Maidon Lane III Doing Better....

FT is running this story this morning.

http://www.ft.com/cms/s/0/ca318d8a-0574-11df-a85e-00144feabdc0.html

Interesting story in the sense that the Treasury and AIG has been in the news constantly of late. This may alleviate some pressure on Geithner although his days are numbered after yesterdays Mass. election results.

"The rising value of collateralized debt obligations bought during the Federal Reserves rescue of AIG is one of several factors stirring hopes that the central bank will be able to recover the money it used to bail out the insurer."

-This is highly unlikely even though Maiden Lane III assets are now at $45. By who's estimations? CDO prices have risen because liquidity is a plenty and more dealers are marking them up just before bonus season. Who in their mind believes that Treasury can sell the whole lot of this garbage CDO at anywhere near full valuation? The ABS CDO market is extremely illiquid and there are no more morons to sell them to. The only idiots that will them are the taxpayer.

Leverage Is Back....

When In Rome....

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKYEXm.iUDcw&pos=5

...Do what the Romans do.

When competition heats up, the quality of collateral and general lending standards fall apart. Sound Familiar?

Goodness. Its like the crisis never happened.

Things I Think Will Happen I Think?

All I have seen, heard, and read over the last few weeks are people's expert opinions and predictions on what happens with the market and economy. Let me tell you something about experts. Run from them.

I am no expert. Not an intellectual in the least. I do know a vast amount of stuff about diverse subjects from baseball to derivatives. From Heavy Metal Music to Mortgage Trading. But I in no way call myself an expert. As soon as that happens I start to take my self seriously.

So....Here Goes.

EQUITIES

The Dow will at some point reach 11,000. Probably by the first week of 2010, only to collapse to under 9000 by the end of February 2010. The reason? Quite simply this huge rally from the March 2009 lows is 100% fraudulent. Its all liquidity and kick the can down the road trading. The banks run the joint and have at every moment delayed their day with destiny. The liquidity will continue through out 2010, but the cat will be out of the bag as the banks are toast. As the markets fall apart the Fed will keep printing and reflating. What else can they do? This will keep a floor on equities through out the year. If and only when long term interest rates rise considerably will the markets revisit the March 2009 lows. The odds of this happening is 2-1. My guess is that treasuries don't capsize and the Dow finishes near 9200-9500 for the year. The SPX at 950 or so. Technology AKA the NASDAQ will outperform as those high tech names generally have cleaner balance sheets. Apple, Google, Amazon.com, RIMM, and Oracle will do better then the averages. Semiconductors will under perform.

TREASURIES/USD

Long Term Bond Yields will drop in January as a general flight to quality will ensue. Ditto for the US Dollar. The 10 year yield is at 3.84%. I see that yield hugging close to 3% during the coming swoon in equities. There is a risk that another huge round of treasury refunding will wallop yields but that's what Quantitative Easing/Monetization is for. If QE doesn't work and the Treasury has problems selling government paper, it can be a snowball effect where as I can just finish this post at this moment. I don't believe the end is that near. Not yet anyway. The dollar will rally across the board. Yields across the curve will be lower at the end of the year then where they started. The US Dollar will rally 15% from here.

COMMODITIES

Crude Oil prices will be volatile for most of 2010. I see Crude dropping to $55-$60 by the end of the year. Partly from USD gains but mostly as Wall Street deleverages and the global growth story takes 2010 off. Natural Gas is 100% an inventory play. Its currently quite cold on the East Coast, so inventories are tight, this will lead to classic hoarding of inventory as the spring/summer period hits us. I see Natural Gas plunging to $3 then climbing back to $4 or so by year end. Gold is the wild card. Gold is a classic weak dollar/inflation hedge/drunken central bank printing play. Gold will correct at some point, likely towards $950-$1000, but as I stated above the Fed will continue to print, so Gold will then reverse course and head towards $1300-$1500 by year end.

Employment

This figure will be depressing for most of 2010. I don't see this rate dipping below 10% too much. If it does its all governmental manipulation. At best the rate goes towards 9.5% Employers are more worried about the state of the economy today then they were 6 months ago. This tempered enthusiasm will have employers on their heels. I don't see the employment rate sky rocketing as work still needs to be down. This is still America. But wages like they have been for the last 30 years will be pressured and hours worked will increase as employers will suck the blood out of scared workers. More and more people will be transferred to temp status as the cost of keeping a full time worker rises. By the end of the year we will have a better idea about the state of employment. But only after we get clarity on the housing picture.

Housing

Let me see.
Disaster.
Blood Bath.
Sink Hole.

This is the one single entity that is holding back the economy. Yes, Its housing! Not jobs. You heard it from me. Millions of jobs have been lost. They are not coming back. We all have to move on. But housing which is heavily leveraged up the wazoo is a serious problem that government and the financial sector keep pretending is getting better. The banks have totally forgotten about the trillions of bad mortgage debt on their books as well as off their books. They are having too much fun borrowing from the Fed and lending to Treasury. But guess what? Just because u don't pay the bill this month, doesn't mean the bills stop coming. There are hundreds of billions (Maybe Trillions?) of horrid ARM/CDO/ALT-A mortgage paper that is still floating around in banking circles. Maybe that is what trillions in Excess Reserves are for? As a cushion for those losses. Funny. Did anyone tell Bernanke and the Fed That? Is the Fed really wasting their time with reverse repo's?

The coming wave of ARM and Option ARM resets will be brutal. These homeowners can't pay the ARM side of their mortgages, what makes you so sure they can pay the fixed? The foreclosure abatement was only temporary. The banks found out they can slow the foreclosure process by completing fake loan modifications and reap huge fees from the tax payer in the process. In this case, they modify mortgages with original principle, add more debt to the back of the mortgage, bill the tax payer for the privilege, and get to keep home foreclosures off their books for the year. This allows the National Association Of Realtors and Case/Shiller to say that housing has stabilized. Of course stock index futures rise 10 points on this alone, allowing banks to do fraudulent secondary stock offerings to dilute current shareholders. They only do this to pay back TARP, so they can go back to paying ludicrous bonus money to the same people who made the reckless bets that murdered us in the first place.

Net.Net...Foreclosures ramp up pretty aggressively throughout the year. The banks cant handle the foreclosure activity so they sell the underlying notes/deeds to FANNIE/FREDDIE/GNMA which really is the government. Need I say the government bends over backwards in buying these loans from the banks? Immediately the government starts to cut down mortgage debt(Cramdown), because that was the original problem that was swept under the rug. Obama will scream to the heavens its not a 100% takeover or nationalization of the housing market, but that's what it is. Housing takes a 30% cut right then and there. This is the reason the caps were taken off of the GSE's. Pure and Simple. I just cant say anything positive about housing with these type of headwinds and the gross incompetence that has been exhibited by our elected officials. Every step of the way its been lets avoid the unpleasant. Lets avoid upsetting the banks. Lets play hard ball with homeowners. This is the year that turns around. The mortgage market subsequently takes a hammering as the securitization market collapses. Credit default swaps written on garbage CDO's will also explode destroying the synthetic CDO market. But homeowners get a reprieve, they get to stay in their homes. The jobs picture slowly gets better going into 2011. The main reason being is that although the government is running on fumes, the banking sector should be OK as the banks are generally on the sell side of the synthetic CDO market, that falls apart, they make money. This coupled with the government paying close to par for toxic mortgage paper will again liquefy the banking sector. Its the long side (Pension Funds/Institutions) that will be looking for a bailout this time around not the banks or Wall Street. I am not stating that the banks are buys. Far from it. They will correct some 50% from here, but will recover their losses as the year draws down. From this event the banks will be a lot better off going into 2011 and beyond. Its government we have to worry about.

GOVERNMENT

Tim Geithner will be fired and Bruce Bartlett takes over for him.
Ben Bernanke will be confirmed.
Lawrence Summers gets marginalized.
Paul Volcker and Shiela Bair get more props from Obama and move into his inner circle.
Obama approval rating will stabilize around 40% and move back to 50% by year end as another crisis has been averted.
The GOP make head ways in the mid term elections, but not enough to take over Congress.
The Treasury works overtime to again sell treasury paper. Flooding and extending the duration of long term paper will be the biggest test for Treasury.
The Federal Reserve will continue with QE 2.

There you have it. I think?

Bank Pay Back TARP? - Who Cares!

Now that Wells Fargo and Citigroup have paid back TARP so they can pass out bonus candy unabated, does that mean that they are 100% free of Tax Payer generousity?

Not quite.

I have spoken before that TARP was a joke. We all know this. But whats a bigger gag on the tax payer is the TLGP - Treasury Loan Guarantee Program.

http://tradersutra.blogspot.com/2009/06/real-tarp-story.html

http://tradersutra.blogspot.com/2009/04/benedict-geithner-speaks.html

Even though big banks and non bank financial have paid back TARP, they still over $300 Billion in TLGP debt backed by the FDIC outstanding. When will this be paid back? Why are these outfits allowed to pay out bonus money when these huge obligation is weighing in on the FDIC?



What is surprising to me is that General Electric has some $88B in TLGP debt outstanding. This is just simply unacceptable coming from the light bulb. You telling me that the bluest of the bluest chips can only raise debt when its backed by the FDIC? Not only that these companies all raised money through this window because it was cheaper for them to do so. They gain the interest rate spread while they are able to refinance their trading books. All at the expense of Joe Tax Payer.

Reason For Divergence

As foreclosures have momentarily slowed because of HAMP and other absurd government programs, we see delinquencies rise to new highs. This is the serious divergence of the impending shadow inventory problem.

Chart courtesy of OC Register



HAMP so far has only converted 4% of trial modifications to permanent status. As well as Option ARM and Alt-A toxic loans are ineligible under HAMP. So its all useless in the end for housing markets in California, Nevada, Arizona, and Florida. The banks are making money on all of the fees from HAMP and not doing a damn thing in the end. This at the end of the day is the game they are playing with the tax payer. Since the start of the recession we have seen trillions poured into housing via the tax payer through the banks and we have delinquencies and foreclosures at record peak highs. BTW....the economy still stinks. The banks have stopped foreclosing because they don't want the extra inventory on their books. They are only modifying mortgages because they get the tax payer to foot the bill via FHA. All in all taking money from the Fed at zero percent and lending it to the Treasury for 4 percent. This is how the banks are operating today. There is zero real lending going on because guess what? There is no end user aggregate loan demand. Housing via Case/Shiller gets better only because foreclosure activity has slowed, tax credits (Presto) subsidized by the morons who are the tax base, and impending shadow inventory is purposefully being left off of bank balance sheets. Both Fannie/Freddie are a disgrace and the FHA is re liquefying old bubbles.

This is currently the grand scheme by our elected officials to get us out of this housing mess. Let the banks figure out a way to rip off the tax payer and pay billions in bonus money. Its the height of stupidity to let the banks have the authority to resolve a mess that they were the culprits in creating. With the untold trillions banks have received we could have paid off every single mortgage in the country. But alas as we have all have figured out by now the bailouts were never about helping the public, rather to protect crony capitalism/kleptocracy on Wall Street.

The only reason any homes are moving in this market is because of the inherent government guarantee that is tied to it. If the banks had zero guarantee from Uncle Sam, you can assume that rates will be between 10% and 12% easy. But because the only morons who are buying mortgage paper is the government, we see rates at or near 5%.

Then we have Bernanke yesterday telling us that low rates had nothing to do with housing keeling over. Its beyond belief. Alan Greenspan dropping rates to 1% juiced and greased the housing market completely. Would people be buying homes if mortgages were 10% Ask yourself this one simple question!

As I noted before in my earlier post about Fannie/Freddie. We are at the point that the government is figuring out that they are the suckers at the poker table. This is why the caps have been lifted for the GSE's. This is why I believe that DC and Wall Street are one and the same. That DC is just a paid subsidiary of the Banking Sector. Its such a sham that its beyond defensible. The banks are telling everyone that the reason modifications are off to a slow start is because the paperwork is long and laborious. REALLY! Are these the same banks that pushed paperwork through the underwriting process for $700k Condo's for people making $50K? The same banks where dead people were used as co-signers? The banks are lagging and dragging their feet because they already have tax payer money in their pockets. Why should they try to help the masses when they can borrow from the FED at zero percent and lend to the Treasury at 4 percent? Obama is so superficial when he talks about "Fat Cat Bankers.

The Bankers can go back to gambling with tax payer money while Rome burns.

Volcker In BusinessWeek

One quote says it all:

"I wasn’t persuasive enough."

http://www.businessweek.com/magazine/content/10_02/b4162011026995.htm?chan=magazine+channel_the+week+in+business

This is not the first time that Volcker has stated the obvious.



In this interview with BW, he seems to be resigned to the fact that another crisis is soon around the corner because Obama hasn't done enough to cut down on Wall Street excess.

I have written in the past that Obama has marginalized Volcker in favor of Pro Wall Street hucksters like Summers and Geithner.

http://tradersutra.blogspot.com/2009/11/obama-is-more-bush-then-bush.html

Words For 2010?

Morgan Stanley's chief European strategist believes the biggest theme for 2010 is how the Fed unwinds excess reserves from the system.

We call this reverse repo's.

http://ftalphaville.ft.com/blog/2010/01/04/119236/the-defining-feature-of-2010-will-be/

How the Fed is going to do this is entirely different.

http://www.ft.com/cms/s/0/bdcc9a80-f3e0-11de-ac55-00144feab49a.html

WRONG.

Let me tell you this. The biggest theme of 2010 is going to be:

HOUSING

Forget about jobs for the time being. We all know that employment is not coming back until 2011 at the earliest. We need to look at the trillions that have been needlessly wasted on propping up the housing market.

The biggest words from this theme is quite depressingly simply:

OPTION ARM and SHADOW INVENTORY

http://voiceofsandiego.org/toscano/article_0e2765d8-f7eb-11de-9cb4-001cc4c002e0.html

With the Obama Administration taking the Caps off of Fannie/Freddie, they have got to know that shadow inventory and the coming new wave of foreclosures stemming from ARM Resets are going to be devastating. This one piece of news coming out of Fannie/Freddie last week only tells me that 2010 is the year of 100% complete nationalization of the U.S. Housing Market/Homeowner.

Man Of The Year Speaks.......

Is this a "Tell" from Uncle Ben on where rates are going?

http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm

Bernanke is defending Fed monetary policy during the housing bubble while blaming the lack of regulatory oversight for the economic crisis. Its just in time monetary policy at its finest.

Its a classic defense of the "Irrational Exuberance" speech that Greenspan made in the mid 90's, that monetary policy is not the right tool to fight asset bubbles. Its kind of strange that Bernanke is now stating that the lack of regulation caused the housing bubble. Really? That is funny coming from a guy who didn't think housing was a bubble in the first place.

When will this guy realize that when rates are so low, money gravitates to higher yielding investments? Investors borrow short then lend long. This leads fund managers to rotate to higher current yield. Form this sub prime grew. Form this lending standards fell apart. From this the ratings agencies forgot how to do their jobs. From this Wall Street needed to securitize garbage with lip stick on it. From this the leverage grew exponentially. From this they grew into the off balance sheet vehicles that Wall Street then created to put these pigs. Put it all together and what do you get?

Failure to regulate was a problem. But that problem came after the Fed kept rates so low. The Fed is in the cross hairs and they just don't want to take any responsibility towards what happened.

I see a much bigger problem when it comes to the legacy of Bernanke/Greenspan. The Fed is also the chief regulator of the financial system and they have the primary responsibility in protecting consumers. So why was Bernanke specifically lobbying against the Consumer Financial Protection Agency? His claims that a lack of regulation was the root cause of the crisis is superficial and disingenuous.

But what is extremely dangerous and downright scary are these thoughts form Time Magazines "Man Of The Year."

"If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks proceeding cautiously and always keeping in mind the inherent difficulties of that approach."

Basically if we don't get financial reforms or a road map for reforms then rates are going higher. He is making the point that bubbles are not caused by monetary policy. Goodness! This guy has learned nothing! He is thoroughly convinced of this and will only use this as a weapon if in the case that proper reforms are not made. Everyone knows that there is no real reform and that getting anything done in 2010 is fruitless. What we have is gridlock and money printing.

Bernanke should not be confirmed.
But then again what we have seen from Obama so far is the next guy will probably be as worse.

No wonder the markets are flying this morning.

If Morgan Stanley Can Walk Away....

....Then there goes the moral argument against home owners doing the same.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLYZhnfoXOSk&pos=5

This is a fascinating and poetic twist on the underwater homeowner walking away from their bad home purchases.

This really is not a default or foreclosure. Morgan Stanley is just handing over the keys to the banks.

Merry Christman Barack Obama

The Bureau Of Labor Statistics just wished The Obama Administration an early Merry Christmas. What a gift for Barack's Boys.

There is nothing much that can be faulted in the report that came out this morning.

Payrolls only shed 11K jobs this month. The unemployment rate nudged to an even 10%. The broader household survey came in at 227,000.

Hourly earnings rose only 0.1. So wage growth still remains weak suggesting that unit labor costs are not inflationary. When you combine the weak hourly earnings and the bigger jump in hours worked, you get an increase in average weekly earnings. Which is always good just in time for the holidays.

I had a strange feeling that farm payrolls were going to be a lot better then expectations. Non farm payrolls are a lagging indicator while weekly initial claims are a leading indicator. The weekly claims data had been getting a lot better after peaking in the high 600,000's. That figure is in the mid 400,000's at the moment. It was just a matter of time before non farm payrolls started acting better.

But what does this mean for the markets? By looking at the pre-market reaction to stock index futures which have gaped up some 17-18 points, it took the market by surprise. I certainly think that many people were getting short ahead of this report. Many have scrambled to cover those bets. Money is coming out of treasuries, but the dollar is exceptionally strong. Federal Fund Futures have dropped, signalling a possible rate rise (unlikely) as early as June 2010.

But what makes me suspicious of any further rallies in this market is this. So far we have seem the market rally each and every time after a poor payroll report. Now we see a great payroll report, even though the market is rallying some 130 points higher, I see big gains in the dollar. This is not good good for equities. If people are buying back dollars, that is a move toward safety. I understand treasuries are also weak today, but the single biggest reason why equities have rallied is because of the USD carry trade. If the USD rallies further from here, there is going to pressure on risk assets across the board. So far Gold is getting hit hard, dropping below 1200 to 1180 currently. Gold has been the biggest momo trade so far. If they can somehow find a way to break Crude as well, we have a problem in the risk trade.

We may have seen the highs for the year and for the foreseeable future.