Tuesday, July 31, 2012

The Obama Welfare State

If voting made any difference they wouldn't let us do it  - Mark Twain
Facebook stock hit a new low today.  It's currently trading at $21.68, 43% below its IPO price, in less than 2 1/2 months since going public.  I know there must be an example of a worse performing new IPO, but I can't think of one in the 33 years in which I've been following/studying/trading the markets.  What blows my mind even more is that the Obama Justice Department AND SEC are not investigating Morgan Stanley for this.   It just goes to show you the degree to which Wall Street controls Obama.  If anyone has a financial adviser who tried to get them into FB stock, they should change advisers immediately.

As everyone knows by now, the employment numbers/unemployment rate metric is manipulated by an extraordinary degree and in a way which enables the Government to release headline statistics that make the employment situation in this country appear far stronger than it is in truth.  It's Orwellian manipulation at its finest.

The statisticians in the Obama administration have discovered a neat trick to help along the manipulation of the unemployment rate.  If you can move people out of the labor force as defined - those working plus those not working but looking for a job - then you can significantly improve the unemployment rate statistic because you can substantially reduce the size of the labor force by substantially reducing the number of people who don't have a job but would have to look for a job and take anything they can get if they had to worry about eating.  To accomplish this, Obama has significantly expanded the welfare, food stamp and disability social security rolls.

Here are some awesome charts prepared by zerohedge.com to illustrate (please click on the charts to enlarge).  The first chart shows the number of households participating in the food stamp program since Oct 2009.  It's increased by 29% since October 2009, which is 8 months after Obama took office officially:


A 29% increase in households receiving food stamps is not the sign of a healthy system.  The second chart  shows number of individuals who receive food stamps.  This has gone up 33% since early 2009:


Again, not the type of data point that one would associate with an economic recovery.  It's certainly not something that is sustainable considering that it is largely paid for using borrowed/printed money.

Finally, social security disability.  While I don't have the time to read through the documentation in order to prove it, it is pretty clear that Obama has liberalized the requirements to qualify for social security disability.  I say this because in the past few months there has been an incredible number of people applying for this benefit.  While general welfare payments are not sustainable, the stress put on social security by including liberalized benefits in general will blow up social security sooner than any Government or Wall Street genius has forecast.  Here's the chart:


Any measure which establishes legal charity in a permanent basis and gives it an administrative form, thereby creates an idle and lazy class, living at the expense of the industrial and working class.  - Alexis de Tocqueville
I don't know what else to say about this matter because welfare plus the military complex are going to bring about the complete collapse of our system.  All the corruption, fraud, and imperialism abroad are symptoms of a system in collapse and a Government that is controlled by people who serve no purpose other than to benefit from the transfer of middle class wealth using the welfare system, banking system fraud and the military complex as the conduits.

One last point.  It won't make a difference which political party gets the White House or control of Congress in the next election.  It just doesn't matter any more and if you think it does, then you are sadly ignorant of the facts, hopelessly naive or tragically stupid.

Friday, July 27, 2012

The Great American Swindle

Facebook is turning out to be the poster child for everything that is corrupt on Wall Street.  From fraudulent representation of financials to the fleecing of widows and orphans.  - Dave in Denver, May 22, 2012
After posting its first earnings report as a full-blown public company, Facebook stock is down over 14% from last night's close as I write this.  It hit a new low of $22.28 earlier.  From IPO ($38) to low, Facebook stock has lost 41.3% of its value in just 51 days of trading as a public company.   That represents a $33 billion dollar loss in wealth.  Given that the reported number in the Madoff Ponzi scheme is around $20 billion, this makes Facebook the largest swindle in U.S. history (next to the U.S. Government's $16 trillion Treasury debt swindle).

I'm actually stunned that the Facebook collapse has happened this quickly.  I expected the stock mania portion of the FB saga to last at least 6 months beyond FB's first earnings report.  Speaking of which, the spin-meisters on Wall St. and the media are lauding FB for "meeting revenue expectations."  Any idiot knew that this would be a no-brainer because FB's quarter was nearly 50% in the bag by the time the IPO occurred.  Having worked on public offerings for companies, I know that the underwriter and primary analysts covering the deal have access to the inside numbers.  Forecasting the revenue number was a no-brainer.

Where the "swindle" occurred was selling the "sizzle" of FB being the king of social networking and internet communication.  The dreamy possibilities are endless.  Just like at the height of the internet bubble.  It's a "new economy and new business model with limitless profits."  Well, the truth is that Facebook's operating margin plunged 10% from the same quarter a year ago and it generated negative $171 million in free cash flow.  This means that it was spending more to generate each dollar revenue than each of those dollars was able generate in cash profit.  This is essentially how a Ponzi scheme operates.  Make no doubt about it, Zuckerberg and Morgan Stanley knew that Facebook would report ugly growth and profit margin numbers when they were hyping up the IPO.  I know this because I've worked on securities offerings in the past.

What makes this most appalling is that it became apparent to the more "sophisticated" investors who were looking at the IPO during the road-show stage that the market value assumed using the likely IPO price was far higher than any true measure of value that could be assigned to FB.  Many of these institutional investors were given a better look at the real numbers behind the IPO marketing spin and walked away.  That left mostly the smaller investors vulnerable to the "share-stuff" done by Morgan Stanley right before the deal priced (Morgan Stanley retail customers were told they could only get 500 shares, only to end up with as much as 5,000 shares right before pricing).

Let's see, Long Term Capital, Enron, Refco, Amaranth, Countrywide, Washington Mutual, Lehman, Wachovia, MF Global, JP Morgan, Madoff, now Facebook - where and when will this end?  Probably not until the country collapses economically then politically. The most appalling aspect in watching this America abortion unfold is that the guy in the Oval Office who was elected on the promise to clean all of this up has turned out to be the guy who has looked the other way while the nation's wealth is being swindled away by Wall Street banks, corporate operators and politicians.

When the history books are written on this era of our country, they will not be kind to Obama.  He was ushered in on the euphoria of being the first African-American to be elected President.  He will be remembered ignominiously by future generations and historians as the ultimate promoter of the great American swindle.

Thursday, July 26, 2012

Housing: Look Out Below

I don't think we are at the beginning of the recovery. I think we are at the end of a disastrous debt supercycle that has gone on for the last thirty or forty years, really. It started when Nixon defaulted on our obligations under Bretton Woods and closed the gold window. Incrementally, year after year since then, we have been going in a direction of extremely unsound money, of massive borrowing in both the private and the public sector. - David Stockman, former OMB Director for Reagan and former Congressman
I have to admit, I get excited when I put forth a thesis and the data confirms my view.  I didn't expect immediate confirmation yesterday when I proffered that the housing market was getting ready to go into "collapse" mode again that the "tight inventory" argument being used by perma-bulls/frauds like the National Association Reality was Orwellian b.s.

Yesterday afternoon a reader linked this article from a New Jersey newspaper:  "The long-expected second wave of foreclosures in states where courts delayed their processing appears to have begun in New Jersey and area counties, with filings jumping in the second quarter from a year ago."  LINK  Then this morning Bloomberg reported this:  "Foreclosure filings rose in almost 60 percent of large U.S. cities in the first half of 2012, indicating many areas will have more distressed homes on the market later this year, RealtyTrac Inc. reported."  LINK

THEN, the National Association of Realtors reported that pending sales for June dropped 1.4% unexpectedly in June.  A .9% increase was forecast by Wall Street's Einsteins. Even more significant - and reinforcing a serial of downwardly revising previously reported data - the NAR downwardly revised the pending homes sales number for May.  Here's a LINK  People, this is the seasonal time of year that the housing market is supposed to be at its relative healthiest.  In fact, the NAR data is seasonally adjusted - imagine how ugly the raw data must be.

The NAR's excuse for the drop in pending home sales is "tight inventory."  But we know that's a bunch of b.s.  I know short-sales are failing to close en masse.  I personally know someone who was sitting in a house with  adefaulted mortgage waiting for a short sale to close that failed because the financing fell through.  Furthermore, a lot of the bank-owned inventory was shifted to FNM/FRE, who then off-loaded it onto investors in big blocks thru a sale-to-rent program initiated by the Obama Administration.  The rental inventory is going to balloon back up, including many apartment buildings that have been started and which have caused the building starts statistic to bounce over the past year.  Interestingly, I happened to notice the other day that rental prices for homes in the Denver area had softened up from this past winter.  I wonder why?

As the rental inventory expands and drives rents lower, it will also drive home values lower.  This process will be exacerbated by this coming 2nd wave of en masse foreclosures.  I'm not the only one who perceives this insidious negative feedback cycle starting back up.  I linked this analysis the other day, but here it is again and it's worth reading:  LINK  For every area of the market, I have certain analysts to whom I pay attention, mostly to confirm my own thinking or gain new insight.  Mark Hanson is the guy worth paying attention to for housing market analysis.

If you are thinking about buying a house because your realtor is telling you that the market is tight and prices are going higher, don't do it.  If you are thinking about selling your house to capture remaining equity value, get it done as soon as possible.  This fall/winter could be very ugly, and not just for the housing market...

Wednesday, July 25, 2012

On The Economy

The 8,753,935 workers who took federal disability insurance payments in July exceeded the population of 39 of the 50 states. Only 11 states—California, Texas, New York, Florida, Illinois, Pennsylvania, Ohio, Michigan, Georgia, North Carolina and New Jersey—had more people in them than the number of workers on the federal disability insurance rolls in July.
Here's the report where I took that quote:   LINK  Since Obama took office,  Social Security Disability benefit payments have accelerated.  In fact, year-to-date, more people have gone on SS Disability than have taken jobs.  And that's if you believe the Government job calculations.  Here's a statistic that should have everyone grabbing their pitchforks and heading out to behead the Government:
The Social Security System’s Disability Insurance Trust Fund has run deficits in each of the last three fiscal years, meaning the government has needed to borrow money to pay disability benefits to the workers claiming them. In fiscal 2009, the Disability Insurance Trust Fund ran a deficit of $8.5 billion. In fiscal 2010, it ran a deficit of $20.8 billion. And in fiscal 2011, it ran a deficit of $25.3 billion.
Like every other debt-financed "Ponzi" mechanism in our Government, this is clearly unsustainable.  The working taxpayer is getting eaten alive by the people in this country handing out Government benefits like pot at a Grateful Dead concert and by the benefit-addicted people who are consuming them.  This will be a large part of the demise of our system - and Atlas shrugs.

Can we please put any notion of the housing market stabilizing into it's proper grave site?  Sometimes I think I'm the only person in the country paying attention to the mortgage purchase application statistic released by the Mortgage Bankers Association weekly.  I'm for sure the ONLY commenter out there who has been consistently pointing out the fact the purchase applications index has been in a steady decline since February.   And it has been declining nearly every week during the May-now peak home buying season.

So today the MBAA index showed a steep 3% decline in purchase applications:  LINK  How can this possibly be happening if the housing market is stabilizing or trending higher, as the bubblehead financial media would have you believe?  It can't.  What makes the statistic even more shocking is the fact the less people are applying for a mortgage to purchase a home despite record low financing rates.  Refinancing activity is booming, led by Government-subsidized refi programs.  In other words, the mortgage data does not fit the home sale data being released by the National Association of Realtors or the National Association of Homebuilders.

Well today the data released by the industry-biased NAHB finally started to make sense.  New home sales were reported to be 350,000 for June (annualized).  But the Einsteins on Wall Street were looking for the number to be 370,000.  They clearly do not look at data from the Mortgage Bankers Association.

So despite record low mortgage rates, Government/taxpayer subsidy programs and the strongest seasonal time of the year for home sales, the housing market continues to flounder.  There will be a huge cliff-dive in housing market activity this fall and into next year, as the market for still-optimistic home buyers - and those falling prey to the "this is great value and the market has bottomed" sales pitch - has been saturated.  Here's a great analysis of the situation from a different angle:  LINK

Not only that, but I can guarantee that the expanding number of people leaving the workforce and going on SS Disablity or other Government welfare programs will absolutely not qualify for a mortgage to purchase a home (contrary to what would have occurred during the bubble years).  The housing market is dying and it will continue to die until we have a complete systemic cleansing and rebuild.  That won't happen in my lifetime.

Tuesday, July 24, 2012

Interest Or No Interest On Excess Reserves, That Is The Question

For what it’s worth, there is an enormous amount of interference in the gold and silver share market.  I think that will end as soon as gold and silver break their highs.  When that happens, I think it’s going to unleash a rally in these stocks that is absolutely going to stun people.  People will be shocked that don’t understand the full extent of the manipulation and how cheap these stocks have become as a result of it.  - John Embry on King World News  LINK
Before I delve into "excess reserves" held at the Fed by banks, I wanted to post two more indicators that confirm my thesis that our economy is pretty much in "plunge" mode.  First, the Richmond Fed released its regional manufacturing index, considered a good proxy for the national economy.  It plunged from -3 last month to a reading of -17 for July.  The incompetent economists on Wall Street were expecting a reading of -1.  Every sub-component of the index was horrific.  You can read the details here:  LINK

Second, Cisco released its Q2 guidance yesterday.  It significantly lowered its expectations, said the outlook for the global economy looks grim and announced it will cut 1,300 jobs:  LINK  Cisco's stock price is down 6% as I write this.  With regions in Italy and Spain now in insolvency and 3 large California cities in bankruptcy, with more to follow there and across the U.S., if Bernanke does not open up the liquidity floodgate again, he is going to be tagged as making the same mistake the Fed made in the early 1930's - a decision of which he claims to be an expert - in causing the Depression.  Even more profound, he'll  hand the Presidency to Romney.  Note:  Bernanke is a Democrat and, given his background, he likely despises hardcore Christian sects.

Now for the debate on cutting the interest rate on the excess reserves held by banks at the Fed. I will try to be concise as possible.  First, bank excess reserves held at the Fed are bank funds - in excess of Fed capital ratio requirements - which banks keep on "reserve" at the Fed for lack of something better to do with them.  Currently the Fed is paying banks .25% in interest on these reserves (IOER - interest on excess reserves).  A big debate has erupted over this policy, as critics contend it's keeping banks from lending out that money into the financial/economic system.  Defenders of the IOER policy say that because the Fed/bank money system is "a closed system," whether or not the Fed pays IOER is irrelevant other than as a monetary tool to regulate the Fed funds rate.

This article, if you are interested, does a good job of explaining why it is said that the Fed/banking system is "a closed system:"  LINK, but you can ignore the part where Stella defends the current IOER policy.  And my friend and colleague wrote an excellent piece yesterday that explains why the argument being served up in the media both for and against IOER is disingenuous and flawed:  LINK  In fact, I didn't really care about the whole issue until Jesse and I started emailing back and forth in depth about the topic.

Let's strip away the Orwellian gobbledygook being served up by lousy economists and retarded financial TV show hosts and commentators.  As Jesse wrote in his piece linked above, the IOER is nothing but a direct means of pumping liquidity into the banks.  And where did the ER come from?  The excess reserves were created by the massive TARP and QE programs.  TARP is directly from the Government and the assets purchased by the Fed under QE are guaranteed in value by the Treasury.  In other words, the $1.46 trillion in bank excess reserves sitting at the Fed is YOUR money.  So the banks are being given a nice liquidity injection from IOER using YOUR capital.  Thank you Bernanke, Geithner and Obama (and Paulson and Bush).

Now to the issue of whether manipulating IOER will stimulate bank lending.  The answer is yes, but not to the private sector economy.  Think about it this way:  given what we know about the economic prospects of this country, would you lend money to a new Mercedes Benz dealership, a new shopping mall development or to build a new Cisco manufacturing plant?  No.  So why would we expect the banks to do that?  Taking the IOER to zero or negative will absolutely not stimulate lending to the private sector UNLESS there are loan opportunities that make sense from a risk/return standpoint.  On this basis, the .25% IOER is irrelevant because a bank can make several percentage points more in interest if it could find risk/return worthy lending projects.  Banks are still lending to homebuyers, but that's because ultimately that loan is being guaranteed by the Government/YOU.  It's also not relevant as a tool to manage the Fed funds rate - the argument against cutting the IOER.   As Jesse points out, IOER is irrelevant other than as a liquidity subsidy to the big banks.  To that I add: using YOUR capital.

Now, if the Fed were to cut the IOER to zero or take it negative, it will increase bank lending to the Government via Treasury auctions.  If the IOER goes to zero, the Fed will "force" a lot of that $1.46 trillion from the excess reserve account at the Fed and into the longer-maturity Treasury auctions.  The Government will be funded through the election and beyond without the Fed having to increase the size of its balance sheet - that is, print money.

They say the devil's greatest trick is to make you think it doesn't exist.   The second greatest trick - ironically by a surrogate devil, the Fed - is to finance the U.S. Government using your money and likely against your desires.  Welcome to this country's transition to totalitarianism.  Orwell smiles, Atlas shrugs.

Monday, July 23, 2012

The Big Easy

“How did you go bankrupt? Two ways. Gradually, then suddenly.”
                                                - Hemingway, The Sun Also Rises

I wanted to work in a congratulatory note to Ernie "The Big Easy" Els for his perseverance in grinding his way to a British Open victory yesterday.  And then I started thinking about his nickname - which is given for his smooth, easy golf swing - in the context of how Easy it is to understand the U.S. financial predicament.  It's The Big Easy because it's easy to figure out how our systemic problems terminate, which is in one of two ways:  massive default or massive money printing, both of which will lead to "hyperinflation."

I define "hyperinflation" as the parabolic price inflation which occurs once the confidence completely collapses in a paper fiat currency.  Zimbabwe and Weimar Germany being the two most cited but there have been several examples in the last 100 years.

The golden truth of the matter is that despite all of the  political rhetoric, our Government simply can not and will not cut deficit spending and therefore the amount of debt required to keep the Government going is increasing at an increasing rate.  That is, it's going parabolic.  We're well beyond the point at which we can hope or expect that we can "grow" our way out of this debt with economic policies.  That's actually a ridiculously absurd notion.

So there's only two ways ultimately to solve the problem:  either the Government defaults in some fashion - this could take form in several ways - or the politicians decide to hyperinflate the currency in order to pay down the debt with printed money.   Either way the currency collapses and the precious metals go absolutely parabolic, as holders of dollars rush into anything available that can be considered a hard asset.  Gold and silver are both a hard asset AND a currency.

With Spain and Italy both now on the verge of financial collapse, and with three large California cities having filed bankruptcy in the last month plus many more in California and other States contemplating the same, the collapse is happening "gradually" right now.  The question is, what will trigger its "suddenness?"

I don't have that kind of crystal ball, but I know that if the U.S. were to outright default on its Treasury debt it would likely cause some of war with China, our second largest creditor after the Federal Reserve.  Not only that, but the Fed is a private entity owned by the banks which control the Fed.  Since the banks also control your Congressman, Geithner and Obama, I doubt the banks would let the Government outright default.

Thus, The Big Easy solution to the problem will be hyper-printing of the currency. It's just a matter of time and the clock is ticking:
national debt

Friday, July 20, 2012

Weekly Chart Porn - Uber-Bullish Silver Signals

Sic Semper Tyrannis

I met up with two good friends of mine for dinner the other night, one of them dating back to second grade.  We used to get together during high school and solve this country's problems.  Back then Jimmy Carter was the President, the U.S. was a net creditor country to the world, the country had just gone off the gold standard a few years earlier and we had very little Federal Government debt, especially as a ratio to GDP.  In other words, this country and its citizens still had a chance.

Now this country has over 50% of the population receiving some form of Government support, our true Federal Debt - including items like FNM/FRE/GMAC/Student Loan guarantees is well in excess of 160% of GDP and we run a monthly trade deficit averaging about $50 billion.  To make matters worse, we have a President who never had a real private sector job in his life, is the emblematic beneficiary of affirmative action and ACLU policies and professes that anyone who built his own business owes his success to the Government.  The only thing Obama likely ever built was the bong he used in college to smoke weed.

Back in the late 1970's, if someone had told my friends and I that this is how the U.S. would end up, we would have laughed at them in disbelief.  Now we shudder in horror for what we know is likely to come. One of my friends shared a letter he wrote to other friend on the 4th of July and has graciously allowed me to share it with the readers of this blog.  This is worth reading more than once:

My Dear Professor,

Salutations on this 236th Anniversary of the adoption of Mr. Jefferson's noble writing proclaiming us free of the tyranny of Great Britain and its odious King.  I hope that you and your beautiful family have plans to observe the occasion festively. 

It is for me an occasion at once happy and solemn.   A friend wrote me this morning to wish me "happy freedom" day.  I was struck by that language.

I fear that we have rather more license,  i.e., leave of the government, than freedom. We are increasingly a nation of men, rather than a nation of laws. Increasingly, we depend upon the permission of the government to conduct our lives, rather than the government depending on the consent of the governed to conduct its affairs.  I think some of the more inspiring founding fathers would be as sickened by what the government has become, as amazed by what the continent has become.  There is precious little virtue left in the government we have instituted, and the officers appointed to it, and too much self-interest. 

Even John Roberts' recent act applying time-honored, though presently unfashionable precepts of jurisprudence smacks less of courage or principle than it does of self-interest; it seems to me more an effort to rub some of the tarnish off his posterior for posterity than concern for the integrity of the institution.  He cannot with one such act undo the damage he and his ideologue friends have done to undermine the integrity of the once-high court recently.  It is not for the whoremonger to restore virtue to the harlot.

We would do well today to recall the sentiment animating the courageous men at Philadelphia 236 summers ago, and to reflect upon the question whether our government has not in its arrogance and insensitivity to the affairs of its subjects (for that is what we increasingly are) become too much like the tyrant indicted in the great Declaration they then adopted:

"When kings the sword of justice first lay down, They are no kings,
 though they possess the crown, Titles are shadows, crowns are empty
 things, The good of subjects is the end of kings."

A toast then, to the revolution and revolutionaries that created us, and a prayer for the rebirth of the liberating spirit that moved them!  May we find that spirit again before it is too late!

Vive la Revolution! Sic semper tyrannis!


"Sic  semper tyrannis" is a Latin phrase commonly used as a rallying cry against the tyranny of Government.

Two of us in the group, the author of the above letter and myself, have concluded that the only way to fix this country now is a pushing of the "reset" button.  A popular revolution, which includes burning down the existing system and rebuilding everything entirely, starting with original Bill of Rights as the basis.  Until that happens, it doesn't matter which party controls the Oval office or either side of Congress because it's the Government and its banking/corporate providers that control us.

Until then - Atlas shrugs.

Thursday, July 19, 2012

More On The Housing Sector

Of course Obama didn't hesitate to release his taxes, any politician who has never had a real job or worked as a builder of businesses in the private sector is always happy to release their taxes.  But then again, I guess Obama made Romney's businesses happen for him. - friend of mine from NY
I wanted to do a quick follow-up to yesterday's post on housing.  I have been postulating since late last year that the housing market "stability" was completely a function of the foreclosure moratorium that went from the middle of last year until the mortgage fraud settlement early this year plus the low/no down payment mortgage products rolled out by the FHA - and subsidized by you and me.

Yesterday I posted an article which showed that FHA mortgage delinquencies jumped 26% from last year.  Now foreclosures are ramping up:
"Thousands of foreclosures that were stuck in process due to delays over the so-called "Robo-signing" paperwork scandal are working their way through a revamped banking system and heading toward final bank repossession."
Here's the report: LINK  Even more troubling:
Even more indicative of this new surge in processing is that repeat foreclosures hit an all-time high in January, representing 47 percent of all starts, according to LPS. Repeat foreclosures are either failed loan modifications, or loans that banks were attempting to modify but couldn't.
Delinquencies and foreclosures are ramping back up.  Inventory will ramp back up as well.  And then we get today's monthly existing home sales report which showed that existing home sales dropped "unexpectedly" by 5.4% to an 8-month low.  It was not unexpected by me as I've been tracking mortgage purchase applications on this blog, which has indicated that home buying activity is in decline (refinancings are going through the roof because the Fed, in combination with FHA refi programs, has made money almost free with near-zero interest rates out to 10-years).

But wait, isn't this supposed to be the seasonal peak of the home buying season?  If home sales are declining through the peak selling season, imagine how bad it could get for the rest of the year.  And combine that with seriously deteriorating economic fundamentals and we are setting up for another housing/bank catastrophe.  2008-squared.

Circling back the quote at the top, make no mistake by thinking that I support Romney.  I actually don't care who wins the election at this point because it's irrelevant.  Either candidate is controlled by the banking and defense company interests that pay for their election (see Citizens United v Federal Election Commission for why this so:  LINK).  I wish Romney would select Herman Cain to be his running mate because then at least we would have some serious entertainment.  As it is, my only interest in this election is to see just how brutal the mud-slinging will become.

Wednesday, July 18, 2012

The Housing Market Black Hole

We have reached a profound point in economic history where the truth is unpalatable to the political class  -  and that truth is that the scale and magnitude of the problem is larger than their ability to respond - and it terrifies them...Bad things are going to happen.  - Hugh Hendry on CNBC
Once again we're going through another wash, rinse, repeat cycle with the housing market fairy tales.  People who bother to pay attention to the news woke up this morning to a report from the Commerce Dept that housing starts rose the highest level since 2008 in June LINK.  I'm not sure why that would be considered good news, since 2008 is when the bottom really fell out of the housing market.  The other anomaly that contradicts this Government-compiled data is that mortgage purchase applications continue to decline on a weekly basis.  Note:  the mortgage application data is compiled and released by a private, free enterprise organization so we can safely assume that the data report is infinitely more reliable than that of the Government's Commerce Department.

The other myth being propagated by the media and the economic wizards is that the housing inventory is declining.  In fact, this housing inventory has largely been converted to rentals.  In particular Fannie Mae and Freddie Mac have been unloading their foreclosed inventory into institutional investors using Taxpayer money to subsidize the transactions.  Interestingly and anecdotally, I was perusing the home rental listings in the Denver area for a friend who may be moving to Denver and I noticed that rents had decreased by about 10% from just 6 months ago, when I was looking for a new rental.  If in fact the total housing inventory, for sale + rentals, was declining then we would expect that rents would be stable or increasing.

So where's the black hole disconnect?  For one, the data is highly suspect, especially since mortgage purchase applications do not correlated with sales and starts.  To be sure, I'm sure home builders are taking advantage of near-zero interest rates and borrowing as much as they can to build.  But, as zerohedge crunched this morning's housing starts numbers, the number of homes actually completed is well below the run-rate of starts:  LINK.  A form of "channel stuffing" for home builders is to start a lot of homes but take a long time to complete them, since the stock market and investors only care about the headline "starts" data.

Even uglier, the "shadow" inventory of housing market is going to start rising rapidly this year.  The "shadow" inventory primarily is composed of homes in which the homeowner is in some form of delinquency or technical default.  These are homes where the lender/bank has opted to sit on the non-paying mortgage rather take on the ownership responsibilities of foreclosing, primarily real estate tax and HOA dues expenses.  If banks thought they could foreclose and sell quickly without incurring a big capital hit, they would.  But instead they let the homeowner live "rent free" but still on the hook for taxes and HOA dues.  This is especially true in the jumbo-mortgage segment (anything over $417k).  In fact, I know of several people who are sitting in high 6-digit and low 7-digit value homes who have not made mortgage payments for at least a year.

These delinquent/default mortgage homes are just part of the shadow inventory.  The other primary part is actual foreclosures.  We had a moratorium in foreclosures while the mortgage fraud litigation was being settled, of course on favorable terms for the banks.  FNM/FRE also delayed their foreclosure process while they unloaded substantial REO on the market.   So what is the data showing us?  From Bloomberg:
The shadow inventory of homes – those in foreclosure plus those 90 days late on mortgage payments – is on the rise again, a further indication that the supply side has not yet healed. According to RealtyTrac, foreclosure starts jumped 6 percent on a year ago basis in the second quarter, the first year-over-year increase since 2009. There are roughly 4.16 million homes that could begin to flow to market.
What's even more troubling is that the Government's FHA filled in the lending void created by the massive financial troubles at FNM/FRE.  In fact, over the past few years, the Government subsidization of the housing market shifted from FNM/FRE to the use of the FHA.  The FHA became the predominant source for mortgages and rolled out several no-down-payment/3.5% down payment programs.  And now, predictably FHA delinquencies are rising quickly, up a frightening 26% from last year:  LINK.   Why is this "frightening?"  One, because it means that the FHA will be forced to foreclose on a huge number of homes, further contributing to the housing market inventory;  and two, because the FHA is going to require a massive taxpayer bailout.

How can the housing market possibly be "stabilizing" and inventories be "returning to a healthy level" given all of this evidence to the contrary?   The housing market is one giant black hole of wasted resources and fraudulent representation of the numbers.  What's worse is that via the FHA, the Government has been using taxpayer money to subsidize a significant portion of the mortgages that have been used to purchase homes since 2008.  And now it's the FHA's turn to blow up.

It will be impossible for the housing market to ever bottom and stabilize until this country recovers economically.  This means real jobs are created which create real income growth and real employment growth.  Furthermore, the totality of the existing REAL inventory has to clear the market.  This requires demographic growth that our system can not possibly support until all the problems we know about are solved and put behind us.  THAT, my friends, will never happen in my lifetime or your's.

Monday, July 16, 2012

Nothing Is, But What Is Not (Shakespeare/Macbeth)

If you’ve got a business -- you didn’t build that. Somebody else made that happen - Barack Obama, July 13, 2012
You know, I have maintained for a long time that Barack Obama is the poster child for affirmative action.  That quote from a speech by him on Friday serves to reinforce my view.  If ever there was an apologetic statement for big Government, welfare and wealth redistribution, that is it.  I fell off my chair when I read that quote.  I guess everyone on field day gets a ribbon and now that policy has become firmly entrenched in our Government.  Barack Obama has had his entire career handed to him by others so I guess no one should be surprised that he made that remark.  What's sadly ironic is that, if you go by the income distribution numbers in our country since Obama was elected, it would appear that he is nothing more than a dish rag for the wealthy entitled, as an even greater percentage of income has trickled up to the 1% than before Obama was elected.

I had to sneak in a tribute to Shakespeare since I'm going to see the Colorado Shakespeare Company perform Richard III on Thursday evening in Boulder.  I've always loved that particular quote from Macbeth because it succinctly and cleverly encapsulates the idea of truth vs. appearance.  In fact, Obama is emblematic of form vs. substance.  He's all form and zero substance.

In a similar fashion, the existence and being of JP Morgan as a capitalistic enterprise also is the perfection of fiction vs. reality.  I recall that about 9 years ago, a good friend and colleague of mine and I discussed the fact that JP Morgan was littered with bad derivatives positions and off-balance-sheet debt and would eventually implode.  But we also knew that JP Morgan was the Fed's primary tool for manipulating the markets and because of that fact the public would never see the extent of which JP Morgan would be bailed out behind the scenes.  The TARP/Fed bailout of JP Morgan (and the other too big to fail banks) was just a glimpse of the bigger behind-the-scenes bailouts that are coming.

JP Morgan reported 67 cents per share earnings on Friday.  Of that, 45 cents was fully disclosed fictitious accounting gains.  I'll explain without delving in too deep.  12 cents of JPM's net income came from a neat little trick known as Debt Valuation Adjustment.  Essentially what this means is that the bonds issued by JP Morgan to raise money declined in market value last quarter (went up in yield).  So JP Morgan pretends that it goes into the market and buys back all of its bonds at a price level less than par (100), and therefore reaps income because they could have saved money buying them back below par rather than waiting until maturity and having to pay par.  Get it?  "What is not" about this bullshit little accounting fiction is that JP Morgan never purchased any bonds during the quarter.  It's 100% fictitious income.

The bigger source of income was 33 cents attributed to "loan loss depletion."  What this means is that JP Morgan accumulated charges to income over the past few years in anticipation of some of its loans and trading bets going bad over time.  For some reason, they decided they over-reserved for loan losses and therefore reduced the amount of loan loss reserves, which then gets translated into accounting (GAAP) income.  The charges to income over time were originally non-cash and the reversal of these charges are non-cash.  However, you have to ask yourself if the use of this loan loss reversal to generate paper income makes sense.  All of the too big to fail banks are using this gimmick to generate a lot of "income" over the past few quarters.

But let's see if it makes rational sense for JPM to do this.  What we know is that JPM incurred a $4.4 billion loss on its London derivatives bet, despite telling us a few weeks ago that the loss was $2 billion.  For me this raises a red flag and I've demonstrated in past  posts how JPM's position marks are fraudulent.  So let's assume this loss is only $4.4 billion.  It's a lot bigger and everyone I know who has worked on a trading desk - including me - knows that it is.  But what about all of its other derivatives bets and loan assets?  Are we supposed to give them the benefit of doubt and trust that all the other assets on and off balance sheet are accurately marked?  I think one would have to be supremely stupid or appallingly naive to believe that JP Morgan and its drunken CEO Jamie Dimon will ever tell us the truth about anything.  The truth is that JP Morgan's assets are hopelessly marked too high in value and the bank will eventually have to recognize massive losses.  They should not have been allowed to reverse their loan loss reserve like this because the facts to not match the action taken by JPM.

My point here is that JPM's earnings reports are completely fictitious and fraudulent.  And if I know this, it means that the people at JPM who are in upper management know this, Jamie Dimon knows this,  many JPM board members likely know this, Bernanke knows this and people in the Treasury and SEC with some modicum of intelligence know this (Geithner and Mary Shapiro are too stupid).  This gets back to the discussions about JPM that I used to have back in 2002 and 2003.  We knew JPM was technically insolvent back then.  Nine years later that level of insolvency is significantly higher by many multiples, which means the smoke being blown to cover it is substantially thicker.  And worse, the tax payer and middle class wealth being confiscated to keep JP Morgan from collapsing is unimaginably large.  This is why JP Morgan is being allowed to steal customer assets that were being used as hypothecated collateral at places like Lehman, MF Global and PFGBest.  This will get worse - expect it.

Wednesday, July 11, 2012

Un po 'di questo e un po' di quella (A Little Of This And A Little Of That)

The few who understand the system, will either be so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages...will bear its burden without complaint, and perhaps without suspecting that the system is inimical (harmful) to their best interests  - The Rothschild brothers of London writing to associates in New York, 1863
Lest anyone think that I'm a Romney supporter, given all the criticism of Obama that I issue, I found this to be not only funny but truly awesome:   “Romney has a Koch problem” (the name is pronounced "coke").  That was the banner being towed by an airplane over the Hamptons, where a couple fundraisers were being conducted for Romney this past weeekend:  LINK

If you ever want to figure out who the puppeteers are that control the puppet strings of a politician, look to the biggest campaign donors.  So for instance, with Obama it's several Wall Street firms and individuals like JP Morgan, Goldman Sachs, Jon Corzine and Warren Buffet.  Now we see that the Koch brothers will have a heavy influence on Romney, should he be elected.  In addition to the double dose of social and moral regulation and control that will come with a Romney White House, the Kochs are truly the modern day equivalent of robber barons.  I'd rather have my teeth pulled out one by one with no novacaine than live in a country influenced by Romney and the Kochs.

How are your muni bonds looking?  LINK  San Bernardino is going to be the 3rd city in California to file bankruptcy in the last two weeks.  It starts slowly and then avalanches.  Anyone who thinks this can't happen in their own city is either hopelessly naive or tragically ignorant.  Most municipalities are running some kind of spending deficit.  If you look into the San Bernardino situation, the city council was given fraudulent budget reports for 13 of the last 16 years. Imagine that?   San Bernardino isn't unique in this regard.  This is going on across the country.

A few months ago I wrote some commentary explaining why the housing market had not bottomed and showed how the recent "stabilization" being promoted in the media as a "bounce in housing" was really nothing more than a big moratorium on foreclosures.  I suggested that 2012 would see a resumption in the escalation of foreclosures.  Well wouldn't you know it: "FHA's mortgage delinquencies soar"  LINK.  The banks and FNM/FRE have been working overtime to work off their REO foreclosure inventory, mostly selling them as rentals to "investors," in order to prepare for the next cycle of foreclosures.  As an aside, it was reported that over 45% of the mortgages in San Bernardino are under water.  Look out below.  If you bought a house in the last 12 months thinking it was "a great value and investment," my condolences.

Finally, I wanted to share some thoughts I sent to GATA's Bill Murphy last night, as he had reflected in his nightly "Midas" report LINK that something about the markets "spooked" him last night:

I just read where you felt "spooked" all day.  Same here.  I can't put my finger exactly on it but I think it has to do with the PFG thing.  That this happened after Madoff and MF Global is just incomprehensible.  Either the people enforcing the laws are retarded or are in on this looting.  My bet with Gary Gensler is the latter.

If Obama was merely just doing his job as President, he would make Gensler step down from the CFTC and go away.  If Obama is worth anything at all as an ethical, principled, moral human being  he would have Gensler investigated.  This would include all email correspondence and phone logs at the CFTC AND his private residence/cell phone.

What is "spooky" about what is going is that our system is being completely looted while the Government stands by and enables it.  The fraud and corruption runs deeper than any of us can possibly comprehend.  The public in general is clueless other than to know vaguely that "things ain't right."
Our country is disintegrating before our eyes.  Buona sera a tutti (Good evening to everyone).

Tuesday, July 10, 2012

Systematic Wealth Confiscation

"[S]ome accounting irregularities are being investigated regarding company accounts...What this means is no customers are able to trade except to liquidate positions. Until further notice, PFGBEST is not authorized to release any funds" - that is the notice given to brokerage customers of PFGBest, Peregrine Financial Group.
"PFGBest is not authorized to release any funds."   Get used to seeing brokerage notices like that.  That is what happened with MF Global.  It's also, in part, what happened with Lehman.  There's also a common thread behind these brokerage firm collapses:  JP Morgan and the systematic confiscation of your wealth.  JP Morgan was one of Lehman's big custodial banks, JP Morgan was the custodian for MF Global's failed book of investments and JP Morgan is the custodian for PFGBest's FX business, which is around $220 million - the amount of missing client funds.

If anyone wants to read about the details, including PFG's CEO's attempted suicide, you can do so here: LINK.  If the PFG CEO really wants to end his life, I'd be happy to be his Dr. Kevorkian.

This whole situation is almost boilerplate like MF Global.  What surprises me the most is that no one in blogosphere or the media has connected this "boilerplate" to the Lehman collapse.  JP Morgan made off with several billion in Lehman assets then.

This kind of adventure, if the Obama Administration does not start dismantling JP Morgan and cracking down on this extreme financial fraud, will be become a weekly event.  The beauty of the MF Global situation is that it set up the boilerplate for customer funds to be confiscated within a rigged jurisprudence framework.

It gets back to the necessity for everyone to unload their IRAs, get out of their 401k's to the extent possible, and get as much of their invested wealth IN to precious metals and OUT of the financial system.  People can "pooh pooh" this advice, but they'll regret it.

Back in 2002, I made the statement that the insider elitists would hold up the system to loot every last crumb of middle class wealth and that the IRA's/401k's would be the last go.  It's starting to look like I was right.  In fact, I just got off the phone with a very good, long time friend who accused me back in 2003 of "seeing black helicopters in the sky" (i.e. I was a whacked out conspiracy theorist).  His greeting this morning was: "I can't believe how right you've been about all of this."

By the way, anyone keeping their precious metals IRA account, or any other precious metals-related account, at PFG Precious Metals, you can probably kiss it good-bye.  Will Monex be next?

Sunday, July 8, 2012

The Obama Government Bends You Over In Ways Not Obvious

First, I'd like to congratulate Roger Federer for his win at Wimbeldon.  He's certainly in the "the greatest of all-time" conversation with a lot of tennis observers.

The Government takes your money and gives it to others often in ways that are not apparent.  In fact, often economic news which has a positive "spin" put on it is, in truth, a product of the Government redistributing your tax money to those who do not earn it.

General Motors, aka Government Motors, reported June sales a few days ago.  The company reported a 16% gain over June 2011 sales.  The "quality" of the sales was described as "broad based."  But let's take a look "under the hood," so to speak, at real quality of those sales.  Many of you have read the dealer inventory gimmick which zerohedge.com does a good job reporting.  But zerohedge misses a huge component of Government subsidy that I'll get to in a moment.

As it turns out, a GM's domestic sales were stimulated by a large increase in fleet purchases by the Government. There's no telling if the Government really needed these cars - and it probably did not - but what a great way to boost the ability of Obama to use GM as a campaign tool.  In addition, as zerohedge chronicles, GM engages in an accounting gimmick known as "channel stuffing:"  LINK  To review the accounting, an auto manufacturer records sales when the car trailer loaded up for dealer deliveries leaves the factory parking lot.  GAAP accounting permits this.  The way it should really work is that a sale is not recorded until the end-user buys the car.  As you can see from the link, the inventory of vehicles at GM dealers has ballooned, increasing almost every month, ever since Obama used your tax money to bail out GM.

When GM assesses its sales in the middle of a given month, it can generate an increase in "sales" to dealers by slapping incentives and dealer "floor financing" to month-end sales for dealers and loading up the car trailers and sending them on their way. To be sure, some of those trailers are still on the highway going to dealers after the end of a month/quarter. You can see in that chart that dealer inventory has increased almost every month since GM was bailed out.  We don't know what true end-user "organic" sales are, and therefore thanks to liberal, fraudulent accounting rules, we can't tell for sure if GM is doing a good job managing the tax payers' investment.  To the extent that GM stock is down 40% since GM went public, GM's turnaround is failing.  Currently the tax payer investment in the stocks is $35 billion under water. There's also $10's of billions in direct bailout money that will never paid back. But you wouldn't know it if you only listen to Obama's accounting of GM.  He promotes the bailout as an example of his successful economic policies.

But there's another insidious way in which the Government misallocates your tax money to prop up General Motors.  One which zerohedge misses.  Ever wonder why the monthly lease payment advertised on GM cars seems so low?  It's because the Government, as part of GM's bailout, guarantees the residual value of those car leases.  To review briefly, the residual value of a lease is the assigned value of a car at the end of the lease.  Lease payments are determined by the length of the lease, the amount of the down payment and the residual value.  The size of the lease payment can be reduced by increasing the amount of the assigned residual value.  But if a dealer sets it too high, it will lose money at the end of the lease.  Dealers don't typically lose money on any part of a transaction.  Enter Obama.  The Obama Government put in a program when GM was bailed out to guarantee the residual of GM leases.  So dealers can set the residual value unrealistically high in order to create a low payment lease and the Government managers can look the other way on this because it's taxpayer money, not their own money.  It's a massive taxpayer subsidy of GM sales, because at the end of the lease term the dealer unloads the car at the prevailing used car market price and any loss vs. the residual value is reimbursed by Obama.  Neat trick huh?

This Obama-contrived monkey business is an egregious and substantial taxpayer subsidy of the large compensation packages received by both GM's upper management AND GM's unionized labor force.  Think about this way:  it is true that the GM bailout saved some jobs; BUT, the end result of this bailout is that Obama is taking money from your pocket and giving it to the upper management and workforce at General Motors.  The average GM union worker makes far more than the average non-union American worker, especially when the generous pension package is factored in.  This is an appalling and tragic transfer of wealth from bona fide workers in the economy to a business that would not have otherwise survived and should have been allowed to fail.  It also creates a significant amount "collateral" damage to the system that won't be apparent for a few more years.  To the extent that there was a need for GM to exist, private capital should have been allowed to pick up the pieces and create real business with real sales and thereby create real "value-added" to our economic system.

Next time you hear Obama congratulate himself over GM's "success,"  think about all the managers and employees who are living a good life thanks to your hard work and tax dollars.