiday season, please consider using some of the links provided here at Sense on Cents. Check out the sidebars for great deals at Amazon, ProFlowers, GiftTree, RedEnvelope, etc.
Have a great day and weekend.
LD
Dollar Carry Trade Remains in Vogue
Posted by Larry Doyle on December 4th, 2009 3:47 PM |
Today’s price action in the markets is very telling. What is it telling us? The dollar carry trade remains in vogue and technicals continue to dominate overall flows much more than fundamentals. Let’s navigate.
Recall that the weakness in the U.S. dollar has facilitated a large number of hedge funds, market speculators, and to a less extent investors to borrow dollars and buy a variety of risk based assets. What assets? Equities, a wide array of bonds, a basket of commodities, primarily gold. How are these sectors performing?
After an initial spike of 1-1.5% across the equity markets, these major market averages have retraced and are now effectively unchanged to slightly better on the day. Is that a sign of investors not believing in the details of the employment report? No, anything but. In fact, I believe the equity performance today is quite strong given the fact that the dollar has increased by 1.6%.
Bonds have traded in a very narrow range. Interest rates moved higher by approximately 12 basis points (.12%) and have sat there almost all day. The question that now comes back front and center is when the Fed will decide to raise rates. While most analysts had written off the possibility of an increase in rates prior to 2011, now analysts are projecting that the Fed may raise rates by mid-2010.
If rates do rise here, what does that do for our greenback? It will do better and it is doing just that today. As I referenced the U.S. Dollar Index has increased by 1.6%. (more…)
UPDATE: FASB 166 and 167
Posted by Larry Doyle on December 4th, 2009 11:27 AM |
Is Wall Street getting a reprieve from the capital constraints that would be effected by the implementation of FASB 166 and 167? I first broached this topic a month ago in writing, “12th Street Capital Reviews FASB 166 and 167 and Tells Us Why Wall Street Will Need More Capital”:
In brief, FASB 166 and 167 will require hundreds of billions in assets to be moved from off-balance sheet vehicles onto the balance sheets of the financial institutions. As those assets, which are embedded in an array of securitization transactions, come on balance sheet, the banks and non-banks alike will have to raise more capital to support the growth in their balance sheets. Best guesstimate is that the institutions will need to raise capital in the tens of billions.
12th Street Capital provides us updated developments on this very important topic with the following release: (more…)
