Fin/Inv

Spreads were broadly wider in the US as all the indices deteriorated (once again underperforming a relentless equity market). For the first day this year, IG4-13 all had upward sloping curves in 3s5s7s10s (notably IG8-11) as HY underperformed IG and rolls decompressed modestly. IG trades 4.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.7s.d.. At 97.5bps, IG (adjusted) has closed tighter on only 13 days so far this year (206 trading days). The last five days have seen IG diverging from its 50d moving average.

The equity-credit divergence remains with credit underperforming an exuberant equity market and with even HY losing some ground today, there is clearly some cognitive dissonance (one of our favorite phrases from earlier in the year) currently. Financials underperformed as FICC performance anxiety in the future coupled with worries over consumer credit from Citi saw most of the majors underperforming along with monolines and insurers (our perspective on the FICC strength is that it has been driven by Q1 AIG handouts, Q2 basis compression, and Q3 spread compression - all helping the opaque valuations of the massive inventories held on the bank books). With basis in IG narrow, HY relatively tight, and IG valuations not far off a V-shaped recovery, the easy money for banks with lack of transparency and balance sheets full of bonds and CDS has been made. The lower volumes and bid-offers that remain similar and perhaps a little lower are not enough to explain this performance even with easier competition (unless GS traders are the WDGann's of the 21st century and paid up for their crystal balls).

Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, HY's skew widened as it underperformed. 19.2% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 2.89% to 2.03%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.

The names having the largest impact on IG are International Paper Co. (-15.25bps) pushing IG 0.12bps tighter, and International Lease Finance Corp. (+84.5bps) adding 0.53bps to IG. HVOL is more sensitive with International Paper Co. pushing it 0.51bps tighter, and International Lease Finance Corp. contributing 2.25bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Transocean Ltd. (-3bps) pushing the index 0.03bps tighter, and UnitedHealth Group Inc (+12.38bps) adding 0.12bps to ExHVOL.

The price of investment grade credit rose 0.39% to around 100.16% of par, while the price of high yield credits fell 0.32% to around 94.31% of par. ABX market prices are higher (improving) by 0.01% of par or in absolute terms, 0.46%. Broadly speaking, CMBX market prices are unch today. Volatility (VIX) is down -1.14pts to 21.72%, with 10Y TSY selling off (yield rising) 4.3bps to 3.46% and the 2s10s curve steepened by 1.1bps, as the cost of protection on US Treasuries fell 0.34bps to 21.5bps. 2Y swap spreads widened 1.6bps to 38.13bps, as the TED Spread widened by 1.3bps to 0.23% and Libor-OIS improved 0bps to 12.8bps.

The Dollar weakened with DXY falling 0.15% to 75.44, Oil rising $2.42 to $77.6 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 4.42% today (a 3.07% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $12.2 to $1050.2 as the S&P rallies (1091.6 0.36%) outperforming IG credits (96bps 0.39%) while IG, which opened tighter at 95bps, outperforms HY credits. IG11 and XOver11 are -0.25bps and +2.5bps respectively while ITRX11 is +1.5bps to 83.25bps.

The majority of credit curves steepened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.

Dispersion rose +6.5bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

30% of IG credits are shifting by more than 3bps and 45% of the CDX universe are also shifting significantly (more than the 5 day average of 43%). The number of names wider than the index increased by 2 to 47 as the day's range rose to 4.5bps (one-week average 4.2bps), between low bid at 94 and high offer at 98.5 and higher beta credits (1.76%) outperformed lower beta credits (3.27%).

In IG, wideners outpaced tighteners by around 6-to-1, with 99 credits wider. By sector, CONS saw 84% names wider, ENRGs 56% names wider, FINLs 81% names wider, INDUs 74% names wider, and TMTs 92% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 85.31bps and the latter at 82.08bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 142.88bps from 136.42bps, but remains above the short-term average of 129bps, with the HY/XOver ratio rising to 1.28x, above its 5-day mean of 1.24x. The IG-Main spread compressed to 12.75bps from 13.75bps, but remains above the short-term average of 11.67bps, with the IG/Main ratio falling to 1.15x, above its 5-day mean of 1.13x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 2bps to 82.1bps, with 14 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.94bps to 98.4bps, with Brokers (worst) wider by 4.83bps to 133bps, Banks (best) wider by 1bps to 136.33bps, and Finance names wider by 31.01bps to 716.71bps. Monolines are trading wider on average by 610.45bps (4.94%) to 5930.91bps.

In IG, FINLs underperformed non-FINLs (3.31% wider to 2.47% wider respectively), with the former (IG FINLs) wider by 6.3bps to 195.5bps, with 2 of the 21 names tighter. The IG CDS market (as per CDX) is 4.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (91.4bps), with the bond ETFs outperforming the IG CDS market by around 3.49bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 1.75bps to 85.31bps (with ITRX FINLs -trending tighter- weaker by 0.5 to 75bps) and is currently trading tight to its week's range at 13.46%, between 96.56 to 83.56bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 11.09%, between 73.96 to 65.14bps. ExHVOL outperformed LoVOL as the differential compressed to 3.36bps from 3.67bps, but remains above the short-term average of 1.29bps. The Main exFINLS to IG ExHVOL differential decompressed to 15.84bps from 14.74bps, but remains below the short-term average of 19.47bps.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes
CDR LQD 50 NAIG +2.13bps to 85.16 (43 wider - 4 tighter <> 28 steeper - 22 flatter).
CDX13 IG +0.5bps to 96 ($0.39 to $100.16) (FV +2.68bps to 100.71) (99 wider - 16 tighter <> 78 steeper - 47 flatter) - Trend Tighter.
CDX13 HVOL 0bps to 180 (FV +4.59bps to 190.23) (22 wider - 4 tighter <> 18 steeper - 12 flatter) - Trend Tighter.
CDX13 ExHVOL +0.66bps to 69.47 (FV +2.11bps to 73.41) (77 wider - 18 tighter <> 35 steeper - 60 flatter).
CDX13 HY (30% recovery) Px $-0.32 to $94.31 / +9bps to 651.9 (FV +3.49bps to 606.11) (66 wider - 29 tighter <> 43 steeper - 54 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.23 to $99.5 / -7.25bps to 549.75 - Trend Tighter.
MCDX12 -1.2bps to 87.8bps. - No Trend.
CD Counterparty Risk Index rose 1.94bps (2.01%) to 98.4bps (12 wider - 2 tighter).
CDR Government Risk Index fell 0.93bps (-2.2%) to 41.33bps..
DXY weakened 0.15% to 75.44.
Oil rose $2.42 to $77.6.
Gold fell $12.2 to $1050.2.
VIX fell 1.14pts to 21.72%.
10Y US Treasury yields rose 4.3bps to 3.46%.
S&P500 Futures gained 0.36% to 1091.6.

The chart below is from page two of our Morning Lineup which is available to subscribers of our Bespoke Premium service. In it we summarize the current levels of the S&P 500 and its ten sectors compared to their normal trading ranges. The circles represent where the sectors and index currently stand, while the end of the tail represents where...

Ken Lewis' problems continue. The WSJ reports that the outgoing BofA/ML CEO was just docked his entire 2009 pay and then some:

Kenneth Lewis, outgoing chief executive of Bank of America Corp., will get no salary or bonus for 2009, according to people familiar with the matter, the biggest Wall Street name thus far to come under the thumb of the government's pay czar.

In fact, Mr. Lewis will have to repay the North Carolina-based bank more than $1 million in salary he has already earned.

The move was demanded by Kenneth Feinberg, the U.S. Treasury Department's special master for compensation, and was agreed to by Mr. Lewis and the bank. Mr. Feinberg's rationale is based largely on the fact that Mr. Lewis will leave the firm with a package of retirement benefits and other stock awards worth between $69.3 million and $120 million, these people said.

Look for every bank still on the taxpayer dime to look to repay TARP tomorrow.

The move will stun Wall Street, which has been anxiously awaiting Mr. Feinberg's rulings on compensation at seven firms receiving large sums of government aid, including also Citigroup Inc. and General Motors. Mr. Feinberg had been expected to clamp down on compensation by cutting salaries for the most highly-paid employees at these firms. But until now there's been little indication he would take away an employee's entire pay.

For Mr. Lewis, the move bookends the rapid fall of an executive once heralded as one of America's top bankers. Less than a year ago, he was hailed for helping avert financial disaster by snapping up teetering mortgage giant Countrywide and rescuing investment bank Merrill Lynch. Mr. Lewis's fortunes soon turned as he was forced into the government's arms to help his bank digest Merrill Lynch and eventually stripped of his chairman title by angry bank shareholders.

While you may think Lewis' the retirement benefit package may be enough to last him until his quiet end somewhere far from the company he nearly destroyed in his over-zealousness to acquire Merrill, and remembered as one of Wall Street's worst CEO's, don't forget - he still has a very rough civil (and potentially criminal) trial coming up. Those can be quite costly, and also, in jail you can only smuggle so much cash (in your various bodily orifices).

Hot on the heels of realizing that the money you have now is getting close to worthless in order to bail out the Wall Street oligarchy, courtesy of the Chairman, Alan Grayson is taking his initiative to delay Bernanke's nomination direct to the people, and here is your chance to be heard. A new website Unmask the Fed is soliciting Americans' endorsement in getting to the bottom of the following question:

Chairman of the Federal Reserve, Ben Bernanke, is up for confirmation to his second term, but he has still refused to disclose where he sent $2 trillion in taxpayers' money. Send a message to your Senators and ask them to make Bernanke come clean before his confirmation moves forward!

Specifically, the answers sought by Messrs. Grayson and Paul are the following (as have been previously disclosed on Zero Hedge):

Last week, Congressmen Ron Paul and Alan Grayson sent an open letter to the Senate Banking Committee about the Chairman of the Federal Reserve, Ben Bernanke. I agree with their sentiments that, before he is reconfirmed for a second term, the Senate should know who got the $2 trillion the Federal Reserve has lent out over the last two years.  Only then will the Senate be able to judge whether he should keep his job.  Specifically, the Fed must disclose:

(1)    Information that Bloomberg reporter Mark Pittman has requested via a Freedom of Information Act Request on the Bear Stearns rescue and that the Federal Reserve is contesting in the courts.

(2)    Information I requested in February on which institutions received the additional $1.2 trillion, how much each institution received, and what was promised in return.

(3)    All Federal Reserve documents that went to Attorney General Andrew Cuomo’s office relating to the Bank of America/Merrill Lynch merger in which potentially illegal and coercive activity might have occurred, as well as all Federal Reserve documents relating to the lawsuit pursued by Merrill Lynch shareholders in the US District court for the Southern District of New York.

(4)    Transcripts of all Open Market Meeting Minutes up to and including that of September, 2009.

(5)    Full disclosure of all terms and conditions of all off-balance sheet Fed transactions in the past three years.

Please vote NO on Ben Bernanke's confirmation until the Federal Reserve comes clean on what it has done with OUR money and answers these inquiries.

You can endorse Grayson's initiative here.

Checks Cashed T shirt from Headline:

"I have various views on Korea, but do not invest there since Korea makes it extremely complicated for foreigners to invest there. I know Korea says loudly and widely that it welcomes foreign investors but Korea's actions tell a different story. They have driven me away and presumably others as well."

In The Korea Herald

Submitted by Jeff Clark of Casey's Gold and Resource Report

 

Attachment	Size
The Dollar in Your Wallet Is Only Worth 18c.pdf	133.23 KB

Chinas Währungsreserven stiegen nach Angaben der People's Bank of China (PBOC) Ende September 2009 auf ein neues Rekordhoch auf unglaubliche 2,2736 Billionen Dollar. Dies ist ein Anstieg von +61,77 Mrd. Dollar zum Vormonat und von +366,6 Mrd. Dollar zum Vorjahresmonat. Im 3. Quartal 2009 stiegen die Währungsreserven um +141 Mrd. Dollar, nach +178 Mrd. Dollar im 2. Quartal 2009.

> Die rasante Entwicklung der chinesischen Währungsreserven seit Januar 2000. <

Die Ungleichgewichte im internationalen Handel sind auch weiterhin ungelöst, einen Hinweis hierfür liefern die immens steigenden chinesischen Währungsreserven, im Chart mehr als deutlich sichtbar! Die Währungsreserven sind die von einer Noten- bzw. Zentralbank auf der Aktivseite in ausländischer Währung, Edelmetallen, Sonderziehungsrechten und als Reservepositionen im Internationalen Währungsfonds gehaltenen Mittel.

Durch das immense Handelsbilanzdefizit (mehr Importe als Exporte) der USA, spielt der US-Dollar nicht nur bei den chinesischen Währungsreserven die zentrale Rolle. Im Handel mit China erzielt die USA gigantische Defizite:

> Von Januar-August 2009, trotz Krise, kumulieren sich für die USA noch -143,699 Mrd. Dollar an Defizit im Handel mit China, nach -268,039 Mrd. Dollar in 2008. Seit 1985 erreicht das Defizit im Handel mit China insgesamt -2,0159 Billionen Dollar. Ein unhaltbares Ungleichgewicht! Quelle Daten: Census.gov <

Das US-Handelsbilanzdefizit aus dem gesamten Welthandel:

> Das US-Handelsbilanzdefizit seit 1976 im Chart. Seit 1976 wird unterbrochen ein Defizit im internationalen Handel erzielt. Das gesamte Defizit aus dem Handel mit Waren, Güter und Dienstleistungen kumuliert sich von 1976 bis August 2009 auf -7,3769 Billionen US-Dollar, noch unfassbarer wird es wenn man die Dienstleistungen herausnimmt, der Handel mit Waren und Güter kumuliert sich auf ein Defizit von -9,0078 Billionen Dollar. <

Im Negativhoch generierte die USA im Jahr 2006 ein Defizit von -760,359 Mrd. Dollar, ohne Dienstleistungen von -847,26 Mrd. Dollar. 2009 sieht die Lage zwar besser aus, aber angesichts der Wirtschaftkrise kann von einem nachhaltigen Abbau des Handelsbilanzdefizits keinerlei Rede sein. Von Januar bis August 2009 kumulierte sich ein Defizit von -237,974 Mrd. Dollar, ohne die Dienstleistungen -324,19 Mrd. Dollar! Da man der Welt kein Äquivalent an Waren und Gütern liefern kann, werden seit Jahrzehnten die Waren der Welt auf Kredit konsumiert, als Gegenleistung gibt es unerfüllbare Schuldversprechen!

China hat sich durch die Globalisierung zur Werkbank der Welt entwickelt und gleichzeitig ist China auch der größte Kreditgeber der USA. Einen großen Teil der Erlöse aus dem Export, die bei der chinesischen Staatsbank als Währungsreserven auflaufen, hat China bisher de facto den USA wieder als Kredit gewährt und damit seinen eigenen Export mitfinanziert.

> Die größten US-Staatsanleihenhalter! Im Juli 2009 hielt China 800,5 Milliarden Dollar in US-Staatsanleihen, ein Anstieg von +45% zum Vorjahresmonat! <

Zusätzlich zu den US-Staatsanleihen hält China, nach den zuletzt verfügbaren Daten, gewaltige 527 Milliarden Dollar in Anleihen (Agency Bonds-Hypothekenmüll) u.a. der beiden halbstaatlichen US-Hypothekenbanken Freddie Mac und Fannie Mae. Angesichts der immer noch vakanten US-Immobilienkrise ein äußerst riskantes Investment.

Die Grundlage des Booms bei den chinesischen Währungsreserven bildet der Exportboom und die staatliche Devisenkontrollen. Die chinesische Unternehmen müssen ihre Devisenerlöse aus den Exporten bei der Zentralbank in die Landeswährung umtauschen. Nur auf Grund der schieren Größe der Währungsreserven fällt es sicher schwer die US-Staatsanleihen komplett zu umschiffen, außerdem will der Kunde der Exportwaren ja auch weiter finanziert werden. Die chinesische Staatsbank hat aber zum Zwecke der Diversifikation der Währungsreserven den Staatsfond China Investment Corporation (CIC) installiert. Damit möchte man nicht nur höhere Renditen als mit US-Staatsanleihen erzielen, sondern auch die heimische Liquidität abschöpfen und binden, indem CIC verzinsliche Anleihen in der heimischen Währung heraus gibt. Mit dem Geld aus den Anleihen in der heimischen Währung geht der Staatsfond zur Zentralbank und kauft dieser zum entsprechenden Wechselkurs die Dollar ab. Nun hat die CIC als Aktiva Dollar und kann auf dem Weltmarkt auf Einkaufstour gehen.

Weltweit betrugen die Währungsreserven zuletzt in Q2 2009 6,8011 Billionen Dollar. Der US-Dollar als noch Weltleitwährung hat einen Anteil an den Weltwährungsreserven von 39,4%, der Euro hält einen Anteil von nur 17,2%!

China hält aktuell ca. 30% der weltweiten Währungsreserven, die genaue Zusammensetzung der Reserven veröffentlicht die chinesische Staatsbank nicht.

Vor allem für China gilt, je höher die Währungsreserven in US-Dollar anwachsen, umso deutlicher wird, dass sie nicht mit realen Werten zu decken sind. Deshalb wurde und wird in Scheinwerte wie Finanzinnovationen und US-Staatsanleihen investiert, dies alles um den Kapitalzufluss in die USA zu sichern. Mit den Investitionen in fiktive US-Werte (uneinbringbare US-Schulden jeglicher Art) finanzieren die Chinesen den nackten US-Kaiser und aber auch ihre eigenen Exporte. Die realwirtschaftliche Mutter aller Ungleichgewichte - harrt weiterhin einer kräftigen Bereinigung!

Querschuesse-Forum

Kontakt: info.querschuss@yahoo.de >

Fun with balance of payments accounting.

The housing outlook has probably never been more uncertain ... and the details are masked by many distortions.

"[T]he HAMP program right now ... really makes it difficult for anyone from the outside [of Citi] to actually have a good view as to the inherent credit profile in our [mortgage] delinquency buckets."
Citi CFO John Gerspach, Oct 15, 2009

So, as confusing as it is, here is a rough overview ...

Supply: the supply of distressed homes has been severely restricted by a combination of foreclosure delays and trial modifications.

Demand: demand has been distorted by the first-time homebuyer tax credit, by extraordinary levels of lending using government-insured FHA loans, and the Fed buying GSE MBS pushing down mortgage rates.

This has led to a buying frenzy in many low end areas, and has pushed up prices.

Look at the California Bay Area report today from DataQuick:

Home sales in the Bay Area edged up in September as buyers scrambled to take advantage of low mortgage interest rates as well as a tax credit due to expire at the end of November. ... The month-to-month gain was atypical: sales normally decline around 11 percent from August to September. ... The use of government-insured FHA loans – a common choice among first- time buyers – represented 29.3 percent of all Bay Area purchase loans in September.

This is a very large percentage of government-insured FHA loans - and many of these buyers are probably using the tax-credit as their downpayment (which will probably lead to higher defaults).

“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
Barney Frank, chairman of the House Financial Services Committee on recent FHA lending.

So what does this mean for the housing market? In the short term:

Existing home sales will probably be strong in September based on regional reports.

With restricted supply and increased demand, prices (Case-Shiller) will probably be strong through at least September (reported with a delay).

Reported inventories will move lower.

But the longer term (2010 or maybe later) will really depend on the success of the modification programs. And according to Citi today, we won't have a feel for the success rate of HAMP until probably Q1.

Amherst Securities isn't optimistic: Timing is Everything, Oct 14, 2009 (no link)

Implementation of the HAMP modification plan is making it even more difficult to predict cash flows. The trial modification period essentially holds the loan in a suspended state ... making it difficult to assess what is happening with modifications. In the end, we expect relatively few of these modifications to be successful.

I also expect most HAMP modifications to fail, although many borrowers might make their payments for a few years, and then finally default.

Even excluding the HAMP, because of slowdowns in the foreclosure process, the lenders are sitting on a backlog of foreclosures in the pipeline (not REOs, but properties in the process). So there should be an increase in foreclosures soon - how soon, and how many, is a guess.

And on the demand side, the Fed's purchases of GSE MBS will end in Q1, the interest in the first-time homebuyer tax credit will wane just like the cash-for-clunkers program (even if it is extended), and the FHA will probably be forced to tighten standards (or at least cut loose poor performing lenders).

So my guess is another down turn in the housing market in 2010 (existing home sales and prices), although prices have probably already bottomed in many low end areas.

But the outlook is very uncertain.

From Marshall Auerback, a fund manager and investment analyst who writes for New Deal 2.0:

As reported by Bloomberg:

Goldman Sachs Group Inc., one of the first banks to receive cash injections from the U.S. Treasury during last year’s crisis, doesn’t have an implicit guarantee from the government, Chief Financial Officer David Viniar said today.

“We operate as an independent financial institution that stands on our own two feet,” Viniar, 54, said in a conference call with reporters today after the New York-based firm posted higher third-quarter profit. “We don’t think we have a guarantee.”

That’s the quote from today.

Then see an excerpt from their last 10Q issued less than three months ago.

Note the footnote (3) that $20 billion was guaranteed via the FDIC (click to view full image).

Now tell me something, what if you have received FDIC guarantees in the middle of the crisis and had been able to borrow three year money at 100bp over 3 year notes or a whopping 1.5% interest cost.

Might you have taken up the opportunity?

Would that be an implicit guarantee or perhaps more than just implicit?

It is an outright lie to say that they “operate as an independent financial…..”

They should be held accountable for lying to their shareholders.

Where is the outrage in Congress and in the Obama administration?

FDR and Jesse Jones never ever would have tolerated this behavior just 8 months after the bank closings.

You need to look beyond the forest of debits and credits.

This goes to the very heart and soul of the democracy and what we have written about the corruption in the American polity.

Yves here. Ahem, and how pray tell does Goldman rationalize that it was allowed to become a bank in the crisis, which gives it direct access to the Fed? And the government has a clear “no more Lehmans” policy, with Goldman as a larger and therefore treated as an even more important to preserve player.

Another doozy from the conference call was that Goldman CFO David Viniar justified Goldman’s high profits by claiming it was justified by the valuable social role the firm was performing.

Organizations that perform valuable social functions are generally controlled by the state (police) or utilities and subject to heavy government oversight to keep them from abusing their crucial role. But Goldman, along with the rest of the financial services industry, has managed to get itself in the “heads I win, tails you lose” position of privatized gains and socialized losses. And then they have the temerity to act as if we don’t see the result, which is looting.

I think I'm done blogging for today. Years ago, I'd do one post in the afternoon. Now I usually bang out ten posts between 6 a.m. and 1:30 p.m. It seems to be a new routine of mine.

I'm sort of hopped up on Beatles right now, so you might as well enjoy this...........

We're excited to announce that tomorrow we will be participating in a live chat with the esteemed Charles Kirk over at The Kirk Report. Charles has been nice enough to ask us to participate in the chat, and we'll be discussing anything and everything about the current state of the market. The live chat will start at 11 AM ET...

An oldie but goodie.

Below we have updated our table of historical S&P 500 bull markets (at least a 20% gain that was preceded by at least a 20% decline) since index data begins in 1927. The table is sorted by bull market length. The current bull market that started on March 9th is now 219 calendar days with a gain of 61.41%. As...

The simply idiotic lawsuit recently commenced by Hertz against Audit Integrity for daring to put the company which was on the verge of bankruptcy numerous times over the past year on its list of top bankruptcy candidates, has been the butt of all jokes within the analyst community. The kind of unwarranted retaliation by a firm against someone who dares to point out its flaws is not only comic, but a practical infringement of the First Amendment, especially if substantiated qualitatively. And for substantiation, maybe Hertz' legal counsel can also go after all those sell side and 3rd party analysts who over the past year have claimed the firm will likely not survive more than 12 months (hint: there are many of those around).

Today, James Kaplan, Chairman and CEO of Audit Integrity has provided his must read response, which one hopes should put to rest Hertz' simply sad and silly attempt to prove its "viability" by going after its critics.

The response is a delightfully sarcastic must read (highlights ours), and needs no additional commentary.

---

“Bankruptcy?” Ouch!!! We Touched a Sore Spot

James A. Kaplan, Chairman and CEO, Audit Integrity

Audit Integrity recently released a new Bankruptcy Risk model.  The model was developed at the request of our clients, which include D&O insurance companies, institutional investors, and other interested stakeholders.

At Audit Integrity, we deal with some unpleasant truths. Some companies go bankrupt. Some corporate managers commit fraud. So it has been, so it will continue. What is equally true is that traditional, accepted measures of fraud and bankruptcy risk have failed time and again to identify companies at risk. Audit Integrity ratings and rankings are based on documented instances of bankruptcies and fraud (SEC Accounting and Auditing Enforcement Releases.) Our intent is to provide a valuable indicator of critical corporate risks.

The purpose of the Bankruptcy Risk Model is to predict the likelihood of bankruptcy among publicly-held companies over a rolling 12-month period.  The model combines traditional quantitative inputs, including financial solvency measures and market valuation (option) models, with our own proprietary AGR®, which quantifies accounting transparency – in other words, whether the company’s published numbers can be trusted.

Each of these components uses historical data and tests that include in- and out-of-sample accuracy measures.  Our statistical approach produces some very positive results, as noted in the White Paper available for review at http://www.auditintegrity.com/.

From my personal perspective, I was surprised to note that the impact of the U.S. Government “carpet-bombing” the world with liquidity had substantially reduced the rate of bankruptcy  since the first Quarter of 2009, when overall probabilities were as much as three times higher than the September results.

I was also surprised by the reaction to our announcement.  For the past six years Audit Integrity has identified corporations most at risk of litigation, earnings restatement, and SEC enforcement actions, but apparently the term “bankruptcy” is more incendiary than all of these combined.

Clearly, the word “fraud” has a similar effect.  Audit Integrity did not state that companies with higher bankruptcy risk are committing fraud, but rather, that fraud risk metrics are part of our statistical process because these indicators of aggressive accounting have proven to be predictive of bankruptcy.  Time will tell which of today’s companies are actually committing fraud.

In our bankruptcy model announcement we mentioned a number of large companies that had the highest probability of filing for bankruptcy over the coming year.  Notwithstanding our report that the probability of bankruptcy was actually very low, a few of the companies listed were totally outraged at being identified as most likely to file.  In one case, Hertz Global Holdings, Inc. (HTZ) filed action against us.  In another case, CBS Corporation (CBS) publicly declared that our Bankruptcy Risk report was based on “flawed pseudo-analysis”.

Both CBS and Hertz complained that we had ignored numerous qualitative issues including analysts’ opinions.  This seems odd, since by definition, quantitative analysis is purely statistical and deliberately excludes any and all subjective evaluation.

Statistical analysis, a branch of applied mathematics concerned with collecting and interpreting data to be used in estimating the probability of a particular outcome, is, and has been, widely used in a host of applications.  I would guess that CBS collects and analyzes statistical information regarding their consumers; if they do not, this might be contributing to their poor performance.

As independent publishers of information, we pride ourselves on the use of applied mathematics to generate objective results.  We are beholden to no one.  Our job is to ferret out the truth in an environment where companies are incented to obfuscate.

However, since Hertz and CBS both objected to the lack of qualitative opinion in Audit Integrity’s report, I am prepared to offer my own personal perspective as a CFA and investor.  I have highlighted the qualitative elements in the statements below to differentiate them from the statistical.

I must warn our readers that this will be the first and last time I depart from the “pseudo-analysis” we call “statistical.”

Hertz Global Holdings, Inc.

• Hertz Global Holdings is a highly overleveraged business whose revenues are dependent on business and leisure travel.
• I doubt that we will see a meaningful rebound in Hertz revenues over the coming year.
• A good portion of their assets are tied up in Goodwill/Intangibles, which represents a low-quality asset and poor collateral.
• Their primary tangible asset is their fleet of autos, which may or may not be fairly valued, since used auto prices have dropped significantly over the last two years.
• In my opinion the likelihood of a bankruptcy filing, as rated by Audit Integrity’s model, seems very conservative.

CBS Corporation

• I believe CBS has a broken business model.
• Revenues have not grown for many years.
• CBS’s media dominance is being eaten away by a host of competitors including cable and Internet providers as additional sources of entertainment and information.
• CBS struggles with the high cost of operation while new entrants in the space are far leaner.
• Goodwill/Intangibles represent more than 60% of assets.  There is a possibility of an impairment charge if revenues and earnings continue to slip.
• Interest on long-term debt of approximately $7 billion is eating up operating income.
• Unless CBS can substantially reduce its cost structure while continually restructuring its debt, I believe trouble lies ahead, and it could be sooner rather than later.

I hope both Hertz and CBS will be satisfied with the qualitative opinion I have provided to complement Audit Integrity’s quantitative analysis.  Please note, “This essay reflects the opinion of the author and not necessarily the opinion of Audit Integrity, Inc.”

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Just beautiful.

Anna here again!!

Well we have yet made another new high, fine let’s get the whole sheebang over with already!! I have been long this week because OPX is normally bullish..

Google beat by a huge margin, So far Google up about 12$ AH. and so did IBM, but their guidance is short. So hence the dump AH. I am making it short today, so here is Zero and you can see the Zero light was non existent today.

Now as usual I have a treat, a Goldilocks outfit to go look for the Bears

Have an great night and see you on the other side

Rolfe Winkler has an interesting pair of charts (below) showing GS’s earnings.  However, Rolfe seems to reach a very different conclusion than I do: Letting Goldman roll the dice

He chalks up their gains up to their “Casino” — but Goldman’s trading revenue has been remarkably consistent. They excellent information flow, and tremendous discipline.

If it were really a roll of the dice, it would be far more erratic . . .

Remember, the casino takes money from the suckers — the House usually wins:

>

Updated chart!

Well, this is my 9th post, so I'm going to take some R&R (probably in the form of pretending I'm Ringo Starr for a couple of songs).

GOOG earnings came out a few moments ago, and their stock is higher by double digits. The /ES actually is down a tiny bit from the closing bell, so I guess GOOG's earnings didn't make the market explode higher (yet).

Anyway, enough for now. I'm going to take a break.

If you needed more evidence that the recession that began in December 2007 has ended, this morning's Philly Fed report should provide it. While the actual number came in below forecasts (11.5 vs 12.0), it was still positive for the third straight month. The last time this indicator was positive for three straight months was from September through November 2007,...

Dylan Ratigan sums it better than any financial analyst has been able to do so far: "giving people $23 trillion in taxpayer money, especially the banks, it makes their stock price go up."

And some observations on the Chairman's Moral Hazard Doctrine: "Ben Bernanke said he would print an unlimited amount of money, against the future of our taxpayer, that's why our dollar continues to collapse, to support the banks which is working pretty well."

Dylan: CNBC misses your optimism.

Today I offer you an insightful look at China’s real estate market – a “burgeoning bubble” that deserves a close eye as the possibility for breaking increases. Remember the chaos in Japan after their own housing dreamscape got violently yanked back to earth? As investors, we have to recognize opportunities – and know what to avoid. With a global economic crisis – and now surging housing prices in China – investors in any global market need to keep watch on political and economic developments around the world.

Today’s analysis comes courtesy my friends at STRATFOR, a global intelligence company. They provide unique and on-the-money analysis and forecasts on all things global, essential for any alternative investment strategy. They’ve got a free newsletter as well, for which I encourage you to sign up by clicking here – so you’re not limited to my caprice.

John Mauldin
Editor, Outside the Box

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The China Files (Special Project): Real Estate

October 13, 2009 | 1149 GMT

Summary

The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing’s stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese – once encouraged to invest in home ownership by the central government – become less and less able to buy.

Editor’s Note: This analysis is part of a series that explores China’s industry, finance and statistics.

Analysis

Related Special Topic Page

The China Files (Special Project)

PDF Version: Click here to download a PDF of this report

On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in the Putuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for the undeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meter of floor space (just in land costs) once the designed residential building is constructed.

The purchase created China’s newest “land king,” a term for the real estate developer who pays the highest price for a piece of real estate during a land auction. And 7.006 billion yuan was the highest price ever paid for a piece of Chinese real estate for any purpose – residential or commercial. The milestone is a result of an increasingly intense competition for land in major cities that began early in the year, when Beijing began distributing stimulus money to various industries – including the real estate sector – to sustain the economy. As a result, land prices have soared throughout China. And with increasing speculative investment in residential real estate, the market faces a surging bubble that jeopardizes the country’s long-term economic development.

Since 1998, real estate investment in China has accounted for more than 10 percent of the country’s gross domestic product (GDP), compared to only 3 percent to 5 percent in the United States. Such investment is also closely associated with many other industries, such as construction and finance, and it provides an abundance of jobs. Therefore, it is seen as a critical pillar of China’s economy and enjoys favorable policies from the government and state-owned banks (more than 70 percent of real estate investment in China comes from bank loans). At the same time, real estate developers, local government officials and investors have escalated housing prices across the country by acquiring massive land holdings, limiting the supply and inflating prices, creating a real estate bubble that is not sustainable in the long run.

The bubble has grown mainly on the residential side of the market, where there is more demand and higher profits to be made. However, while fewer developers and investors have been chasing nonresidential projects, Beijing’s 4 trillion yuan ($586 billion) stimulus package in early 2009 has generated more interest and activity in the commercial side. Indeed, there are signs that commercial real estate may also be headed for a bubble, and STRATFOR will be watching the situation closely.

Origins of the Bubble

Since 1978, China’s pace of urbanization has increased dramatically, with the number of middle-size and large cities (those having nonagricultural populations of more than 200,000) growing rapidly. Beginning in 1985, economic reforms implemented in urban areas to make China’s planned economy more market-oriented added even more momentum to the real estate boom, with real estate investment increasing by 71 percent by 1987. The government’s macroeconomic policy of monetary belt-tightening helped cool this overheated market, which was further tempered by the government’s continuing to provide housing for state employees (fu li fen fang, or “welfare housing”).

However, when the state significantly cut back on its welfare housing program in 1998, the Chinese perception of personal property changed, and this would have an important impact on the real estate sector. The government began this privatization process by making a private dwelling a “commodity” and granting the purchaser the right to own a newly built house for 70 years. (Likewise, the developer who buys the property on which residential or commercial buildings are to be constructed may own that property for 70 years.) Home ownership in China could now be a sound financial investment.

Thus, the residential real estate market would boom in almost every urban area in China – and particularly in the “first-tier” and “second-tier” cities (only Beijing, Shenzhen, Guangzhou and Shanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal ports are in the second tier). But rising land prices would eventually put housing prices out of reach for the general public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged 4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, while personal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008] to 27,025 yuan [$3,960] per year).

A 2006 survey conducted by the National Development and Reform Commission showed that the average ratio between housing prices and income was approaching 12:1 in many large and middle-size cities in China (in Beijing it had reached 27:1). Twelve to one is significantly higher than the World Bank’s suggested affordability ratio of 5:1 and the United Nations’ 3:1. The problem was compounded by the fact that, of the more than 80 percent of Chinese who owned their own homes in urban areas (generally considered cities with populations of more than 20,000), 54.1 percent were making monthly mortgage payments that constituted 20 percent to 50 percent of their monthly incomes.

The Recovery Bubble

Following a temporary drop toward the end of 2007, land prices rose steadily, then began surging again with Beijing’s stimulus package and a flood of easy credit in 2009. With much of this money flowing into the real estate sector, major beneficiaries included large state-owned enterprises (SOEs) involved in speculative real estate and housing investment, contributing to the inflating bubble. Among the 10 highest-priced land purchases in major cities in the first half of 2009, 60 percent went to SOEs.

Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution – limiting the flow of cash and credit – could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.

As housing prices continue to rise, a parallel trend is manifesting itself – rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for “commodity housing” (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing – pressure that continues to drive up the prices.

This closed loop in the Chinese real estate market is facilitated by the country’s political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council’s Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments’ extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments’ incentive to expand their real estate investments without much concern for cost or impact on public services.

Economic performance also is the prime prerequisite for bureaucratic advancement, which gives local officials the incentive to generate as much revenue as possible through land auctions. And this generally involves a level of collusion – and corruption – among government officials, real estate developers and investors.

One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices.

Another factor that enters the equation is a cultural one. The Chinese people generally prefer to buy new houses, as opposed to renting homes or buying secondary houses in which people have already lived. Indeed, in urban areas, marriage proposals often include a promise to buy a new commodity house. As a result, the secondary housing market remains very small in comparison (due also to fewer available bank loans for lived-in houses and the complicated process involved in transferring ownership).

All of these factors contribute to the burgeoning real estate bubble – and make it difficult to predict when that bubble will burst. With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China’s first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well.

Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.

But in China’s real estate, as in most sectors of this vast and complex land, implementing and enforcing prudent regulation has never been an easy task.

With everyone's eyes glued to Google earnings after the close, below is a representation of the most active options classes today: the top 3 contracts traded were all near-term (Friday expiration) calls with 550, 540 and 560 strikes. It is not immediately known if investors are setting themselves up bullishly (buying calls) or bearishly (selling calls), although with the price of the entire top 10 complex down, except for the Oct 530 puts, it does appear that bearishness may be dominant. Whether or not the option action is a material factor for Google's underperformance is also not clear.

Keep in mind, in terms of a successful report, investors will be looking for (mean consensus estimate) revenue of $4,248 million and EPS of $5.431 for Q3, a 33.77% increase over Q3 2008. However, what is notable is that over the past 10 quarters, Google has never surprised to the upside based on consensus EPS: maybe the executive committee can take some tips from Steve Jobs on how to manage expectations.

 

I was on three Tech Ticker segments yesterday with Henry Blodget and Aaron Task.

Tech Ticker - Inflation or Deflation?

Inflation or Deflation? "It's Definitely Deflation," Mish Says

Ask an economist about their biggest concern about the U.S. economy and you're likely to get one of two starkly different answers: America is either about to be swamped by a major bout of inflation or decimated by deflation.

Count Mike "Mish" Shedlock of Sitka Pacific Capital among the deflationistas.

While some consumer prices are rising and the Fed is printing money like crazy, Shedlock says deflation is "definitely" a greater threat than inflation.

People looking at prices are completely missing the mark," says Shedlock. "Consumer credit is falling, banks aren't lending, and we've got bank failures at a massive rate. These are the same kind of conditions as in the Great Depression."

Indeed, bank lending has tumbled and the Fed reports consumer credit has shrunk for seven consecutive months and was down 5.8% on an annualized basis in August, the most recent month available.

.....

Tech Ticker - Ignore The Euphoria

Dow Breaks 10,000: Don't Get Caught Up in "Euphoria", Mish Warns

The Dow Jones Industrial Average closed above 10,000 today for the first time in a year, and more than a decade after first breaking the mark. Since hitting lows in March, the Dow is up an astounding 50%, while the S&P 500 has gained 60%.

Before you get your broker on the phone or start trading that dormant online brokerage account, take heed of this warning from Mike “Mish” Shedlock, the blogger behind MISH'S Global Economic Trend Analysis: "Five years from now, I think its quite likely the Dow is not going to be much more than 10,000," he says.

Why so negative?

"We've still not solved any of those structural problems" in the housing, banking and debt markets, that caused last year's crisis, he claims.

Shedlock's advice: ignore the euphoria, and "take some chips off the table. Now's just not a good time to be invested."

Shedlock, also an investment advisor representative for SitkaPacific Capital Management, thinks investors are better positioned in gold and cash.

Tech Ticker - Thoughts On Gold

Exploding Gold Prices Have Nothing To Do With Inflation

If there are two things that just about everyone agrees on these days it's that the dollar will continue to plummet and gold will continue to soar.

The dollar will keep plunging, everyone agrees, because the Fed will keep printing so much new money that soaring inflation will eventually turn it into toilet paper. Gold, meanwhile, will go to the moon as investors rush to try to hedge against this impending monetary disaster.

Balderdash, says Mike "Mish" Shedlock, blogger and investment advisor with SitkaPacific Capital Management.

The dollar's a buy here, in part because everyone is so darn certain that it's about to collapse.

And gold?

Well, gold is indeed going higher, Shedlock argues, but not for the reason people think. Gold is actually a lousy inflation hedge, as evidenced by the period from the late 1980s to the early 2000s in which there was plenty of inflation but gold prices plummeted from $800 to $250.

But gold IS a good place to preserve value during a credit crunch, Shedlock says. And that's what we're still having here. So Shedlock is long gold, too, even though he thinks everyone else is buying it for the wrong reason.

Via email AK asks:

"Hi Mish

Caught the post on the Tech Ticker (Yahoo site) you did about gold today. The article says "Well, gold is indeed going higher, Shedlock argues, but not for the reason people think." I'm intrigued. Can you point me to a blog post where you explain why gold prices ARE going up in more detail?"

Sure AK

Please consider Gold And The Watched Pot Theory

So What's Behind Moves In Gold?

Is Gold an Inflation Hedge?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Here is what has caught my eye today:

• Mark-to-Make-Believe Turns Junk Loans to Gold (Bloomberg)

• Distressed Real Estate Continues to Be a Growth Industry (Real Property Alpha)

• Social Security makes it official: No COLA in 2010 (Yahoo Finance)

• The $800 Billion Deception (Newsweek)

• Weak Dollar Equals Strong Stocks, For Now (Barron’s)

• Perils of a Talking Head (Capital Gains and Games)

• 30 Resources to Find the Data You Need (Flowing Data)

Anything worthwhile catching your eye?

Bloomberg highlights an interesting development out of CDO land, where TPG Credit is in the process of attempting to raid quality assets in a TRuPs CDO at the rip off price of 5 cents on the dollar, while bribing the first loss tranche: the CDO equity holders, with a moderate take out fee. If this is a broad loophole in which the equity tranche, which in most cases is out of the money since even the highest-rated slices are trading at 40-50 cents on the dollar in most CDOs, can determine the fate of CDO dispositions, expect many other funds to join TPG in raiding any and all good assets making up comparable CDOs. As there is roughly $650 billion in CDOs outstanding, they have quite an extensive selection to pick and choose from.

From Bloomberg:

A TPG Credit Management LP fund offered Oct. 9 to buy $115 million of bank trust preferred securities for 5 cents on the dollar from Tropic CDO V Ltd., according to a trustee report obtained by Bloomberg News. TPG Credit will pay holders of so- called equity portions another $5.75 million to allow the sale, the document says. Equity holders have the right to decide which assets the CDO sells because they’re first in line for losses.

Tropic CDO V’s equity holders may no longer have the incentive to ensure that assets are sold at fair value because their investments were wiped out by the worst financial crisis since the Great Depression. That may allow TPG Credit, a Minneapolis-based firm founded by former Cargill Inc. executive Rory O’Neill, to cherry-pick the best assets and erode senior holders’ collateral, according to John Scannell, chief operating officer of New York hedge fund Hildene Capital Management LLC.

In essence TPG is providing tip value to the decision makers who don't care either way what the fate of the asset below above them is, so long as they get even minor compensation for an investment that had been previously considered a total loss. In this light, it is easy to see why holders of higher-rated CDO tranches should be very concerned about the confiscation of their collateral at bargain basement prices:

“The 5 percent offer per security seems low and likely counter-beneficial to all or almost all noteholders in the deal, with the possible exception of the equity investors,” Gene Phillips, a director at advisory firm PF2 Securities Evaluations Inc., said in an interview from his New York office. “If this were allowed to go through, it would seem to be against the spirit of the deal, which aims to protect the senior noteholders.”

As the administration is doing all it can to rekindle the securitization market, this should be a big flashing light: the last thing needed is investors figuring out how to abuse comparable loopholes not only in the existing securitization universe but also for any such planned offerings in the future. And without some form of securitization vehicle coming to the rescue of CREs over the next 2-3 years, look for the loans we discussed earlier which banks have on their books still at 95 cents and above to turn very ugly quick.

 

These comments show how important HAMP is to the housing market. The key points are 1) Loans in trial modifications are included in the delinquency rates (as we've discussed), and 2) we are completely in the dark on how the trial mods are performing!

Meredith Whitney:

Since so much of your numbers today are influenced by the trial mod [HAMP] results, I wanted to ask a couple of questions. Number one, is the early experience consistent with the report that came out in October with the Congressional oversight result, which talked to the difficulty of finding documentation on the modifications? Can you provide more color there? And also a question that I have been asking management is when do you think an appropriate report card will be accessible in terms of the success of these? Is it fourth quarter, first quarter and then I have a follow-up after that please?

Citi CFO John Gerspach:

The earliest modifications that we entered into were in May. And so we are just finishing up the five-month period right now. And I would say that the documentation process, both in the way that the request is given to the consumer, as well as the assistance that we are giving consumers, has improved over time. So the early stages, we are seeing some difficulty in the customers fulfilling the documentation request as either you noted or we noted. That is one of the reasons behind the extension of the trial period from three months to five months. So let's kind of wait until we at least get the October and perhaps November results in to see whether or not the documentation collection or submission process has improved. As far as an overall scorecard on HAMP, my sense, especially given the fact that you have got five months -- five-month trial for all modifications entered into prior to September 1 and then a three-month period is at best it will be towards the end of the fourth quarter, but it is probably more of a first quarter next year type of answer.
emphasis added

Click on graph for larger image in new window.

This is slide 18 from the Citi Presentation. This slide shows the increase in mortgage delinquencies and Gerspach discusses the impact of HAMP below.

Apparently the increase in the 90 to 179 day bucket is due to HAMP, and so is half of the increase in the greater than 180 day bucket. The remaining increase in the greater than 180 day bucket is due to delays in foreclosures.

Earlier from CFO John Gerspach:

Turning to first mortgages on slide 18, we take a closer look at the delinquency data. Last quarter, we discussed a trend that showed a decline in the 90 to 179 day bucket and an increase in the 180 day plus bucket. The trend in the 90 to 179 day bucket has reversed this quarter, but can be largely explained by the loan modification program known as Home Affordable Modification or HAMP. We have approximately $6 billion of on-balance sheet mortgages in this program. Under HAMP, borrowers make reduced mortgage payments for a trial period, during which they continue to age through our delinquency buckets even if they are current under the new payment terms. This serves to increase our delinquencies. Virtually all of the increase in the 90 to 179 bucket and half of the increase in the 180 plus day bucket are loans in HAMP trial modifications. The rest of the increase in the 180 plus day bucket is attributable to a backlog of foreclosure inventory driven by a slowdown in the foreclosure process in many states. HAMP also reduces net credit losses as loans in the trial period do not get charged off at 180 days past-due as long as they have made at least one payment. Nearly half the sequential decline in net credit losses on first mortgages this quarter was attributable to HAMP. We have provided additional loan loss provisions to offset this impact.

Analyst:

And of all of the metrics that we see, for example, the 90 day delinquencies and the like, which do you think that we should pay the most attention to in terms of evaluating the choices that you made in terms of building reserves other than the 13 months?

John Gerspach:

Well, you certainly have to take a look at the combination of the 90 day plus delinquencies. Let's talk about cards. I think cards and mortgages are somewhat different. From a cards point of view, as I mentioned, when we look at things, we are looking at both the early buckets, as well as the later buckets. And admittedly, we don't give you much information on the early buckets. But in the retail partner cards portfolio, as we mentioned, we are seeing improvements in the 90 day plus buckets and we are also seeing some stabilization in the early buckets. And that is what gives us, again, some deal of comfort when looking at that portfolio. Branded cards, I think I mentioned that we have seen reductions in the 90 plus day delinquencies, but as I noted, the net credit losses continued to grow slightly this quarter and so we are somewhat more cautious in that portfolio. And finally, when it comes to mortgages, as I mentioned on the call, or just before, the HAMP program right now has got a rather significant impact on our delinquency statistics and really makes it difficult for anyone from the outside to actually have a good view as to the inherent credit profile in our delinquency buckets.

An anemic day in the markets is punctuated by a large spike in crude prices, which despite near record low refinery utilizations, a draw down in reserves has caused the NYMEX speculators to believe that Goldman will finally be proven right with their "oil at $200 v2.0" call. Another highlight is that even as the DXY approaches the highs for the day (and pushing gold lower), stocks have dislocated from chasing the dollar and instead follow bonds (inversely) intraday. Watch for Google earnings after the close.