Market Update – June 25th

Hi All,

Please forward this to others who may be interested.  If you want to sign up to receive these emails, see the instructions at the bottom of this article.


I’m doing some traveling right now and I’m behind on my reading.  Today, I caught up on some articles about the Fed, the financial sector, the bailout and a few other random things.  I will probably be blogging a fair amount next week, as I have articles that I need to get through about housing, employment, BP, EU and China.  I’ll probably do almost one per day plus add in some other stuff.  Enjoy.


1. Fannie and Freddie took over a foreclosed house every 90 seconds during Q1.  By the end of Q1, they owned 163,828 homes.


2. So far, taxpayers have spent $145.9 billion on Fannie and Freddie.  The CBO predicts that it could reach $389 billion.


3. On average, Fannie and Freddie recoup less than 60% of the money that is owed to them by a borrower.


4. So far this year, 68.4% of buyers (of houses sold by Fannie) have certified that they would use the house as their primary residence.  Investors are not allowed to buy during the first 15 days of listing.  Buyers may not resell a house for a profit within 90 days.


5. Since the “Making Homes Affordable” program was launched last year, 340,000 homeowners have received a permanent loan modification (lowering their loan payment for five years).  Approximately 436,000 have been dropped from the program (because they miss a payment during the time when there is a temporary modification or because they can’t prove that they qualify for mortgage assistance).  Approximately half of those dropped from the program received another type of modification from their bank.


6. Congress is considering a plan to make $3 billion of loans to unemployed homeowners who are having trouble paying their mortgage.


7. In reconciling the Financial Reform bill, it looks like the GAO (which is overseen by Congress) will not be given the authority to audit the Fed’s interest rate decisions.  The GAO would have authority to scrutinize the Fed’s crisis decisions and the Fed would disclose discount window borrowers with a two-year lag.  My view has not changed on this issue…the Fed is far from perfect, but politicizing it and giving Congress a say is not the solution.


8. It looks like Congress will instruct the SEC to set up a government panel to parcel out security offerings to ratings agencies (in order to stop the rated company from directly paying the rating agency).  This will be done after a two year study in which they determine whether there is a better alternative.


9. The House and Senate are reconciling their respective financial reform bills and are trying to decide whether mortgage lenders should have to retain a stake in even the most conservative mortgage loans (30-year or shorter fixed rate loans with income documented and no right to defer payments).  With riskier loans, the lender will definitely have to retain 5% of the credit risk on loans that they securitize.


10. Federal Reserve Vice-Chairman gave the WSJ an interview prior to his retirement.  His key comments:

1. Greenspan’s interest rate decisions were good, but he will not be remembered well for his bank supervision.
2. The stability of the economy (and infrequency of recessions) made people less careful.  We believed home prices could not drop.
3. The regulation of the financial system did not keep up with the changes in the financial sector.  Supervision did not keep up with the shift from bank-oriented to market-oriented intermediation.
4. Bank supervision is a better tool than monetary policy in regulating bubbles.

11. The IMF’s first Deputy Managing Director (John Lipsky) said that the financial crisis showed that fixing weaknesses in supervision is at least as important as the efforts to reform financial regulation.  Yet, very few people are focused on supervision.  He also said that supervisors did not seem to understand new sophisticated products and didn’t do a good job of ensuring that management and boards understood them.


12. The top six credit-card lenders (including JPM, BAC and Capital One) said that loans at least 30 days late dropped to 4.22% in May, compared with 4.4% in April.  This is the lowest since July.  This is considered a leading indicator of write-offs.  Write-offs also fell, except at BAC and Discover.


The reduction in accounts that are 30 days delinquent:

American Express 2.9% (April 3.1%)

Capital One 4.8% (April 5.07%)

Bank of America 6.39% (April 6.73%)

Citi 5.59% (April 5.85%)

Discover 4.95% (April 5.3%)


Selected Write-offs:

American Express dropped from 6.7% to 6.3% (lowest levels)

BAC increased from 12.71% to 13.33% (highest levels)


13. The Fed adopted new rules showing that they will exert more power over compensation.  They now have the right to reject compensation structures which they feel promote unnecessary risk-taking.  They said that they had found deficiencies at many large banks, including the inability to determine which employees can expose a bank to risk and pay structures that don’t adequately mitigate risky behavior.  This new policy will apply to banks regulated by the FDIC, the Office of the Comptroller of the Currency and Office of Thrift Supervision.  The rules apply to senior executives and other who are responsible for oversight of firm-wide activities or material business lines.


14. Some banks (like Citi) are apparently more concerned about the new Basel regulations which would require them to hold more capital instead of lending it out.  This would result in safer banks (larger buffer) but it would mean less money is being loaned out in the world economy.  The Institute of International Finance estimates that banks in the US, EU and Japan would need to raise $700 billion of common equity and issue $5.4 trillion of long-term debt from 2010 to 2015 in order to meet the Basel capital and liquidity requirements.


15. Alan Greenspan wrote a piece in the WSJ.  I think that the key takeaways are:

1. investors’ willingness to buy Treasuries (and finance our deficits) has allowed us to continue our spending
2. rates can rise very quickly
3. we will not be able to grow our way out of our problems
4. we need fiscal restraint right now (and we have no record of this)

16. Geithner told the Congressional Oversight Panel that banks had repaid about 75% of the bailout money they received, but that we would likely have a loss from AIG.  The CBO estimates that loss will be $36 billion.


17. Many states are realizing that their pensions are in huge trouble.  They are implementing changes – such as later retirement or capped retirement pay.  The problem is that they are only doing this for new hires.  It doesn’t solve the problems.


18. In an effort to raise tax revenue, NY is considering raising the taxes on cigarettes.  Including the NYC tax, the price for a pack of cigarettes in Manhattan could be $11 if this goes through.


19. As mentioned earlier this year, Social Security will pay out more than it takes in for the first time this year.  The program is taking in less money because more people are unemployed and it is paying out more money because more people are applying for benefits early.


20, Credit default swaps on California and Illinois cost more than swaps on Portugal and Ireland.


21. GS estimates that the unemployment rate in Q4 2011 will be 9.7%.


22. Since May 26, the Baltic Freight Index has dropped 48%.  This is a very volatile index, but it’s at its lowest level for the year.


23. According to a WSJ poll:

-       62% of Americans think the country is on the wrong track

-       1/3 think the economy will get better over the next year

-       57% would prefer to elect a new person to Congress than to re-elect their current representative


24. Consumer prices in May fell for the second month in a row.  Prices are lower than they were in January.


25. The Fed said that short-term interest rates would stay near zero “for an extended period.”  They also said that “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”  The Fed said that the recovery is “proceeding”, a notable change from April’s comment that the recovery “continued to strengthen.”


26. The KC Fed President (Thomas Hoenig) dissented for the fourth time this year.  He wants to raise rates.


27. A new Fed research paper concluded that the Fed is likely to wait until 2012 before it starts to raise interest rates.  The author wrote that there was a statistical relationship over the last twenty years between core consumer price inflation and the gap between actual unemployment and the natural, or normal, rate of unemployment.


28. The paper also argued that if rates were raised too soon, it would be hard to reverse course.  On the other hand, if tightening is started too late, the Fed could catch up by raise rates quickly.


29. Does the market want the savings rate to increase or consumer spending to increase?


30. Geithner is calling on G-20 nations to continue spending and to worry about deficits later.  He urged member nations to stabilize their debt levels, enact new rules for financial regulation and reduce their reliance on fossil fuel.  It’s easy for Geithner to say this stuff because we don’t share any of these issues…


31. The average weekly hours of private workers rose for the third month in a row, from 34.1 to 34.2.  This is the highest since January 2009 and the longest streak of monthly gains since before the recession.  Paying overtime is cheaper than benefits for new employees.  In addition, it gives the employer the flexibility to cut the hours if things slow down.


32. A Portland massage therapist accused former Vice President Al Gore of “unwanted sexual contact” at a hotel during an October 2006 visit.  I’m sympathetic to the former Vice-President, as Jenny has made this accusation against me with some regularity.
__________________________________________________________________________
If you want to be on my email list:

1.      go to www.leedsonfinance.com

2.      toward the top right corner is a place to click on for email service—click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.