Fin/Inv

Interesting research suggests that investors are "inertial" when presented with a situation in which their shares of Company A are bought out by Company B. Instead of analyzing Company B as a distinct holding and possibly divesting those shares, investors tend to retain the shares of Company B with little analysis or forward planning.

Such inertia takes place when traders and investors anchor themselves to old ways of viewing situations and thus discount new data that suggest that their situations have changed. For instance, investors may initially underweight earnings surprise data, only to later overweight it as repeated earnings "surprises" are integrated into a revised view of the company.

In trading, we see inertia when a position is obviously going against a trader, but the trader does not exit the position until an obvious stop out level is hit (such as a clear support or resistance area or an even-numbered price level). At that point, underreaction leads to overreaction, as the trader "pukes" the position at the worst possible time.

Inertia yields a kind of market inefficiency derived from human nature. If we can identify where traders are leaning the wrong way but not yet acting on data contrary to their positions, we can squeeze opportunity from markets. The key to such a strategy is to identify occasions in which markets are telling traders they are wrong, but traders are not yet acting on that information.
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Hat tip Larry Doyle’s Sense on Cents

The most recent weekly ABC consumer confidence index number is out, and at -50 it is the lowest reading in exactly 3 months. Surprisingly, consumers are not keeping their confidence in lockstep with the value of their burgeoning E-Trade accounts. What next is up the administration's sleeve is anybody's guess.

From Reuters: White House skeptical on renewing home buyers credit

[Housing and Urban Development Secretary Shaun] Donovan told the Senate Banking Committee that while he was aware the program was popular with lawmakers, "At the same time, I am mindful that these proposals can be very expensive, especially at a time of significant budget deficits."
...
Under questioning, Donovan said the administration would make a decision in the coming weeks after it sees more government data on the cost of the tax credit.
...
"I do not believe that a catastrophic decline would be the result of the end of the credit," Donovan said.
emphasis added

And more from Reuters on the widespread fraud: IRS warned again of U.S. homebuyer credit fraud

The internal watchdog for the U.S. Internal Revenue Service is expected to warn the agency for the fourth time about fraud in the multibillion dollar homebuyer tax credit program ... The inspector general found at least 70,000 tax credit claims, totaling $489 million, were granted to individuals who do not appear to qualify for it. ... The agency has opened 107,000 civil cases related to the credit and identified 167 criminal schemes

From Diana Olick at CNBC: HUD Hints on Home Buyer Tax Credit . Olick reviews Donovan's testimony and writes:

[T]hat sounded more like a "No" to me than a "Yes."

And Rex Nutting at MarketWatch reviews many of the arguments against the tax credit: Kill the wasteful home-buyer tax credit

There are other reasons to oppose the tax credit (other than it is expensive and poorly targeted). An extension of the tax credit will increase the apartment vacancy rate, push down rents, and lead to more defaults for CMBS (with falling rents), see Housing Wire: Rating Agencies See More Pain Ahead for Commercial MBS

[S]ervicers of commercial mortgage-backed securities (CMBS) are ... requiring more time to resolve delinquent loans, according to Fitch Ratings.

The delay for servicers, combined with continued market value declines, indicates loss severities are likely to increase “markedly” for US CMBS well into 2010, according to an annual study by the rating agency.

Multifamily loans in particular, which represent an average cumulative loss severity of 38.6% in 2008, will see a significant increase in loss severity as many markets suffer rising unemployment and oversupply.

And that means more losses for small and regional banks.

And, for fun, from housing economist Tom Lawler (no link, a joke):

Michigan politicians, meanwhile, are arguing that Senator Isakson [sponsor of tax credit] is “almost right” in that housing needs a big boost, but so does the auto industry. As such, legislators from the Wolverine State are working behind the scenes to craft a “bipartisan” bill that would eliminate a home buyer tax credit, but instead would give all home buyers next year an American-made compact car valued up to $15,000 – at, of course, the MSRP, and paid for by the US government. Purportedly one staffer said, “hey, this proposal is no dumber than Isakson’s, and in fact it helps kill two birds with one stone, so to speak!”

This was a joke, but it really is no dumber than the Isakson proposal.

Spreads were broadly wider in the US as all the indices deteriorated (with IG just underperforming HY as intraday ranges remained low but sentiment was definitely more skewed to the widening side). The last week or so has seen a shift in the relative-strength between debt, equity, and vol and based on this we would expect HY-IG decompression in the short-term and equities to underperform credit here (for equity guys a sell the rally rather than buy the dips mentality in stocks short-term).

IG trades 3.8bps tight (rich) to its 50d moving average, which is a Z-Score of -0.6sd. At 98bps, IG has closed tighter on only 15 days so far this year (209 trading days) but closes today at the top of the day's range and its widest since 10/13. The last five days have seen IG flat to its 50d moving average.

Notably IG9 did see its 5s10s curve flatten back to inverted intraday and some notable index moves include XOver12 back below 500bps, HY-XOver back above 150bps, HY-IG back above 550bps, and HY-LCDX holding above 100bps still. IG13 5Y vs IG9 7Y compressed to 40bps and will likely be the next of our low cost long vol plays as technicals pressure IG9 and fundamentals hold intrinsics wide.

Overall, high and low beta names were equally improving on the day but it was the higher beta FINLs that were the best performers as perhaps a flight to FINL safety trade was on with most of the majors outperforming. AIG/ILFC improved as did other tail names with IG9 outperforming IG12/13, IG12x13 compressing a smidge, and on-the-run curve steepening continuing. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.

7.2% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -0.88% to -0.58%. 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 Lease Finance Corp. (-69.62bps) pushing IG 0.44bps tighter, and DirecTV Holdings LLC (+7bps) adding 0.05bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 1.87bps tighter, and DirecTV Holdings LLC contributing 0.23bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Caterpillar Inc. (-8bps) pushing the index 0.08bps tighter, and Constellation Energy Group Inc. (+6.54bps) adding 0.06bps to ExHVOL.

The price of investment grade credit fell 0.13% to around 100.07% of par, while the price of high yield credits fell 0.12% to around 94.38% of par. ABX market prices are higher (improving) by 0.5% of par or in absolute terms, 2.69%. Broadly speaking, CMBX market prices are higher (improving) by 0% of par or in absolute terms, 0%. Volatility (VIX) is down -0.59pts to 21.03%, with 10Y TSY rallying (yield falling) 5.2bps to 3.34% and the 2s10s curve flattened by 1.2bps, as the cost of protection on US Treasuries fell 1.1bps to 20.5bps. 2Y swap spreads tightened 1.2bps to 36.13bps, as the TED Spread tightened by 1.3bps to 0.21% and Libor-OIS deteriorated 0.8bps to 11.6bps.

The Dollar strengthened with DXY rising 0.05% to 75.549, Oil falling $0.52 to $79.09 (underperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.2% today (a 0.6% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $9.1 to $1055.1 as the S&P is down (1088.2 -0.27%) underperforming IG credits (98.5bps -0.11%) while IG, which opened tighter at 96bps, outperforms HY credits. IG12 and XOver12 are +1.5bps and -5.75bps respectively while ITRX12 is +0.5bps to 83.75bps.

The majority of credit curves flattened 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 fell -6.3bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 21% of IG credits are shifting by more than 3bps and 36% of the CDX universe are also shifting significantly (less than the 5 day average of 42%). The number of names wider than the index decreased by 1 to 45 as the day's range rose to 5bps (one-week average 4bps), between low bid at 94 and high offer at 99 and higher beta credits (-0.87%) outperformed lower beta credits (-0.79%).

In IG, tighteners outpaced wideners by around 3-to-1, with only 29 credits notably wider. By sector, CONS saw 16% names wider, ENRGs 47% names wider, FINLs 19% names wider, INDUs 23% names wider, and TMTs 21% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 86.31bps and the latter at 82.6bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 150bps from 140.91bps, but remains above the short-term average of 139.14bps, with the HY/XOver ratio rising to 1.3x, above its 5-day mean of 1.27x. The IG-Main spread decompressed to 14.75bps from 12.75bps, and remains above the short-term average of 13.28bps, with the IG/Main ratio rising to 1.18x, above its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0.5bps to 82.6bps, with 59 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.27bps to 94.31bps, with Finance names (worst) tighter by 10.71bps to 686.78bps, Brokers (best) tighter by 4.42bps to 122.92bps, and Banks tighter by 2.71bps to 130.62bps. Monolines are trading wider on average by 524.55bps (2.85%) to 6787.5bps.

In IG, FINLs outperformed non-FINLs (2.7% tighter to 0.65% tighter respectively), with the former (IG FINLs) tighter by 5.3bps to 191.2bps, with 13 of the 21 names tighter. The IG CDS market (as per CDX) is 4.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (93.77bps), with the bond ETFs outperforming the IG CDS market by around 4.33bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 0.9bps to 86.31bps (with ITRX FINLs -trading sideways- better by 1.13 to 73.5bps) and is currently trading in the middle of the week's range at 55.67%, between 88.5 to 83.56bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 50.52%, between 67.91 to 65.14bps. ExHVOL underperformed LoVOL as the differential decompressed to 4.64bps from 3.99bps, but remains above the short-term average of 3.47bps. The Main exFINLS to IG ExHVOL differential compressed to 15.13bps from 15.94bps, but remains below the short-term average of 16.22bps.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes
CDR LQD 50 NAIG -1.16bps to 83.8 (11 wider - 30 tighter <> 17 steeper - 31 flatter).
CDX13 IG +2.5bps to 98.5 ($-0.11 to $100.07) (FV -1.34bps to 100.46) (32 wider - 69 tighter <> 58 steeper - 62 flatter) - No Trend.
CDX13 HVOL +5bps to 185 (FV -4.21bps to 186.84) (5 wider - 18 tighter <> 17 steeper - 13 flatter) - No Trend.
CDX13 ExHVOL +1.71bps to 71.18 (FV -0.46bps to 74.06) (27 wider - 68 tighter <> 54 steeper - 41 flatter).
CDX13 HY (30% recovery) Px $-0.19 to $94.31 / +5.3bps to 651.5 (FV -7.2bps to 588.26) (20 wider - 67 tighter <> 51 steeper - 48 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.05 to $99.47 / +1.62bps to 543.36 - Trend Tighter.
MCDX12 0bps to 89.5bps. - No Trend.
CDR Counterparty Risk Index fell 2.22bps (-2.3%) to 94.36bps (0 wider - 14 tighter).
CDR Government Risk Index fell 0.02bps (-0.04%) to 41.32bps..
DXY strengthened 0.05% to 75.55.
Oil fell $0.52 to $79.09.
Gold fell $8.4 to $1055.8.
VIX fell 0.59pts to 20.9%.
10Y US Treasury yields fell 4.9bps to 3.34%.
S&P500 Futures lost 0.16% to 1089.4. (based on Bloomberg's closing data - though SPX was -0.6%)

by Bruce Webb

Scottish Professor Gavin Kennedy is the blog-proprietor of ADAM SMITH'S LOST LEGACY and a new (and continuing?) contributer to Angry Bear, most recently with Spare Us From the Invisible Hand. In an earlier post by Gavin Adam Smith in a Broader Legacy I responded to one of our regular Angry Bear glibertarians and rather than disrupting Prof. Kennedy's thread further took it to my own post at the Bruce Web Adam Smith and Glibertarianism which in turn led to some back and forth between Prof. Kennedy and me on ASLL and the Bruce Web with two posts from Gavin and two from me including Marx, Smith and the Ages of Man.

The discussion was initially about the development of private property and its relation to both liberty and rising consumption/population levels as that is seen developed in the works of Adam Smith. In the course of the discussion it appears that Prof. Kennedy and I have radically diverging views not only on the underlying nature of pre-historic, ancient and some current economic modes of production but also on how those resolve themselves in the conceptual conflict of 'liberty' vs 'democracy'.

It is all rather a departure from the more numeric analysis typical of Angry Bear, but for those interested in history, economic history in relation to modes of production, the economic and philosophical thought of Adam Smith feel free to jump in at either or both sites. In an upcoming post I am going to add some discussion of 'democracy' as it relates to the development of English Land Law, where the latter was marked in large part by its suppression of the former. Hints so far are that Prof. Kennedy and I are coming at this last question from totally different perspectives. Which may reflect fundamental differences between the British historical view of democracy and that expressed in the American Declaration of Independence. We'll have to see how it goes.

Got ideas to share?

We diligently await the retorts from Senators Kyl and Hagan on how this is an "unnecessary" piece of transparency-promoting legislation, which will merely attempt to prevent the destruction of the endangered species better known as Americanus Middleclassus.

Merkley, Corker Introduce Legislation to Audit the Fed, Protect Taxpayer Dollars
 
WASHINGTON, D.C. – In the wake of the Federal Reserve’s extraordinary actions last year to stabilize the financial system, U.S. Senators Jeff Merkley (D-OR) and Bob Corker (R-TN), members of the Senate Banking Committee, today introduced legislation that will require the Government Accountability Office (GAO) to conduct an audit of the Fed’s emergency lending programs.  The Federal Reserve Accountability Act will monitor and protect taxpayer dollars without intruding upon the Federal Reserve’s independent monetary policy or its role as lender of last resort.
 
“Transparency and accountability are fundamental principles of representative government,”Merkley said.  “During this financial crisis, Federal Reserve credit contributed greatly to the stabilization of the system.  In doing so, the Federal Reserve departed significantly from its traditional relationship with markets and took on unprecedented new risks.  Such a significant change in the Federal Reserve’s traditional activities demands responsible, robust oversight.  The Federal Reserve Accountability Act strikes the right balance between protecting taxpayer dollars and respecting the central bank’s responsibility to manage monetary policy. ”
 
“The Federal Reserve has provided our financial system with emergency credit during this time of financial hardship, and in the course of doing so, has seen a $1.4 trillion increase in its balance sheet.  Despite its independence, these are still taxpayer dollars at risk, and many Americans have called for an audit of the Fed,” Corker said.  “This bill is the way to do it. We give the Government Accountability Office the authority to audit the Fed's emergency credit facilities without inappropriately compromising the independence of the Fed or politicizing its role in crafting monetary policy.”
 
The Federal Reserve Accountability Act would require the GAO to audit all remaining emergency lending programs not already subject to audit.  To protect against the risk that disclosure of the participation of particular institutions could disrupt markets, the GAO would be required to redact the names of the specific institutions.  Names would, however, be made available one year after each emergency program is no longer used.  In addition, to encourage greater accessibility for the average taxpayer, the Fed would be required to place these GAO audits along with additional audit materials on its website under a new “Audit” section.

Always good to remember what we're dealing with.

As anyone who has spent even a day looking at securitization tranching or CDS trading will tell you, there are two critical components to any investment that involves risky fixed income: cumulative loss probability and loss severity: the first tells about how likely any given security is to default within a given amount of time, while the second determines what the final recovery will be assuming there is an actual even of default. The two are usually tied in very closely, as any (forced) delays in reaching a default state usually come at the expense of exhausting any underlying asset value (and in some cases being primed by additional layer of debt which get a first look on assets in the case of liquidation).

Which is why today's announcement by Fitch that CMBS loss severity is expected to risk markedly next year should be viewed with extreme caution: in essence the artificial delays in bringing the CRE market to fair value in terms of delinquencies and REOs going to foreclosures will simply result in much lower eventual recoveries.

From Fitch, as reprtined from Research Recap:

More than three-fourths (78%) of loan resolutions resulted in no losses to the trust last year. But with commercial real estate debt capital remaining scarce, disposition times will increase to between 24 and 36 months as special servicers are contending with a record backlog of loans (up over 300% since beginning of the year).

‘Special servicers may have to hold certain properties until liquidity returns to the market,’ said Senior Director Britt Johnson. ‘Though recent REMIC reforms may help mitigate loss severities, defaulted loans will take more time to be resolved and losses often will be deferred until maturity.’

Multifamily loans represented an average cumulative loss severity of 38.6% in 2008, with that number likely to increase as many markets have seen increasing levels of unemployment and are suffering from oversupply. Other property types that will see increased loss severities include office (33.3% cumulative average loss in 2008) and hotels (39.5% last year). It should be noted that other property types other than multifamily collectively make up a significantly smaller piece of the CMBS loan universe.

The one area mostly concerning to Fitch is hotel loans:

Additional hotel losses and defaults are likely as sponsors may deplete reserves or discontinue coming out of pocket to pay debt service on underperforming assets,’ said Johnson.

The take home message here is that what is relevant for CMBS is just as relevant for all leveraged loans: the temporary reprieves granted to many leveraged securities will come back to bite investors when defaults eventually pick up again, however with the result being loss rates which will be much higher than default expectations. Frequent Zero Hedge readers will recall CDS auctions from the beginning of the year when many companies would achieve single digit recoveries. The repeat of that phenomenon is only a matter of time as underlying cash flows and asset bases become exhausted. In the meantime, the delay mentality has gripped every asset class. How long, however, can delays persist in an environment of declining cash flows is an open question, and the unpleasant answer to investors is "not much." And when the double whammy of marginal recoveries once again sets in, look for a major correction across all credit markets.

A short list:

• The Energizer Rally: Contrarian analysis continues to reach bullish conclusions (Marketwatch)

• Which Came First: Government Ownership or Catastrophic Losses? (Big Money)

• Mortgage modification schemes see ‘disappointing’ results (FT)

• Homes: About to get much cheaper (CNN/Money)

• Bruce Bartlett: Supply-Side Economics, R.I.P.

• Battle of the Quants

• How to Grease a Palm: The $20 Theory of the Universe (Esquire)

What are you reading?

For those interested, here are some Wells Fargo (America's Servicing Corporation) HAMP documentation (pdf) (ht Dave).

A few notes:

The borrower is delinquent and hasn't made a payment in about one year.

The trial modification plan (three months) calls for three payments of $1170.82 per month (includes an escrow account for taxes and insurance). This is about $1000.00 less than the borrower's previous monthly payment.

The borrower owes approximately $330,000 (including missed payments). Wells Fargo is waiving the late fees if the borrower completes the trial modification plan.

A similar house has recently sold for $150,000 (distressed sale), so the borrower is probably $150,000 to $180,000 underwater.

Comparable houses rent for close to $1,500 per month. So the borrower is paying less than the going rent on the modified loan.

Today, Regions Financial (RF) reported Q3 results. The results were to some degree worse then expected, but in the crazy world of banking stocks RF rallied today after an initial selloff.Looking at the numbers and reading the transcript of the CC, it appears that RF largely reported a bigger then expected loss due to dramatically increasing the provision for losses. In fact the loan provisions

Die Eis- und Schneekappen der sogenannten "Wassertuerme" Asiens, von denen zehn der groessten Fluesse gespeist werden, schmelzen bereits seit den 60er Jahren des vergangenen Jahrhunderts, waehrend das Schelzen der Alpengletscher erst zwanzig Jahre spaeter begann.

For now, at least, the aura of inevitability has settled on policies that I believe should be enacted.

Auch im September 2009 dümpelt der US-Immobilienmarkt auf niedrigen Niveaus, wie in den letzten 3 Monaten herum! Nach den heutigen Daten des Census Bureau steigen die US-Baubeginne (Housing Starts) um +0,5% zum Vormonat auf saisonbereinigte und auf das Jahr hochgerechnete 590'000 Neubaubeginne (SAAR) an, nach 587'000 im Vormonat. Im Vergleich zum Vorjahresmonat handelt es sich nur noch um einen Einbruch von -28,2%, aber der niedrigere statistische Basiseffekt aus dem Vorjahresmonat beschönigt die Lage. Zum Hoch im Januar 2006 mit 2,273 Millionen Wohneinheiten brechen die Baubeginne um gewaltige -74,04% ein. Das Allzeittief seit 1959 wurde im April 2009 bei 479'000 Baubeginnen markiert!

> Die US-Baubeginne (blau) mit 590'000 neuen Wohneinheiten, im September 2009, saisonbereinigt und auf das Jahr hochgerechnet (SAAR). Die Baugenehmigungen (rot) mit 573‘000 Einheiten. Beide Indikatoren bewegen sich aber weiterhin in der Nähe des historischen Tiefs! Von einer relevanten Erholung ist im Langfristchart seit Januar 1959 nichts zu sehen. Quelle Daten: XLS Census.gov/housing starts, XLS Census.gov/permits <

Nicht saisonbereinigt und auf das Jahr hochgerechnet fallen die Baubeginne im September sogar um -1,5% auf 52'700, nach 53'500 Baubeginnen im Vormonat.

Die Baubeginne gelten als ein Indikator für die aktuelle Bautätigkeit. Sie verfolgen die Bauanfänge von neuen Einfamilien-, Stadt- und Apartmenthäusern, jede einzelne Wohnung wird als Baubeginn gezählt. Wie brutal der Einbruch ist, zeigt sich auch in der Relation zur Bevölkerung. Heute werden nur ein Drittel der Häuser gebaut wie im Jahr 1959, damals betrug die Einwohnerzahl der USA 177,135 Millionen, aktuell liegt die Einwohnerzahl bei 307,742 Millionen!

Die Baugenehmigungen hingegen beschreiben die Bauaussichten. Im September 2009 fiel die Zahl der Baugenehmigungen um -1,2% zum Vormonat auf 573'000 Wohneinheiten (SAAR)! Im Vergleich zum Vorjahresmonat sind es nur noch -28,9%! Das letzte Hoch bei den Baugenehmigungen lag bei 2,263 Millionen Einheiten im September 2005, ein Einbruch seit dem von -74,67%!

Millionen Immobilien von in Bedrängnis geratenen Hypothekennehmern werden zwangsversteigert, das Angebot auf dem Immobilienmarkt ist mehr als reichlich, insofern ist der Bedarf nach neuen Wohnimmobilien begrenzt. Trotzdem sind die schwachen Daten aus dem Wohnungsbau ein Desaster, denn der US-Arbeitsmarkt hat ein Problem wenn sich die Beschäftigtenzahlen in der Bauwirtschaft nicht stabilisieren bzw. keine neuen Jobs entstehen.

> Im September gingen weitere -64'000 Stellen in der gesamten Bauwirtschaft verloren. 6,038 Millionen Beschäftige sind noch am Bau tätig. Seit dem Beschäftigungshoch im Januar 2007 mit 7,737 Mio. Jobs sind -1,699 Mio. Stellen verloren gegangen! <

Die Stimmung in US-Bauwirtschaft bleibt ebenfalls auf niedrigen Niveaus:

> Der Stimmungsindikator der US-Bauunternehmer zum Wohnungsbau (National Association of Home Builders/Wells Fargo) fällt im Oktober 2009 wieder leicht auf 18 Punkte, nach 19 Punkten im September! Der Langfristchart des NAHB Housing Market Index, seit 1985, zeigt in welchen Tiefen sich der Stimmungsindikator der Bauwirtschaft immer noch bewegt. <

Have you had it with the scams, frauds, "mark to myth" and lies?

Tired of this sort of garbage - being punished for being responsible?

You may believe that your exemplary behavior shields you from unexpected credit card fees. Sadly, that is no longer the case.

You can stop it.

Yes, you.

All 330,000,000 of you.

Here's how.

Go withdraw all your money and business from the following institutions:

Bank of America
Wells Fargo/Wachovia
Citibank
JP Morgan/Chase

Those four.

Place your business with a local community bank or credit union in their place, and tell the above four institutions to "piss off."

I've resisted doing this, but the idea that banks are now going to try to penalize those who do not carry balances or pay late fees is the last straw.

This is a call for a boycott.

A call to break these institutions by destroying their deposit base and "net interest margin", one consumer at a time, as a protest against the outrageous actions these firms have taken in terms of risk and their shifting of the costs of that risk, which should have resulted in their failure and closure by The FDIC and OCC, onto the backs of their customers via outrageous fees, interest rates and costs, along with the direct subsidy being paid by all taxpayers generally.

Are not 30% credit card interest rates enough, while these four banks all can and do borrow at near-zero from The Fed and have issued debt with an FDIC guarantee (that is, funded by you)?

If that is not enough to dissuade you, how about Wells Fargo holding an unknown amount of Wachovia "off-balance sheet assets" at god-knows-what in terms of valuations - and justification for same - while cutting back HELOC lines and credit cards?

If not that, how about the practice of large banks re-ordering transactions to generate the maximum amount in overdraft fees, with the brunt of these fees and costs being born by those least able to afford it - the working class person?  Yes, I know, the banks, in response to "outrage" on Capitol Hill, recently have "agreed" to reduce the maximum number of overdraft fees they will charge, but what they didn't (voluntarily) agree to do is stop that practice entirely.  Oh, many will also allow you to overdraw your account at an ATM or debit terminal, and some will even display a "balance" at the ATM that includes uncleared funds in a puerile attempt to encourage you to do so.  That latter practice, by the way, has drawn pending legislation - a few years late, of course, and with no clawback of the ill-gotten gains (tens of billions of dollars) that have been stolen, er, "earned" over the last few years.

There is no law that says you must patronize firms that engage in practices that you find outrageous or abusive.  Indeed, it is your right and duty as an American to withdraw your consent to such practices by telling institutions such as this to go piss up a rope.

It is also your right to band together with others and persuade them to do so as well.

This is a call for all of America to do exactly that.

The "large banking industry" has effectively captured the regulatory and legislative apparatus of The United States to do their bidding, even when they screw up, instead of those costs being imposed on their shareholders and bondholders as it should be.

You have no duty to support or tolerate this, and indeed, if you ever want to see it change, you must stop providing these firms with your dollars - your deposits - and your loan business.

Wells Fargo/Wachovia
Citibank
Bank of America
JP Morgan/Chase

Tell them to go to hell and pull your business, whether it be small or large, and take that business to your local community bank or credit union.

Not only will you send a message, you'll reward those firms that provide you with quality service and a reasonable cost structure, instead of those who appear to use every opportunity to nickel and dime you to death.

These institutions, like all businesses, rely on customers in order to survive.

Deny them that business and these practices will change, or they will go out of business - as they should.

After having been invited to appear on CNBC to discuss the litigation launched against State Street for what on the surface at least appears rather damaging allegations (and, in honesty, something that does not come as a surprise to anyone on Wall Street), the California Attorney General is greeted by this intellectual pearl from the woman who alleges bloggers tend to generically fall in the "idiot" camp. Michelle - while the blogosphere can not made any counterclaims yet, it is quite nice of you to open your mouth and do it for us:

"I don't dispute that $56 million is a lot of money, I don't dispute the merits of the suit but you had a big press conference, you're coming on C....N....B....C....[the leader in propaganda worldwide^TM], all this surrounding publicity over this $56 million,  what do you say to people [or one person in this case] who look at this and say this is a perfect example of the demagoguery that attorney generals [sic] use when they want to run for governor."

The hilarity that ensuses has to be seen to be believed (at 3:20 into the clip). Also, for whatever, reason the recently cancelled Dennis Kneale chimes in.

 

In 2 weeks, we will be in Dallas and Austin (the week of November 2nd).

I am looking forward to checking out our new office in Dallas, located in the beautiful Crescent Court complex. Now we are in the Dallas Business Community, I will be in Texas on a regular basis.

We will be meeting with current and future clients. Anyone in the Dallas/Ft Worth area or in Austin who would like to sit down one-on-one with us to discuss their investments, we still have some slots left. As we saw in LA, spaces for these meetings fill up quickly — if you are interested, please email Joe Fitzgerald with your contact information to schedule a time.

Additionally, any investment advisors/brokers who are looking for a better alternative and would like to learn more about the Fusion Advisor Platform, they can also meet with us. Advisors can email Eric Willer who heads our Dallas operations.

ZIRP must abide. Oh, and we need more stimulus.

It’s not easy being a book publisher. In most other media businesses, high demand gives you pricing power. You pay full-freight to see a movie on the opening weekend and top dollar for hot concert seats. But with books, the best properties are used by retailers as loss-leading door-busters. That trend only got worse this last weekend as Amazon, Wal-Mart and Target all joined into a price war on select blockbuster books that introduces $8.99 into the equation.

Disaster, right? Publishers certainly think so:

The combination of slow sales and squeezed margins is enough to make any publishing executive queasy. Perseus CEO David Steinberger explained it to the Wall Street Journal: “If you are taking margin out of the supply chain, it will eventually put pressure on everyone in that chain.” Publishers are afraid that if Wal-Mart, Amazon, and Target can make that $9 price stick, they’ll be forced to lower their wholesale prices. They don’t think the big writers will take less money up front. So they’re freaking out that the lower price point will come out of their profit margin. Publishers need that margin to pay off all the overpriced advances that lie like a dead hand on publishers’ profits.

But lower hardcover prices could finally give publishers some leverage to re-structure their business model. Rather than fight the increased sales–which are subsidized right now by the retailers–publishers should start chipping away at the super-sized advances they pay. I won’t bore you with my argument here but, if you’re interested, you can read the rest at The Big Money.

Source:

It’s the End of the Book World As We Know It: And Publishers Should Feel Fine
MARION MANEKER
The Big Money, October 2o, 2009
http://www.thebigmoney.com/features/kindle-chronicles/2009/10/20/it-s-end-book-world-we-know-it

We appreciate the concerted efforts by Sen. Schumer, the NYSE, Getco, Goldman Sachs, Knight Ridder, and others to "level the playing field." This is a good start. In addition to the proposals contained in this letter (assuming all are enacted), there is much more to be done before anyone can claim the market is again "transparent."

---

October 20, 2009

Mary Schapiro
Chairman
United States Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Dear Chairman Schapiro,

I write out of concern that the proliferation of Alternative Trading Systems (ATSs) and the disparate regulatory treatment between these ATSs and registered exchanges is creating a two-tiered system that undermines the transparency of our national market system and exposes our capital markets to significant additional risks.  I understand the Commission is holding an open meeting this week at which it will address some of the issues discussed below, and is conducting an ongoing review of broader market structure issues.  I am glad to see the Commission is taking a proactive approach in addressing these issues, and Wednesday’s open meeting is another good step in the right direction. 

As the Commission considers the treatment of ATSs, at this week’s open meeting and beyond, I respectfully ask that you consider the proposals outlined below to ensure that ATSs, while continuing to provide beneficial competition to registered exchanges that directly and indirectly benefits retail investors, do not undermine the fairness, transparency and integrity in our markets that the Commission has worked for so many decades to foster.

As you know, the Securities Exchange Act of 1934 (the Exchange Act) requires that exchanges bear the burden of self regulation, including market surveillance, capacity and systems compliance, and ensuring that exchange members comply with applicable securities laws and other rules, regulations and listing standards.  Registered exchanges also must submit rule changes to the SEC for pre-approval, and are required to publicly quote and participate in price discovery. 

In 1998, the SEC promulgated Regulation ATS with the goal of introducing competition to the New York Stock Exchange and Nasdaq, which dominated trading in the equities markets at the time.  Regulation ATS promoted competition by making it easy to set up an alternative trading system – broker-dealers are simply required to file a notice with the SEC at least 20 days prior to beginning operations, the notice contains only a general description of the ATS’s proposed operation methods, and is not subject to prior approval by the SEC.  Once they are operational, ATSs are not responsible for conducting market surveillance (FINRA conducts market surveillance for all broker-dealers operating ATSs) or for monitoring their users’ compliance with securities and other laws – they are only required to maintain an order audit trail in case FINRA or the Commission examines them.

Regulation ATS has had the desired effect: the number of ATSs has proliferated, and ATS market share has dramatically increased. Approximately 35% of trading volume now takes place off-exchange, up from only 9 percent in 2001.  This competition has resulted in significant benefits, direct and indirect, to retail investors – liquidity is greater than ever, bid-ask spreads are lower than ever, and transaction costs have been reduced significantly.

But all of these benefits have come at a cost, as our capital markets have become increasingly fragmented, market surveillance has not kept pace and I am concerned that a large and growing portion of market activity takes place in dark or semi-dark spaces.  These developments risk undermining the transparency that is so critical to maintaining fair and efficient markets, and have made it increasingly difficult – especially in light of technological developments that facilitate large volumes of trading at very high speeds – to conduct adequate market surveillance across all markets.  Together, these developments risk undermining the fairness, transparency and integrity that have become hallmarks of the US capital markets. 

That is why I am urging the Commission to consider the following proposals:

1.    Establish Consolidated Market Surveillance

In 1975, Congress vested in the Commission the authority to create the National Market System, which provided a framework for connecting the growing number of trading venues.  However, with the fragmentation of trading volume between different markets also came the fragmentation of market surveillance.  Currently, each exchange has a separate arrangement for monitoring trading on its respective market, while FINRA conducts market surveillance of broker-dealers operating ATSs.  I am concerned that this fragmented system of market surveillance makes it nearly impossible to monitor market manipulation, trading ahead of customer orders and other abuses at the same time that the fragmentation of our markets and technological advances make such abuses easier to carry out.  For example, a trader can manipulate share prices through complex trading strategies at different exchanges and ATSs but escape unnoticed because no individual exchange is responsible for monitoring beyond its respective trading platform.  I respectfully request that the Commission consider requiring that market surveillance be consolidated across all trading venues and that data from all exchanges and ATSs be submitted on a real-time basis to a consolidated audit trail.  The costs of providing this consolidated surveillance would be covered by fees assessed by the consolidated regulatory authority on all trading venues on the basis of their respective proportion of total trading volume.

2.    Require Broker-Dealers to Obtain Commission Approval Prior to Operating ATSs or Amending Their Operations

I believe the establishment of a trading venue is no light matter and that an ATS should demonstrate that it has adequate policies and procedures in place to ensure compliance with applicable laws and regulations by itself and its users, and to monitor system capacity, security, and contingency planning procedures as described below.  Currently, in order to operate an ATS, a broker-dealer is only required to file a notice 20 days prior to commencing operation.  Crucially, this notice procedure does not require Commission approval.  I respectfully request that the Commission consider replacing this notice procedure with a robust approval process in order to determine whether the ATS would (i) ensure fair access and market transparency in accordance with existing law, (ii) comply with applicable market surveillance obligations and (iii) promote market stability and protect against systemic risks as well as risks posed to potential users of the ATS.  I also respectfully request that the Commission require ATSs to obtain prior approval from the Commission for material changes to their operations.

3.    Require ATSs to Have Procedures for Reviewing System Capacity, Security, and Contingency Planning 

Regulation ATS only requires an ATS to adopt policies and procedures for reviewing system capacity, security, and contingency planning procedures if 20 percent or more of the average daily volume of any NMS stock has taken place on that ATS for at least four of the preceding six months.  I respectfully request that the Commission consider eliminating this 20 percent threshold and require all ATSs to adopt such policies and procedures, provide a reasonably detailed description of such policies and procedures on Form ATS, and obtain the approval of the Commission prior to materially amending such policies and procedures. 

4.    Daily and Standardized Reporting

Presently, ATSs are required to report trades to the Consolidated Tape on a 90-second delay.  They also report aggregate trade volume to the Commission on a quarterly basis.  This trade volume data is not standardized – for example, some ATSs “double-count” by counting a matched order as two trades, while others treat a matched order as only one trade.  I am very concerned that nobody seems to know the precise amount of trading volume that occurs in the non-displayed markets, and that this information is not available more frequently than quarterly. 

I understand you intend to address post-trade reporting at your open meeting this week, and I respectfully request that the Commission consider requiring real-time reporting of trade information to the Consolidated Tape.  I also respectfully request that the Commission consider requiring each ATS to report to the Commission, at the end of each trading day, aggregate trade volume by ticker symbol.  This information should be reported in a standardized format that avoids double-counting of matched trades.  Finally, I would urge the Commission to consider requiring public disclosure of aggregate daily trade volume for each individual ATS.  I strongly believe that accurate and transparent reporting by ATSs will help reduce risks to market integrity and stability and greatly contribute to rebuilding public confidence in our markets.

5.    Lower Percentage Threshold for Order Display and Review Fair Access Threshold

I am increasingly concerned that, as more trading volume moves onto non-displayed markets, including so-called “dark pools” and internalized broker-dealer networks, a two-tier market is beginning to develop in which a large segment of the market does not participate in price discovery.  Thus, even though dark pools are generally required to execute trades at the best “market” price as determined in the lit markets – i.e., the national best bid and offer – the very process by which that market price is determined may be impacted. 

Currently, ATSs are only required to disseminate their quotes for any given NMS stock to the Consolidated Quotation System if five percent or more of the aggregate daily share volume of that stock has been traded on the ATS for at least four of the preceding six months.  Individually, most ATSs do not trade in volumes even approaching this threshold, but in the aggregate they account for a significant and growing portion of trading volume, most of which does not contribute to the price discovery process.  Accordingly, I respectfully request, at the open meeting scheduled for Wednesday, October 21, 2009, that the Commission consider lowering the public quoting threshold from five percent to one percent. However, I recognize the important role that certain ATSs fulfill by executing large block orders on behalf of institutional investors in a non-display environment, and I would urge the Commission to consider an exception to the one-percent threshold as may be necessary to facilitate such block execution services. 

In addition, I respectfully request that the Commission review the current threshold for fair access requirements under Regulation ATS, in order to determine whether those thresholds are meaningful in light of current trading volumes on ATSs.

6.    Treat Actionable Indications of Interest as Firm Quotes Under Regulation NMS

I understand that the Commission intends to address so-called “actionable indications of interest” at this week’s open meeting.  As you know, I feel that so-called flash orders undermine the fairness and transparency that are hallmarks of our markets, and I strongly support the rule proposed by the Commission at its open meeting last month that would effectively eliminate flash orders.  However, I believe that certain “actionable” indications of interest (IOIs) operate similarly to flash orders.  These IOIs bear virtually all the indicia of a firm quote, but are not required to be treated as such under Regulation NMS.  As a result, very detailed information about potential order flow is exchanged among a small group of market participants, presenting even greater opportunities for abuse as flash orders.  This anomaly should be eliminated.  While many indications of interest are perfectly legitimate, and contribute to the efficient functioning of the non-lit parts of our markets, I believe that IOIs that walk and talk like firm quotes should be treated as such under Regulation NMS.

Accordingly, I respectfully request that the Commission consider, at this week’s open meeting, classifying such actionable indications of interest as firm quotes that must be disseminated to the Consolidated Quotation System (assuming the applicable volume thresholds are met).  Combined with the reduction of the volume thresholds for order display described above, this proposal will result in bringing significant additional trading volume into the lit markets where it will participate in price discovery, thereby bolstering the efficiency and transparency of the markets.

I applaud the hard work you and your staff have done on these and related issues and greatly appreciate your consideration of the proposals outlined above.  I look forward to working with you to address the critical issues arising in our ever-evolving financial markets.

Sincerely,

Charles Schumer                                                         
United States Senator 

PhD economist John Hussman has some great quotes in his current market comment:

It appears to be wishful thinking to believe that the credit crisis is over. Most likely, what we've witnessed in recent months is little more than the combination of a lull in the [mortgage] reset schedule coupled with a wholly unsustainable burst of deficit spending amounting to over 7% of GDP.

My impression of the U.S. banking system is that it is quietly going insolvent, in a manner that will become evident only when the slack for “significant judgment” (provided by the FASB earlier this year when it altered mark-to-market rules) is taken up so tightly that the rope snaps. Presently, this slack has allowed banks some time, but the question is, time for what? The rules encourage banks to neither modify loans nor foreclose, both which would trigger a restatement of value on the mortgage asset. Meanwhile, banks are reluctant to allow “short sales” in lieu of foreclosure (where a homeowner sells a home to avoid foreclosure, but at a price less than the residual loan value, so the bank has to essentially eat the loss). This again defers the restatement of asset values for a while, but makes business sense only if home prices are expected to recover faster than the foregone interest that could be earned on new loans.

So if you talk to people who oversee these assets, including people who work with the FDIC, you'll hear that there is an inventory of unrecognized losses being built up, in hopes that the underlying mortgages will turn around without the need for loss reporting. In view of the CRL foreclosure projections, all we can think is – fat chance...

Our policy makers bailed out bank bondholders instead of focusing on debt restructuring. The bad assets are still in the banking system, millions of families will still lose their homes, the Treasury and Fed have jointly issued trillions in new government obligations, but the bondholders of Bear Stearns will still get 100% of their principal and interest.

Despite the current enthusiasm of Wall Street, this story has probably not ended, and the evidence suggests it will end badly.

For background, see this and this.

Technical note: Hussman thinks that stocks are extremely overbought.

The source of Moody's latest public humiliation in the matter of the Hilton Hotel LBO information leakage to Galleon, has been identified as Deep Shah, an analyst in his mid-twenties, who has since left the company, and is rumored to be back in India. A casual glance at Moody's reports that list  Shah as an author discloses numerous other potential deals in which the former Moody's employer may have leaked information.

The WSJ discloses:

Federal prosecutors now allege that a former junior analyst, identified by a person familiar with the matter as Deep Shah, breached that trust in July 2007 when he passed on inside information about Blackstone Group's pending $26 billion takeover of Hilton Hotels.

While Mr. Shah's role in the alleged insider-trading affair is small, his link to the third party -- now a key cooperating witness in the probe -- could shed light on how investigators uncovered the trading ring. Unusual trading in Hilton's shares was one of the first events that attracted scrutiny from regulators in 2007. The same cooperating witness was friends with an executive at Polycom Inc. and also passed on information about Google Inc.

Mr. Shah couldn't be reached for comment. A Moody's spokesman declined to comment on the alleged role of Mr. Shah. He reiterated the company's statement last week, saying that the alleged wrongdoing by one of its employees "would be an egregious violation" of the rating firm's policies.

Mr. Shah, who is in his mid-20s, left Moody's more than a year ago and is believed to have returned to his home country of India, according to former colleagues. One ex-colleague described him as "mellow."

Zero Hedge has conducted an inquiry into Moody's reports that carry Shah's name on them: the associate analyst was busy, as he covered a plethora of LBO-ridden sectors and names in the 2004-2008 time frame, which have included these takeover targets:

• Sabre Holdings
• First Data Corporation
• Computer Associates
• Ceridian
• Electronic Data Systems
• Several overview pieces of U.S. Gaming Companies, a compendium of all American gaming companies, many of which were acquired in the 2007 LBO boom wave

If Mr. Shah allegedly leaked the Hilton information on a few minutes notice in exchange for $10,000, and he was presumably also in possession of material "take private" information on many other companies in his coverage list, we suggest the SEC focus on any and all odd activity around LBOs that Mr. Shah may have been responsible for, especially in the 24 hour advance notice period that only rating agencies inexplicably are privy to such very material, non-public information, and which, the allegation goes, they have been so successful in leaking to the highest bidders.

Oh, and a regulatory idea: immediately do away with the practice of giving Moody's or S&P any advance notice of LBOs (not that there will be many of those in the foreseeable future). In fact, do away with the practice of giving rating agencies any material non-public information period. And, even more in fact, do away with the rating agencies in total. After all their existence is merely there to generate page views for blogosphere which fills its content extolling their endless stupidity and corruption.

It has long been a standard claim of economics—iirc, Robert Lucas was the first to say it aloud, though it may have been Gary Becker*—that a man who marries his housekeeper lowers GDP.

Apparently, Dubner and Levitt have taken this claim—along with their Rick James title**—to heart. Echidne has the details. A short sample:

There is one labour market women have always dominated: prostitution. Its business model is built upon a simple premise. Since time immemorial and all over the world, men have wanted more sex than they could get for free. So what inevitably emerges is a supply of women who, for the right price, are willing to satisfy this demand. But what is the right price?...

It turns out that the typical street prostitute in Chicago works 13 hours a week, performing 10 sex acts during that period, and earns an hourly wage of approximately $27. So her weekly take-home pay is roughly $350. This includes an average of $20 that a prostitute steals from her customers and drugs accepted in lieu of cash.

If I didn't know that Levitt has done some research on prostitution, I would think he left this section solely to Dubner. As it is, the skewed perspective (supply-side only) wouldn't even pass muster in a basic neoclassical labor market model, and that the authors are trying to sell this as "economics" is, to extend a recent note from Brad DeLong that "Levitt and Dubner today appear to no longer be thinking like economists", going to do Levitt much more harm than good.

Perhaps the difference between prostitutes and economists is that only the former have to worry about their reputation.

*Google indicates that the source is Pigou (1932). Does this explain the popularity of the Pigou Club?

**At this point, I'm betting they chose the title because of Abigail Breslin.