Market Update – July 13, 2012

Here’s some of what I found interesting in my Thursday reading…

Italy downgraded.  Moody’s downgraded Italy’s bond rating  from A3 to Baa2.  They said that Italy (the euro area’s third-biggest economy) faces higher funding costs and contagion risk from Greece and Spain.  Italy is trying to sell 5.25 billion euros of bonds today.  Moody’s warned that Italy could be downgraded further if they have difficulty implementing reforms or if there is further deterioration in their economic prospects.

China growing at slower rate.  Economists think that China will announce (today) that Q2 growth was 7.6%.  This would be the sixth straight quarter of lower growth.  The BRIC nations are not supplying the world with the marginal growth that we’ve come to expect.

Jobless claims dropped.  First-time claims for jobless benefits decreased by 26,000 in the week ended July 7 to 350,000.  This is the fewest since March 2008.  But, economists attributed this to the timing of auto plant shutdowns to retool for the new model year.  These shutdowns have been difficult to predict this year and the result is that it’s very difficult to make seasonal adjustments.

Distrust of corporate America.  62% of Americans believe corruption is widespread across corporate America.  Nearly 75% believe that corruption has increase over the past three years.

One academic study (based on the amount of fraud during the dot-com bubble) estimated that in any given year a fraud was being committed by 11 – 13% of the large companies in the country.

Wells Fargo and consent agreements.  The Justice Department says Wells Fargo will pay at least $175 million to settle accusations that it violated fair-lending laws from 2004 – 2009.  The government alleged that the bank’s discriminatory lending practices resulted in more than 34,000 African-American and Hispanic borrowers in 36 states and the District of Columbia paying higher rates for loans solely because of the color of their skin.  Wells Fargo entered into a consent decree and denied all charges as part of this.  This is absurd – the government should not be allowed to enter into agreements like this.  In criminal actions, when someone pleads guilty, they have to admit guilt.  They can’t stand before a judge and say, “I’ll take the plea, but I’m not good for it.”  We should have similar rules with administrative actions.  You either did this or you didn’t.

LIBOR damages could add up.  Morgan Stanley estimates that the twelve banks publicly linked to the LIBOR scandal could face as much as $22 billion in combined penalties and damages to investors and counterparties.

Mortgages tied to LIBOR.  Cleveland Fed economist Guhan Venkatu observed that 45% of prime mortgage loans are indexed to LIBOR, while 80% of subprime loans are tied to LIBOR.

Locking in low rates.  Investors accepted the lowest yields ever (1.459%) for 10-year U.S. Treasury bond auction.  This auction was shortly before the release of the FOMC’s minutes.

Direct bids accounted for 45% of the Treasury auction.  The “direct bid” enables a buyer to remain anonymous as they do not place their order with a Wall Street dealer.  Recently, direct bids have averaged 17%, so this (45%) was a huge increase.  Some people are speculating that this could be China or some other large investor.

Fewer mortgage delinquencies.  Mortgage delinquencies are dropping, with the share of home loans at least 30 days late dropping to 7.4 percent in the first quarter from 7.58 percent in the prior three months.

Foreclosures take about a year.  The foreclosure process in the U.S. increased to an average of 378 days in the second quarter, the highest in records dating back to 2007.  New York has the slowest process – with a 1,001 day average

Food stamps.  The cost of SNAP benefits (“food stamps”) totaled $72 billion in 2011, according to the Congressional Budget Office, a 70% increase from 2007, attributable primarily to the recession, sluggish recovery and measures that broadened eligibility. The CBO projected the number of people receiving benefits would continue to rise until 2014, in part because of persistently high unemployment.

College degrees.  The share of young Americans who hold college degrees edged up in 2010, according to Education Department data.  Approximately 39.3% of people age 25 to 34 had college degrees.

Interesting quote from FOMC minutes.  “A few members observed that it would be helpful to have a better understanding of how large the Federal Reserve’s asset purchases would have to be to cause a meaningful deterioration in securities market functioning, and of the potential costs of such deterioration for the economy as a whole.”

Have a great weekend.

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