World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.
Yikes -- did you see that intraday chart on the long bond futures? Nasty! The government just sold $14 billion of long bonds at a whopping 4.288% yield. That was far above pre-auction forecasts for a yield of 4.192%, according to Bloomberg. The bid-to-cover ratio came in at just 2.14, compared with a 10-auction average of 2.24 and a last auction showing of 2.4. Only 33% of the bonds sold to indirect bidders. That was above the 26.1% average of the last 10 auctions, but well below the 46.2% reading at the last auction. At last check, LB futures were off 1 29/32 after trading weak earlier in the session. Ten-year yields are shooting up 11 basis points to 3.3%.
Frankly, it’s good to see some bond vigilantism. It is sorely need to cap the shenanigans at the Fed and Treasury who are simply OUT OF CONTROL.
In case you didn’t catch how out of control, here’s the video of the Fed’s IG explaining “clearly” how she does (or doesn’t do) her job:
Is Anyone Minding the Store at the Federal Reserve?
Those who think that spike down in bonds (rates UP) are not related, you best think again.
May 7 (Bloomberg) -- Federal regulators today unveil what Treasury Secretary Timothy Geithner said will be a “reassuring” picture of a U.S. banking system able to withstand whatever stresses the recession may inflict on it once a handful of institutions add to their capital base.
Now who could have ever guessed that little weasel Geithner would come out and say a thing like that? Nice show Timmy, thank you so much for the act, now please do your country a big favor and go jump off the Empire State Building or something, will you? Plllleeeeaase… give me a break. I’m sorry, but I have to interrupt this update with a very appropriate tune:
Three Dog Night – Liar:
And absolutely there are more “greenshoots.” Heck, GM only burned through a little more than $10 billion dollars in the first quarter, losing $6 billion on the bottom line in a real sign of health and good times to come.
Not to worry, the banks show no insolvency. Riiiight.
And for the past week jobless claims fell to a very reassuring 601,000, that’s all… yet another green shoot. Please ignore the new all time record in continuing claims that grew to 6.35 million, that’s irrelevant and a “lagging” indicator. No, we’re looking across the valley to the other side and what a nicely shaped V valley it is too.
So, with the /ES leaping the 912 pivot area, it now becomes support and the next higher pivot is at 935. Here’s the overnight action:
We’re actually not getting too far from the last significant high on the SPX which is up at 944. A break over that would be bullish indeed.
And I just want to point out clearly that I made another good call in my update yesterday (cough)! You did see all my caveat’s… right?
Have a great “reassuring” and “stress” free day,
Nate
PS - And whatever you do, don't watch the video in the post below this one, that might take away your confidence that the government has a single check and balance on it. I'm so glad they have their tenacles in so many large institutions now...
This is a guest article by frequent contributor Frank the Tank. Frank has a way with words and he has a very clear understanding of the forces at work on our economy. What he is bringing you tonight is shocking. What a wake up call for America.
Rest easy Comrades, the Inspector General of the Federal Reserve is on the job:
Is Anyone Minding the Store at the Federal Reserve?
Let me just add this comrades, if you have not yet seen enough daylight thievery from your own pockets, if you have not yet seen enough destruction of your children and grandchildren's hopes for liberty, if you have not yet seen enough of the wanton demolition of America's financial freedom and sovereignty, rest assured that you will see more.
The unmitigated gall of tossing this buffoon into the public square to answer to the people's elected representatives says all that you need to know regarding how seriously the banking cartel takes your calls for reform and for the much ballyhooed "change you can believe in." This was a spit in the face to every man and woman on Main Street busting ass to make a decent enough living to simply afford a roof above their heads. But I suppose we have long passed the time when our nation was capable of anything more than a perfunctory glance at the headlines and a brief shaking of the head before the next ballgame or reality show lulls us back into the abyss. Good night America, how are ya?
Arlo Guthrie /City of New Orleans:
Shocking testimony by someone who obviously isn’t qualified to balance my checkbook much less be an Inspector General for a Federal Reserve who is out of control. This PROVES that there are no checks and balances in regards to the maniacs running our government. What a crying shame, that’s enough to make me shed a tear for our country. It’s time we take our country back.
While I’m not a psychiatrist, I did stay at a Holiday Inn Express last night… and with the help of math I can spot a bad case of EMS a mile away! Yes, dear. I know it's that time again, no need to apologize.
Wasn’t it Albert Einstein who defined insanity as “doing the same thing over and over again but expecting different results?”
Lindsey Buckingham - Go Insane:
There are people who actually believe that “stimulus” spending and ramming more “credit” into the system is going to fix our economy? Huh? What utter and complete nonsense – wait, that’s too polite… I want to just say its bullshit, because that’s exactly what it is.
And while we spend more and more, our tax revenues are falling off a cliff. Sure, there’s a recovery in there... for those who do not live in the world of the sane. And never mind that debts have grown to numbers that are absolutely beyond the tipping point, so huge that there is NO HOPE to ever pay them back. No, that doesn’t make me negative, it makes the majority of people incompetent at math and a large part of the mass psychosis that has befallen the globe.
I’ve been harping on the unworkable math for quite some time, Death by Numbers. And while that article is now out of date number wise, revising it would be utterly pointless as the numbers did not work then and they certainly don’t work now.
While the pontificators bullshit about this and that on the teledistractor and in the halls of Congress, the math just continues to get worse and no one, save Ron Paul, is willing to get up in front of a mic and talk about the real issues and how our system led to this mass psychosis. I’ve been pinning the blame on our Interest Bearing Fractional Reserve Money by Fiat… Which is run by the PRIVATE/ CRIMINAL central bankers, but very few people can see this as a primary root cause.
Today Mish stepped up to the plate and called that spade what it is, good on him. While I know he’s been an advocate of abolishing the Fed, he is going a big step further towards the ROOTS with this article, it’s a good one that I suggest everyone follow the link to read in its entirety, this is just the outline below:
Fractional Reserve Lending (FRL) is fraudulent. Indeed, FRL in conjunction with micro-mismanagement of interest rates by the Fed is the root cause of the financial crisis we are in.
Unfortunately many do not see FRL for the fraudulent scheme that it is. Here are the most common defenses against the allegation of fraud.
Five Arguments Used To Defend FRL
1. FRL is not fraud because the lending is backed by assets. 2. FRL is not fraud because it is allowed by law. 3. Eliminating FRL would require unwarranted "regulation". 4. No one is harmed by FRL. 5. People have a legal right to make agreements with banks allowing their money to be lent with no reserves
Rebuttal
1R. To those who claim credit extended by fractional reserve lending is not fraudulent because it's backed by assets, I ask: "What assets?" The answer of course is .... Fannie Mae and Freddie Mac debt that would be worthless were it not for taxpayer bailouts.
Asset backed commercial paper that has ceased to trade.
Toggle bonds and other such nonsense where debt is paid back with more debt. Loans to hedge funds for speculation in credit default swaps and commodities.
Commercial real estate boondoggles including scores of condo towers now sitting empty. A whole array of other silly loans that should never have been made.
Close analysis shows the "backed by assets" claim only holds true as long as asset prices are rising. When asset prices are falling as they are now, the true state of the non-existent backing is plain to see.
Credit extended via FRL is backed by nothing more than thin air and promises. Those promises are currently worth pennies on the dollar, and the entire global banking system is insolvent as a result.
2R. Some claim that fractional reserve lending cannot be fraud because it is legal. However, Just because something is legal does not make it right. For example: Slavery was once legal. It certainly never was right. Government decree cannot make slavery right, but it can and did make it legal. By the same token, government decree alone cannot change the fact that fractional reserve lending is fraudulent. Proof of fraudulence will be offered in the rebuttal to point number 4.
3R. Some claim that FRL cannot be eliminated because that would require regulation and such regulation would in and of itself be against free market principles. The fact of the matter is that a free market would quickly shut down any bank lending out more money than it had in the vault. No one would possibly trust such a bank. It is only government decree (regulation) that allows banks to get away with such obvious fraud.
Furthermore, people are confused by what "libertarian" means. Libertarian does not mean anarchy. There are laws against murder, theft, fraud, and slavery that no libertarian I know would argue against.
Indeed, for any society to function, there must be certain laws (regulations) in place. Here are the basic tenants of valid laws. Protection of property rights Protection of civil rights Freedom of religion Equal protection under the law regardless of race, creed, color, sex, nationality, wealth, etc.
4R. Proponents of FRL claim no one is harmed by it. In practice, everyone is harmed by it. Here is how it starts. Those with first access to money accumulate assets and those with later access to money bid up those assets. Consider housing. GSE creation of credit out of thin air is a perfect example of what happens. By the time credit was available to those of lower economic status, the bubble was already formed and ripe for a collapse. Even the non-participants were harmed. How so? Via rising property taxes and rising prices of goods and services without the benefit of rising wages.
Ironically, even those with first access to money (the banks and wealthy) ultimately did not fare well because they were greedy. When the bubble popped (as all debt bubbles eventually do) the only winners were the few who made timely bets on the demise of the bubble.
FRL is the enabler for credit bubbles. Given enough time, credit bubbles are guaranteed to implode in deflationary fashion. History is replete with examples. The South Seas bubble, the John Law Mississippi bubble, and tulip mania are prime examples.
5R. People have no such right to agree to commit fraud. Here are more things people have no right to do: Shout fire in a movie theatre, conspire to steal someone's money, agree to start a toxic waste dump in a location where it would poison every water source in the neighborhood. There is an infinite number of things two people cannot agree to do. The right of people to do things ends when it affects the property rights of everyone else. And as noted in 4R, everyone is affected by fraudulent agreements that allow more credit to be extended than there is money in the bank.
Mish is definitely onto the rational and sane truth here. The leverage created by the fractional reserve system has gotten higher and higher as the required real reserves have declined. Today the banks have NO REAL RESERVES and thus our system has gone to an INFINITE Fractional Reserve Lending system.
Never ending growth is not possible in the real world, only insane or very uneducated people would make that a goal, and our Fed has, while scores of people buy into that mantra as a possibility. They have never Spent some Time with the Good Dr. Bartlett…
Albert Einstein and Dr. Bartlett would have gotten along, I can imagine, as they both understood the limits of math. Einstein said it best when he said, "Two things are infinite: the universe and human stupidity; and I'm not sure about the universe."
Our entire PONZI economy has been brought to you via one little Keynesian lie and distortion after another. The central bankers continue to buy the politicians and the politicians continue to spread and implant their little lies that distort reality and lead to mass psychosis. They are telling you that they need your money to ensure the flow of credit (debt) to get the system running again. It’s up to you whether you wish to believe their not so little lies.
I am writing an update this afternoon as it is the first time in a while I have seen signs that some form of a top could possibly, maybe, might be at hand? Did I mention maybe, and that it depends on the game du jour from Goldman? And, if indeed it proves to be a top, then yes, I will take full credit for calling it. However, I reserve the right to deny calling it because I added so many caveats. Am I clear? Did everyone bet their life fortunes on it? Good, because by calling it both ways I will be able to point to either my top call or my caveat, and be right either way! Where are we seeing that trick? Just remember, monkeys pick their bottoms, only crazy anti-establishment bears would pick their top.
Okay, today the SOW, I mean DOW finished up 101 points, the S&P finished up 1.7% at 919, the NDX finished almost exactly FLAT, and the RUT finished up .5% at 505. A lot of Seth qualifying numbers there, just to point that out.
The XLF gained a fraudulent 7.96%, IYR gained 3.35%, and GLD gained 1.5%.
The internals were positive on the NYSE with about 2.5 to 1 advancing issues and 75.5% of the volume on the up side. The number of new lows diverged slightly against higher prices by climbing to 9.
So, despite all the “greenshoots,” this market is way, way overextended and I see signs that today the rally could be in trouble. First of all notice that the prior leaders, the NDX and the RUT did not lead today. In fact, the NDX barely finished positive after being down most of the day. The internals were positive, however, on the NDX.
Let’s take a look at the percentage of stocks above their 50dma… (again, ht Maize). Below is a chart showing that this indicator is at the highest level of the past year, a full 2 standard deviations above the mean:
And looking at a 3 year version of that chart, you can see that the percent above the 50dma is higher than even at the peak of mania in 2007:
The SPX created what looks like another potential ending diagonal on the 10 minute chart in blue. Note the stochastic on this timeframe is neutral, and that there may be a slight bit higher to go in this diagonal, but when I look at the daily candles, I doubt it:
On the 30 day, 30 minute chart you can see the latest pattern and that the stochastic is overbought. Here you can see lower RSI on higher price, a bearish divergence. The 60 minute stochastic is also overbought:
Now let’s look at the DOW daily. Here we see what appears to be a very bullish candle on much higher volume. Note that the close was above the upper Bollinger where it has closed for the past 3 days. The daily stochastic is deeply overbought as it is on the weekly as well. You will find a similar picture and candle on the SPX, so I won’t show that:
However, when we go over the ETFs and look at their candles we see something quite different. The SPY daily candle is a perfect clear air hammer above the upper Bollinger. This is a candle I would short and be right a high percentage of the time. Again, the volume is higher, but that’s not uncommon for what could be a mild case of buying capitulation:
Now let’s look at the DIA candle. Again, same thing and I would short that, but I would not stay with it on any price higher than the body of that candle:
Now let’s look at the NDX. A black hammer up against the upper Bollinger. Not completely free air, but close enough to look like a potential reversal indicator. Again, it will need confirmation in this trumped up, over-hyped, fiat market tomorrow:
And look at the XLF. Way above the upper Bollinger, way overbought:
And here’s IYR. Again a hammer and way overbought:
Here’s GLD… a hammer exactly on the 50DMA with the 50 descending and the 100 rising. (USO, btw, is above the upper Bollinger and getting close to resistance):
And in the bond market, TLT after producing three hammers in a row produced an inverted hammer that indicates bonds may rise up the stem tomorrow and that would normally mean declining equities, but that relationship is manipulated in this environment of course:
So, that’s my case for lower prices tomorrow. If prices rise above those hammers, I would NOT be short. And if I am right about tomorrow and prices decline, I do not have the slightest clue as to how deep or how long a decline might go. Sorry. You know me though, I think the market deserves to be much, much lower than here on a fundamental debt infested, cockroach lead, dead bank fed, anti-rule-of-law, basis.
In other words I think this rally could be in trouble…
Futures are higher this morning with the /ES right on the 912 pivot:
The next higher pivot is at 935, and the next lower is at 848.
And let me say to all those who wrote me and said that the automakers should not be allowed to go bankrupt, “Pfluuuutttting fricken #%&?!” Okay, there, I said it. See, we were handing out billions to the automakers and now that Chrysler is finally in bankruptcy we learn that they will not be paying back the government for the billions YOU AND I gave them - EVER. Way to go.
Remember who the owners of Chrysler are. They are the political and the elite who own Cerberus, a hedge fund… of the elite. And where did those billions go? See, this is most definitely NOT the rule of law. The rule of law has a hierarchy for the repayment of obligations through the bankruptcy process. What happened here is that the rule of law was skirted to give the elite an out before the other creditors, and it was your money and my money that gave them that out. Money that they STOLE. They are thieves and they belong in prison.
Please, do not tell me ever again that we should be bailing some asshats out. Thank you. It was NOT in the best interest of AMERICA, it was completely against the interests of AMERICA and those who continue the robbery and theft are TRAITORS to our country.
Okay, now that I got that out. I’ll continue.
According to Econoday, Purchase Applications rose in the first week of May:
Highlights Housing reports have been on the upswing, at least most of the data but not MBA's purchase applications index which is lagging behind. But there was some improvement in the May 1 week as the purchase index rose 5.0 percent to 264.3, a still very weak level. In contrast to purchase applications, applications for refinancing are very strong, up another 1.2 percent to 5,169.3. Refinancing makes up 74.4 percent of all applications. Rock-bottom mortgage rates are behind the rise in refinancing though rates did move higher in the latest week with 30-year fixed loans averaging 4.79 percent. The outlook for the housing market is definitely improving but expectations won't take off until MBA's purchase index shows some life.
And according to Econoday, the Challenger Job-Cut Report is showing improvement:
Highlights Challenger layoff count shows month-to-month improvement, at 132,590 vs. 150,411 in March. Interestingly layoffs were led by the government component, reflecting job cuts in New York City. The report noted that local and state governments are feeling the pinch from foreclosures and lost property taxes. Also interesting is that hiring intentions, a less looked at category in the report, improved to 27,062 from March's 19,309. The hiring gain was led by autos of all sectors, but the report stressed that the sector nevertheless is seeing heavy downsizing. Today's report points to easing contraction in Friday's jobs report. ADP is up next at 8:15 a.m. ET.
AND, the ADP Jobs Report shows that jobs are being lost at a significantly lower pace in April than in March:
Highlights ADP estimates private payrolls fell 491,000 in April, indicating an easing rate of job losses. The report will increase talk that the worst of the recession has already passed. There was limited reaction to the report at least initially, but the result is very likely to increase risk appetite in what would be a positive for stocks and commodities and a negative for the dollar and Treasuries.
Greenshoots indeed, unless you’re one of the 491,000 of course. This was a significant improvement over March which was a -742,000 figure. While I do not like or trust ADPs methodology, this is definitely a large improvement but still a very distressed level.
The Petroleum report comes at 10:30 eastern and there are several bond auctions once again. Must crank up the debt to give to the robber barons while indebting Americans. Nice.
And reports are out that Bank of America will need $34 billion in additional “capital.” No problem, it’s a buy of a lifetime. And Jamie Dimon claims that JPM is such an angel company that they don’t need any more stinking capital. And how true that is! They have the taxpayers there to give them capital anytime they need it! This despite being the most highly leveraged financial institution in the history of the planet – derivative central.
And if you’re a common stock holder in General Motors, you just got the shaft royal. In a dilutive shotgun of new stock, current shareholders are going to net approximately 1/100th the stock’s current value as their debt is rolled into common shares. Again, this violates the RULE OF LAW for a bankrupt company. This is not how bankruptcy is supposed to happen and it places the American public as shareholders instead of bond holders in a company that is sure to go bankrupt later and when it does all those billions will be wiped away too, rewarding others and giving YOU the shaft AGAIN.
Very complex deal, yet that sums it up. And do you think the average American sees through the complexity to the bottom line?
I hope America wakes the heck up. To hell with the greenshoots, the only thing that should be sprouting up in America are the pitchforks!
Oh, and as far as the markets go, they are corrupt beyond belief. The rule of law is completely out the window. This is a time to be protective as risk takers will get burned eventually, count on it.
I think America needs to take a collective week off to mark the end of common sense and the end of morals and ethics in America. Then we need a revolution and a new independence day. This time independence from the central bankers.
Futures are down slightly with the /ES sitting right on 900:
Adidas reported that profits were down 97%. Kraft earning rose 10%. GM says that car sales in China jumped 50%! I’m sure that there is a lot of growth to be had there, but increasing demand won’t be coming from the rest of the world for some time.
Meanwhile ICSC same store sales rose .7% last week but was down .8% year over year. Redbook chain store sales rose year over year by .3% after rising .7% the week prior. Non-manufacturing ISM comes out at 10 Eastern, the same time Bernanke is scheduled to speak.
The market is insanely overbought as the percentage of stocks above their 50 day moving average indicates – by far the highest in the past year:
The AAA CMBX index has come up in price slightly:
But the lower tier stuff is still way down there and spreads are still at historic highs:
Other indicators, such as LIBOR, have come in significantly.
The next pivot point is at 912. I’d be willing to bet that it holds today, especially being overbought on all the short term indicators. The percent of stocks above their 5 day average is insane again, that is one of the precursors of significant declines, although the last time we had that condition was during this rally and we did not get the expected pullback, obviously.
It’s spring! The birds are chirping, the chipmunks are chasing potential mates around the yard and Nate’s allergies are acting up as he feels like there’s 10 pounds of pollen in his eyes…
It must be the greenshoots, they are popping up all over and if you believe the pundants the chain of ever-growing Ponzi derivative securitized credit finance remains unbroken:
Econoday – Pending Home Sales Index…
Government efforts to push mortgage rates lower in combination with financing incentives and falling home prices may be turning the housing sector around at long last. The pending sales index rose 3.2 percent to 84.6 in March pointing to improvement in existing sales for April and May. Gains were centered in the Midwest and South, but a decline in the West, where the housing collapse is centered, does pose the only bad news in the report. Construction spending for March was also released at 10:00 ET and shows the first increase in six months. Markets showed no reaction to the reports at least initially, though they should give stocks an extra boost through the session and may also raise talk of easing toxic pressures on banks.
Yes indeed, the government’s action are “turning the housing sector around at long last!”
LOL, okay, if they say so. This nonsense happened last spring and it happens every spring. No kidding, pending sales picked up at the beginning of spring? That’s a surprise, who would have guessed?
Now, how about those year-over-year comparisons? No? Sorry, no pickup there, only historic plunges. But pending sales do lead the new and existing home sales so look for small increases in the next couple of months there. As you’ll see in my commentary this matches what I’m seeing anecdotally in the market right now.
And Construction Spending is also seeing an upturn on a month over month basis:
Econoday – Construction Spending…
Construction spending in March rebounded unexpectedly but housing is still on a downtrend. Construction outlays posted a 0.3 percent gain in March, following a 1.0 percent decrease the month before. The rise in March was much better than the market forecast for a 1.0 percent fall. The rebound in March was led by private nonresidential outlays which jumped 2.7 percent after a 0.7 increase in February. The public component also advanced 1.1 percent, following a 1.3 percent boost the month before. However, the private residential component continued its downward trend, falling 4.2 percent after a 5.9 percent plunge in February.
Within private residential outlays, the single-family component dropped a monthly 8.6 percent while the multifamily component slipped 1.1 percent in the latest month.
On a year-on-year basis, overall construction outlays weakened to down11.1 percent in March, from down 10.1 percent in February.
Construction outlays in March indicate that businesses may be looking ahead toward the end of recession when increased capacity is needed. And we may be seeing a rising in public construction from fiscal stimulus beginning. But the important housing sector has not yet hit bottom. However, today's pending home sales report was moderately positive, indicating that outlays in this sector could be bottoming soon. Equities rose on the news of improvement in both outlays and pending home sales.
Market Consensus Before Announcement Construction spending in February fell again but not as much as expected. Construction outlays dropped another 0.9 percent in February, after plunging 3.5 percent in January. Weakness in February was led private residential outlays, which fell 4.3 percent. The single-family subcomponent dropped 10.9 percent while the multifamily portion slipped 2.1 percent. The other two major components actually made partial rebounds. The private nonresidential component rose 0.3 percent after a 4.3 percent drop in January. Public outlays rebounded 0.8 percent, following a 2.4 percent decrease the month before. Looking ahead, the drop in the level of housing starts on average over the last three months indicates that the residential component of outlays will likely continue downward in March, pulling down overall construction spending.
"Glimmers of hope?" More “greenshoots?”
Mass psychosis, sorry.
As many of you know, I sold all my rental properties in late '05 and early '06. I then I sold my "million plus" dollar home (on paper, but not in reality) and rented a brand new equivalent from a builder who couldn't sell it. Total cost of living? Less than 40% of what our prior house cost to own (property taxes rose from $800 per month to over $1,300 in just seven years - per month! That's nearly $16,000 per year for that one tax alone!). Thank goodness we found a greater fool and now our youngest child is leaving home to go to college as our oldest is graduating from the U of W at the same time next month – making us near empty-nesters.
So, we're looking to downsize the house to have less to take care of and to lower our overhead further still. What I have found is simply amazing... yes it's springtime and there is more activity in the market right now, but it's a different kind of activity, I would describe it as “desperate.” Keep in mind that this is anecdotal and that the Seattle area lags the rest of the market in the U.S. by approximately 12 to 18 months.
First of all, they are still building new houses like crazy all over the place and yet there are many abandoned developments around the area and many new houses that have been sitting for a year or two. Its nuts really…
I met a guy who has many rentals that are two to four years old, all very, very nice homes that he paid in the 700K to 900K range for – as rentals! What was he thinking? He would buy a house, get it appraised at a higher value, take out a second mortgage and use that money as the down payment on the next house! That’s called leverage, and he was using it to the max. He just didn’t realize that the bubble had already begun to pop when he was buying. And upper end homes for rentals? Not smart, especially considering that the Baby Boom Generation had already driven the value of luxury homes through the roof.
At any rate, this guy has several of them empty now with no renters and he is slashing his rental prices and has been trying to sell as many as he can (attempting to delever) but has sold NONE. I had a frank conversation with him and found out that he is AVERAGE $180K upside down on each of his rental properties! He's about to go into foreclosure on at least one and just can't give away the others for any amount that works. Thus he’s attempting to short sale (no one will buy even at less than he owes) or will rent for way less than his payments – anything and everything, he is DESPERATE.
And I talked to several new home builders who are also desperate and willing to RENT their new inventory in an attempt to keep cash flow going. Their preference is: first to sell, then to lease to own (this works around no down payment money), then their last resort is to rent (which is what I’m taking advantage of now). To be fair, in the past month or two most have seen a sale or two where before there were none – but again, it’s spring time and that’s what you’d expect, only more so in a normal and healthy market.
Now, the other side is that the "average" home rental prices are indeed coming up. It used to be that the upper end non-executive home rental prices in the area was about $1,500 a month. Real nice home like the one I live in are more, of course, but that was generally as much as a blue collar neighborhood would garner in rent. Now, though, that price has moved up and I'm seeing many homes in this area rent for 1,650 to $2,000. But we all know that incomes are not growing at that same rate, so we'll see how that works out - they are definitely trying to create Zimbabwe, no doubt. And that’s what gets the middle-class into trouble.
Look, you can’t blame the young couple who just had their first child for buying an overpriced home using financing that is exotic by historical standards. What do they know about history, bubbles, or finance? NOTHING, and the pigmen intend to keep it that way. It is the pigmen who approve the loan, push for higher appraisals, securitize the debt, and then sell it to unsuspecting retirement plans all without so much as a Ponzi care in the world!
Yes, some individuals have taken full advantage, but again, whose fault is it that the moral hazard was created? The CENTRAL BANKERS AND THE FED IN CONCERT WITH OUR OWN POLITICIANS.
Anyway, one builder I talked with has a 3,000 square foot luxury home for rent for $1,900, one of the better deals for the money in the area. I told him I wanted to downsize even more and he pointed across the street and said he would finish out a 2,500 sq. foot rambler the way we want and rent it for $1,775 a month, new, very nice! Custom finished rentals, yahoo!
But not for us this time, we’re not doing another new house, tired of that and suburbia and now that we’ll be empty nesters are looking for a change. Anyway, I numbered out to buy those new houses at these historic low interest rates and the cost of owning versus renting is still WAY out of whack (way cheaper to rent). I was talking to the developer and blew him away when I told him it was not a good time to buy with interest rates at historic lows. “WHAT?” He obviously doesn’t understand, like most Americans, that low monthly PAYMENTS are not the same as buying for low PRICES. That’s just how people are brainwashed with our marketing – LOW INTEREST RATES, NEVER BEEN A BETTER TIME TO BUY!
At any rate, we wound up renting a CHARMING old 1914 home on a very CHARMING and beautiful street in a CHARMING small town we never would have considered before and it’s only 8 minutes down the road from where my wife works. Walking distance to everything and mass transit via rail two blocks away. The house has been completely redone and did I mention Charming? It is, and it’s going to lower our cost of living by another 30 or 35% or so. Love it.
The people we’re renting this place from have been trying to sell for quite some time. Prime location, best in the town. Immaculate street, beautiful. They actually didn’t have the house for rent, they had it for sale. We drove by and it was so nice that we called them and asked if they would be willing to rent instead. “It must be fate,” they now say, because they were just having that conversation 10 minutes before we called. Now we have an agreement and they are going to pack up and move to be close to family in Oregon and become renters themselves. They couldn’t sell because they owe too much (and don’t have the knowledge to work a short sale – again, not trained in finance and probably have a second mortgage they used to do all that wonderful remodel work)!
Another cute house we looked at a few blocks over was for rent and we looked at it. Young guy (mid 30’s, young children) like the previous couple, just built a big new house and openly says he regrets starting it. Took them a year to build it and have been living in their new house for six months while trying to sell their old one. They had a buyer on a good agreement, but the house didn’t appraise for anything close to the agreed upon price! So he rented it out, unhappily so. Couldn’t sell it, but they did find renters in only a couple weeks of trying - $1,450 a month including lawn service! Small, but beautiful yard and the neighbors made him promise to keep the yard up!
LOL, wouldn’t want any of those “bad” renters ruining the neighborhood! And let’s face it, America has a problem in that the perception is that people who rent are not in the upper crust! And mostly that’s been true, and yes, you must be careful who you rent to. I toured several homes that renters had ruined, including one where the entire yard will have to be completely redone costing thousands I’m certain.
Now, you guys might be wondering why Nate’s not going out to BUY some defensible piece of high ground property and bunkering down? NO, I’m not. By renting way below my means I think I offer myself way more protection and it makes me free and flexible to do as I please depending on future circumstances. I will be FREE. FREEDOM EQUALS SECURITY. Those who seek SECURITY SACRIFICE FREEDOM.
I can jump on my bike and just travel. I could decide to pack up and move anywhere, or I could decide to stay in that charming house and blog forever. If the economy crumbles in a deflationary spiral, too bad… If it melts up in Zimbabwe fashion, then that’s horrid, but I’ll have the CASH (and inflation hedges) to deal with it. Anyone looking at retirement and planning to live on a fixed income should be getting prepared now.
Back to the two couples I mentioned above, they both want to sell their places but can’t. This is a great example of pent up inventory. There’s a ton of it out there. And this is in a very desirable and charming (did I mention that) town. Pent up inventory will keep prices in check as will wages which are not rising – unemployment’s rising.
And yet they keep building new houses in ever worse locations, way out in what used to be “the sticks.” The roads become bottlenecks and hell on four wheels. Kunstler is correct about that.
Our central bankers blew a credit bubble with the backing and blessing of our politicians. That’s because our politicians use central banker money to get their jobs and to maintain them. Debt is “securitized,” ground into sausage and sold creating a horrid moral hazard where no one cared about the deceit all along the chain.
Let’s start with David Tice, former manager of the Prudent Bear Fund. Sorry to the sunshine crowd, but David has been correct and is correct in what he says here, especially his comments about debt and the government’s debt bubble Ponzi dynamics.
People like the bull in that video keep talking about the “solid fundamentals,” but they are simply selling you their product. There is only one fundamental that you need concern yourself with that underlies our economy and that is DEBT. It is growing exponentially and that is not sustainable – period. Incomes already cannot service existing debt levels, much less service more and more and more. It’s over, sorry. This is the only chart that you really need to know in concerns to the fundamental underpinnings of this country (HT – Maize, thanks):
And that chart does not include unfunded future liabilities that more than double that amount of debt!
It is INCOME TO DEBT THAT MATTERS, and it is completely unworkable: Death by Numbers.
Many of Tice’s comments come as a result of the work of his colleague, Doug Nolan, who had this to say in his recent article, “The Greatest Cost:”
First of all, while it often appears otherwise, finance provides no free lunch. The mispricing of Credit and misperceptions of risk in the marketplace have deleterious effects, although their true impact may remain unexposed for years. Indeed, the more immediate (and always seductive) consequences of loosened financial conditions tend to be reduced risk premiums, higher asset prices, and a boost to economic “output”. Conventional analysis of monetary policymaking still focuses on “inflation” and “deflation” risks. I would strongly argue that our contemporary world has already validated the analysis that acute financial and economic fragility are major costs associated with market pricing distortions.
When the Federal Reserve collapsed interest rates following the bursting of the technology Bubble, the results seemed constructive. Stock and real estate prices inflated; a robust economic recovery ensued. There was at the time some recognition of the potential for real estate excesses. But this was seen as such a small price to pay in the fight against the scourge of deflation. It was not until 2007 that the nature of the true costs of a massive “reflation” began to come to light.
Many would today argue that it was simply a case of the Fed’s failure to take the punchbowl away in time. Such analysis misses a key facet of Bubble dynamics. Once the Mortgage Finance Bubble gained a foothold there was absolutely no way policymakers were going to be willing to risk bursting such a consequential Bubble.
I see ample support for my view that Bubble dynamics have taken root throughout government finance. This unprecedented inflation includes Federal Reserve Credit, Treasury borrowings, Agency debt, GSE MBS guarantees, FHA and FDIC insurance, massive pension and healthcare obligations, the myriad new market support programs, etc. This Government Finance Bubble is domestic as well as global. Amazingly, the scope of the unfolding Bubble dwarfs even the Mortgage Finance Bubble. And, importantly, it is reasonable to presume that the Federal Reserve will find itself in the familiar position of being trapped by the risk of bursting a historic Bubble.
So I see the probabilities as very low that the Fed will reverse course and impose tightened liquidity conditions upon the marketplace. Actually, reflationary pressures may force the Fed to increase its Treasury holdings in an effort to maintain artificially low interest rates. At the same time, I don’t see higher inflation as the greatest cost associated with this predicament. Much greater risk lies with the acute systemic fragility that I believe is inherent to major Bubbles. Similar to mortgage finance 2002-2007, the marketplace is significantly mispricing the cost - and failing to recognize the risks - of a massive inflation of government finance. And while every Bubble has its own dynamics and nuances, the unfolding Government Finance Bubble has even more precarious Ponzi Finance dynamics than the Mortgage Bubble…
Tice and Nolan are correct. The debt bubble has not gone away, it has simply been made even bigger as it has been pushed onto the government, and makes the risk belong to all of us. And unfortunately it’s a risk that is a for certain sure loser over time.
And here’s another truth teller, Martin Weiss with his latest thoughts:
The Next Mammoth Failures - Why The Stock Market Rally Will End
By Martin D. Weiss on May 4,
Just in the past few days, the United States has moved dramatically closer to the final fork in the road that I set forth in my online video of April 7th:
Either a prolonged, agonizing depression that dooms our country to decades of stagnation, decline, and poverty … or a painful-but-shorter depression that paves the way for a wholesome, sustainable recovery.
Either a government that pursues the dogma of “too-big-to-fail” to the bitter end, rewarding wild risk-takers and punishing taxpayers … or a government that pro-actively guides the natural process of failure, rewarding those who save for the future and can reinvest in America.
I’ll tell you which way we’re headed - and how it will impact your investments - in a moment. But first, an update on what we’re doing about it:
Yesterday, we printed out your petitions appealing for the better scenario; and tomorrow, I will deliver them to Capitol Hill.
I had hoped readers would sign at least 10,000 petitions; instead, they signed 53,547. I had hoped we’d get a good number from the most populous states; instead, we got large participation from all 50. I had expected only U.S. residents would join; instead, citizens residing overseas joined from 45 different countries around the world.
The most urgent and pressing issue …
What to Do With Failed Corporate Giants, Monoliths, and Mammoths
The great dilemma today is not just companies that have already filed for Chapter 11 like Chrysler … but also those that would be in bankruptcy today had it not been for taxpayer bailouts - Fannie Mae, Freddie Mac, Merrill Lynch, General Motors, Citigroup, AIG, and others.
The great debate is not merely what to do with big companies that have already hit the skids … but also how to deal with those that could meet a similar fate in the not-too-distant future - Ford, JPMorgan Chase, Wells Fargo, Goldman Sachs, SunTrust, Fifth Third Bank, and many more.
And the greatest challenge of all will not be strictly about the failure of giant corporations. It will also be about the next big shoe to fall - the failure of the U.S. government to fund its bailout follies without severe consequences.
Where do we stand? I see two phases in the evolution of this crisis:
Current Phase: Prolonged Agony
Right now, we have nearly all the pain of failure but little hope of resolution. And nowhere is this “worst-of-both-worlds” outcome clearer than in the Chrysler failure …
First, despite the infusion of another $4.5 billion in taxpayer money to finance Chrysler in bankruptcy, its Chapter 11 filing last week is wrecking havoc on the auto industry anyhow:
We have a supposedly “temporary” - but TOTAL - shutdown of Chrysler production, pushing U.S. auto-parts suppliers to the edge of bankruptcy and disrupting the flow of parts to General Motors and even Ford.
We see Chrysler auto dealers going broke in large numbers.
And we see a new phase in the collapse of auto financing, as lenders recoil in horror.
Second, despite massive commitments of taxpayer funds to back up the warranties on millions of Chrysler and GM automobiles, consumer confidence in the ailing auto industry has plunged, helping to drive all auto sales even deeper into the gutter.
Every major auto maker, whether failing or not, has reported dramatic sales declines from year-earlier levels: Not just Chrysler, which got whacked with a massive 48 percent loss in sales … but also General Motors, down 33 percent … Toyota, down 42 percent … and even Ford, supposedly better off, suffering a 32 percent hit to sales.
Third, despite hopes and assurances that the Chrysler bankruptcy will be “quick and easy,” we can already see signs of an imminent barrage of creditor lawsuits and claims hitting the courts. Their demands: Liquidate the company! Sell off the assets! Distribute the cash based on the contractual pecking order that gives first dibs to secured creditors!
In sum, we have BOTH a huge burden to taxpayers AND widespread pain for all those who rely on the auto industry for their livelihood!
In the final reckoning, the bailouts have bought nothing more than prolonged agony.
Next Phase: Tougher Love
The true pessimists of our time are those who assume the current pattern will simply continue indefinitely.
These pessimists include former U.S. Treasury Secretary Paulson, who literally dropped to his knees last September to beg Congress for $700 billion to save the nation from a Wall Street meltdown.
They include Treasury Secretary Geithner, who’s so terrified of bank failures that he’s zealously pursuing the crazy goal of guaranteeing ALL bank credit.
They include Federal Reserve Chairman Ben Bernanke, who’s so plagued by Depression-era nightmares that he’s been willing to abandon the Fed’s history, destroy the Fed’s balance sheet, and sell the nation’s monetary soul to the devil of unbridled money printing.
Plus, among them are all the Wall Street pundits and cheerleaders chanting for more.
In contrast, I am an optimist in this sense: I am very confident their days are numbered and our nation will soon step up to the tougher task of truly putting this crisis behind us.
My optimism is not derived from wishful thinking or armchair philosophizing. It’s steeped in practical, hard-nosed realities:
Hard-nosed reality #1
The market is not dead!
Even the most elaborate of government bailouts are not immune to powerful market forces. That’s why Fannie Mae and Freddie Mac shares plunged to zero. That’s why Bank of America and Citigroup shares have lost over four-fifths of their peak value (even after the recent rallies). And that’s why Chrysler finally wound up in bankruptcy court last week, despite repeated government promises to the contrary.
“Isn’t the government fighting to intervene massively in the market?” you ask.
Yes, of course. But fighting is one thing; winning is another. The undeniable fact is that the markets are not dead. They’re still alive, kicking, and massively powerful. Despite delusional bureaucrats who may think otherwise, it’s the marketplace - and not their mad-science experiments - that’s ultimately driving the course of history.
Hard-nosed reality #2
Easy to promise, hard to deliver!
Anyone in power can step up to a podium, make speeches, and say they’re going to spend or lend trillions of dollars. But even if directives are written and laws are passed, what’s promised on paper is not the same as what actually happens in practice.
Right now, for example, the total tally of the government’s bailout operations and commitments is $14.7 trillion. But among that, only $2.5 trillion has actually been spent or lent so far. Meanwhile, in 2008 alone, U.S. households lost $12.8 trillion according to Fed data, or over FIVE times the bailouts thus far.
Hard-nosed reality #3
No free lunch!
Anyone who thinks all the funding for the bailouts is going to simply appear out of thin air must also believe in the tooth fairy. The facts:
Congress cannot raise taxes without sinking the economy even faster.
The Treasury can’t borrow the money without driving interest rates through the roof for everyone.
And the Federal Reserve can’t print the money without destroying global confidence in the U.S. dollar and credit markets, gutting the economy even more.
Each of these - singly or in combination - will sabotage the same bailouts they’re seeking to finance. Each, even if pursued initially, will soon backfire.
Hard-nosed reality #4
The truth always comes out!
Last week, I told you about Six Egregious Lies perpetrated by Washington and Wall Street.
But I also showed you how the truth has already begun to pour forth - via leaked confidential memos, such as AIG’s confessions of a likely insurance industry collapse, and dire official forecasts like the IMF’s latest prediction of a massive global decline.
Hard-nosed reality #5
Not everyone is stupid!
There is a fast-growing, informed minority - skeptical investors and independent citizens - now rising in rebellion against federal bailouts.
That’s why our petition drive against senseless bailouts has been such a resounding success!
That’s why, two months ago, Thomas M. Hoenig, President of the Kansas City Federal Reserve, defied his own chairman … declaring that the “too-big-to-fail” doctrine has failed … recommending regulatory tough love for any failed bank, no matter how big. (See his paper “Too Big Has Failed.”)
That’s why, one week ago, FDIC Chairman Sheila Bair demonstrated equal defiance against her fellow regulators, stating, point blank:
“The notion of ‘too big to fail’ … is a 25-year-old idea that ought to be tossed into the dustbin …
“[It has] eroded market discipline for those who invest and lend to very large institutions. And this intervention, in turn, has given rise to public cynicism about the system and anger directed at the government and financial market participants. …
“Everybody should have the freedom to fail in a market economy. Without that freedom, capitalism doesn’t work. … Ultimately, this would benefit those better managed institutions and make the financial system and the economy stronger and more resilient.”
Finding it hard to believe that one of our nation’s top regulators is openly attacking the shaky thesis underlying most of the government’s bailout operations? Then read her speech for yourself.
This doesn’t mean we agree with everything these voices stand for. But it does go to show how the days of unlimited bailouts are numbered … and the epic fork in the road is now rapidly approaching.
The Consequences for Investors
This is bad news for investors who are again taking risks - and good news for all Americans willing to make the sacrifices needed to get this crisis over with as soon as possible.
It means that:
The supposedly “too-big-to-fail” banks like Citigroup or corporations like General Motors WILL ultimately be allowed to fail after all; their shareholders, wiped out; their creditors, suffering massive losses.
In the stock market, the seven-week rally we’ve seen will end; the financial stocks will give up all their gains and the broad averages will plunge to new lows.
Credit markets will freeze up once more, the government’s stimulus package will be overwhelmed, and any pause in the economic decline will be over.
But it also means that any temporary revival of inflation will soon die … the dollar will ultimately remain viable … and we can still look forward to a real recovery in the future.
That’s why I’m optimistic and why I’m delivering over 53,500 petitions to Washington tomorrow.
Sorry sunshine rally people… reality and the TRUTH does not match up to your marketing strategy of pressing endless debt into society. Buy the rally if you wish, my tune has not changed and will not until that debt to income graph above changes.
The securitization of debt process caused the greatest bubble in the history of mankind (with the Fed’s help of course) and is now in the process of collapsing. Exponential growth will not be renewed at this time despite their greatest efforts. It’s a lousy Ponzi dynamic… Hopefully, we’re never going back again!
Fleetwood Mac - Never Going Back Again - Live 1977
Remember “sell in May and go away?” Well, it’s been one heck of a run, and while there may be one more beginning of month push, I’m seeing signs that this rally is running on fumes. Many negative divergences exist and the market is still very overbought in the short and medium time frames. I see divergences in the RSI, in the Stochastics, in the A/D line, and the most telling is in the volume pattern which is clearly showing decreasing volume on rising prices.
And Friday produced another small movement on the McClelland Oscillator meaning that a large price move is likely today or tomorrow. Direction is unknown with that indicator. The odds favor a downside move but the momentum is still very positive. A move lower is very overdue, but that doesn’t mean we can’t go higher first, it’s absolutely a possibility and I don’t have a good read on short term direction as my short term indicators are mid-range and on Friday just before the close we bounced off the bottom of the latest rising channel. So, I am personally not doing anything until that channel breaks or I see a good entry at higher levels.
888 is still the high for now, if we exceed that, then 902ish is right around the top of the channel today. 912 is the next higher pivot level. We may have to run there to see it, again, I am playing it patiently here.
Lots of chatter about DOW Theory… NO, in my opinion the DOW will not make a new high of meaning until it breaks the 9,100 level – not even close.
The real action to watch, of course, is in the bond market and I will be keeping you up to date on that. This morning bonds are slightly higher but moving around a lot, not a stable environment unless you enjoy swimming in debt. As rates in the long bond rise, mortgages and other debt (credit) will as well and that WILL have an impact on the equity markets down the road, but the effect will not be immediate.
The dollar has broken its triangle to the downside. The P&F charts are still indicating bullish target for the dollar, but on my charts it looks like it could be a significant breakdown that began a couple of weeks ago but broke the bottom of the triangle last week. Stocks moving higher on a lower dollar is nothing but Zimbabwe action.
The futures are slightly higher this morning:
Warren Buffet is beginning to oink a little too loudly for my taste, personally I think we would all be better served if he just shut the hell up and stopped playing good cop/ bad cop. It’s all terrible, but his banks and insurance companies are sound as ever! What a load of self-serving crap. I can’t even stand listening to these guys anymore. I hope you are smart enough to see the interests they are really serving, it’s not yours.
And Obama is now going after offshore tax havens. That’s too bad, because it’ll mean the wealth will not want to form in any way in the United States. No, it won’t pull capital back into the U.S., it will drive it away. Yes, we need more tax revenue, but we have already “screwed the pooch” in that regard and are now in a place where garnering more tax revenue gets you less. That’s what happens when the math no longer works, and it doesn’t.
And they better stick to their phony baloney “stress test” results being released on Thursday or else… or else… the idiots in the market place might cheer and rally some more! [sarcasm, sorry] Actually, the timing of this release with the beginning of May might prove to be a turning point, I don’t know.
And then there’s the automaker moral hazard galore. Little old Fiat is trying to possibly swallow two giants? I’ll believe it when I see it. The entire thing looks like a money laundering operation sponsored by the government to me.
So, I know I tilt the news here negatively, that’s just the way I see it. If you want roses and sunshine, there’s always CNBS, and the millions of other people and networks who don’t know how to do math and spew happy self-serving marketing based nonsense at you.
Other than that, my outlook on life is as good as ever and I hope yours is too. Reality is fun, getting caught in mass-psychosis is not. I’ve been out looking at the rental home market in the area and I can tell you that there are many, many people who are just plain old CAUGHT. They are stuck in their homes, underwater, and don’t know how to extricate themselves from that position. Sad.
At any rate, I hope you have a good day, I know those who read this column are much more savvy and equipped to handle the current reality.
Silverton Bank closes, costing the Deposit Insurance Fund an estimated $1.4 billion. Smaller New Jersey and Utah banks also shutter.
NEW YORK (CNNMoney.com) -- Three more banks shut their doors Friday, according to the federal government, bringing the total number of failures up to 32 in 2009.
The first failure was a wholesale banking operator that served 1,400 other lenders across the country and was the fifth biggest bank failure during the current recession in terms of assets.
Georgia "bankers' bank": The Federal Deposit Insurance Corp. said in a statement that it created a bridge bank to take over the operations of Silverton Bank, National Bank, headquartered in Atlanta.
Unlike the other 30 banks that have failed so far in 2009, Silverton Bank did not take deposits directly from the general public or make loans to consumers. Instead, it was a "bankers' bank," offering a wide variety of services, such as foreign wire transfers, as well as clearing and cash management, to other banks.
Silverton was cooperatively owned by community banks throughout the Southeast and was heavily invested in loans to real estate developments in Florida, Georgia, and other parts of the Southeast, according to Christopher Marinac, managing principal of financial firm FIG Partners LLC based out of Atlanta, Ga.
When real estate values sank in the current downturn, the assets backing those properties also lost their value. The Southeast has seen numerous regional banks topple as the housing bubble burst.
At the time of its closing, Silverton Bank had approximately $4.1 billion in assets and $3.3 billion in deposits, all of which are expected to be within the FDIC's insurance limits.
The FDIC estimates that the cost to the Deposit Insurance Fund will be $1.3 billion, making it the fourth costliest bank failure since the start of the recession. "It is a bigger hit to the insurance fund than they have seen in the last couple weeks," Marinac said. "This is a bigger issue than we have seen in awhile."
Silverton served banks in 44 states and operated six regional offices. The FDIC created a bridge bank to take over the assets of the institution and has contracted The Independent Bankers Bank, out of Irving, Texas, to assist. The FDIC does not expect to see any significant impact to the bank's clients, at least in the near term.
However, the bridge bank only plans to be operational for 60 days, with a possible 30-day extension. When the bridge bank services terminate, the banks that were serviced by the cooperatively owned bank will have to go out and find another institution to take care of those services.
"There is no clear cut answer on a situation like this," said Marinac. "This is a little bit more complex and therefore there are more uncertainties about how this will unfold."
Thus far, the FDIC has not been able to find another wholesale bank to agree to take over Silverton's operations. The FDIC will attempt to sell off the assets, but it could pose a challenge to find a buyer for risky commercial loans. However, the FDIC could try to find a buyer by discounting the debt. "Everything has a price," said Marinac.
New Jersey: State regulators shut down Citizens Community Bank Friday night, and named the FDIC as the receiver. The Ridgewood, N.J.- based bank had total assets of approximately $45.1 million and total deposits of $43.7 million as of Dec. 31.
North Jersey Community Bank, of Englewood Cliffs, N.J., has agreed to assume all of the deposits of the failed bank. The failed bank's single office will reopen Monday as the North Jersey Community Bank.
North Jersey Community Bank paid a premium of 0.67% to acquire all of the deposits of the failed bank and has agreed to purchase approximately $11.5 million in assets. The FDIC will hold onto the rest of the assets to dispose of later.
The FDIC will continue to fully insure individual accounts up to $250,000 through the end of 2009.
Utah: On Friday evening the FDIC also became the receiver of America West Bank, after the Utah regulators closed the institution. The Layton, Utah-based bank had total assets of approximately $299.4 million and total deposits of $284.1 million as of Dec. 31.
Cache Valley Bank, based in Logan, Utah, is assuming all deposits, paying discounted price of $352,000. It also agreed to buy nearly $11 million worth of America West's assets and took a 30-day option to purchase loans at book value. The FDIC estimates that the cost to the Deposit Insurance Fund will be $119.4 million.
America West's three branches will reopen Monday as Cache Valley Bank outposts. Checking accounts, debit cards still work: Through the weekend, depositors of both Citizens Community Bank and America West Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on either of the failed banks will continue to be processed, and the FDIC said loan customers should continue to make their payments as usual.
Stress tests awaited
Local banks have been shutting down in droves as the recession has made it harder for customers and businesses to pay their loans. Nearly every Friday so far this year, at least one bank has failed. Last week, four regional banks were shuttered.
Even as the government has committed unprecedented amounts of money to increase liquidity and jumpstart the economy, the pace of bank failures has accelerated. In all of 2008, 25 banks failed, compared with 2009's 31 banks.
It is not only smaller, regional banks that have felt the pressure of the recession. The nation's largest banks have also been hit by rising default rates and a decline in business spending.
The assessment of the bank's health was expected to be made public May 4, but an announcement from the Treasury Department Friday indicated that results would be delayed until May 7.
Market watchers are anxiously awaiting the results of the stress tests, which have been designed to assess the banks' preparedness to weather further downturns in the economy, including further increases in unemployment and decreases in home prices.
So, the transactions are starting to get a little more complex, and more institutions are being seized without having a buyer in hand.
While it may appear that these failures are insignificant, what is happening is that the debts are mostly moving from one institution to another with the government’s backing, of course. This process, while clearing out the small and weaker players, does not clear out the debt and it leaves consumers with fewer banking choices and larger banking institutions to play with.
So, the fringes are fraying and getting clipped away. Large shifts always start at the fringes and thus these failures are important and should not be glossed over.
Meanwhile the really large institutions, all of which are truly insolvent, are being kept alive with government money and false/ completely phony accounting with the government’s blessing and backing, of course.
Again, the “Stress Test” is really no stress whatsoever. It’s a sham developed to divert attention and distract people away from the real issue while they are being robbed. Oh yeah, it’s also an excuse to “inject more capital” into the banks which is code for STEAL FROM THE AMERICAN TAXPAYER.
Meanwhile, they are milking this sham for everything its worth, now delaying the already delayed “results” yet again. And the market monkeys use this carrot to pump the financials or at least hold them up for as long as they can to draw in as many retail investors as possible to distribute their “equity” and overvalued debt to those buying into a “once in a lifetime opportunity.”
And what an impressive rally it’s been in the financials… why this rally is of historic proportions, they say, you better get in before it’s too late! Yes, the XLF did rally an astonishing 81% in the past eight weeks!! But let’s look at the chart a little further out than 8 weeks for those who didn’t catch the XLF below $6, shall we?
Here’s a 2 year weekly chart of the XLF and you can see that it went from a high of over $36 to today’s $10.65 price, a DROP of 71%! Is the latest rally really any different than the previous ones of this bear market? Look at the volume pattern, that’s where you find confirmation or a lack thereof… and I’m seeing a very large divergence there between rising prices and falling volume. Does it really look different than the other bear market rallies?
And funny, but the stair step nature of this decline looks very similar to another and the comments along the way sound familiar too:
While this MAY have been THE bottom in the financials, you have to ask yourself what's changed FUNDAMENTALLY over the past two years in the banking system that will spark and initiate new growth and new profits? Yes, spreads have widened allowing the banks to arbitrage profits from the consumers… but have the debts cleared the system? And I don’t mean the banking system, I mean the economy. The answer is no either way. The only structural change has been letting accounting standards fall back to the banker’s good old mark-to-fantasy/ take a bonus ways. Oh, and the industry has consolidated its power and grip on politicians further – there’s progress.
Be my guest, go ahead and donate your money to their cause. Not me.
I will say it again. The only “once in a lifetime opportunity” here is to sell this rally and get positioned for what’s coming in the months and years ahead. It won’t be pretty, the banking system, the consumer, and the entire economy have already hit the wall...
I know that I’ve been neglecting fans of the good old rock and roll lately, so I’m going to give you a some Santana to set the mood and to let you know Nate’s still on the job, and that somebody's winning, right now I think it's the bond market vigilantes...
It appears that I correctly labeled THE peak, as it has now been 3.5 months and global intervention and Quantitative Easing (QE) have not been able to keep long term rates in the bond and treasury market at those extreme lows. As I said in that article, once the Fed lowers their target rate to zero, you know you are near the end.
As the following chart of TLT (20 year bond fund) shows, we experienced a parabolic rise followed by a parabolic collapse. The collapse was indeed halted via intervention for about 3 months, but it has now resumed with technical breakdowns occurring since Bernanke and the FOMC failed to announce further actions or a larger pool of money to buy our own debt with phony trumped up dollars. You can see that we have now retraced more than 78.6% of the last parabolic rise, and places the odds high that we will retrace all of it:
Here’s a one month chart showing how fast the selloff and breakdown is occurring in bonds over the past few days:
And the ten year is nearly as bad.
Remember, most fixed mortgage rates are tied to the ten year rate. Although mortgage rates are at historic lows, as seen in this chart by the fed, they are at those lows only because the fed has been buying up hundreds of billions worth of near worthless Fannie and Freddie mortgage debt:
While conditions in the bond market here are oversold, returning prices up and rates lower will now require very difficult tradeoffs, but a short term bound could happen at any time making a levered bet on the bond market risky. Those tradeoffs would include letting the equity market go in order to preserve low rates.
These rates are NOT sustainable, so I would suggest that if you haven’t refinanced real estate that you should do so immediately.
Now, a lot of people think that with rates this low, it’s time to BUY real estate. The exact opposite is true. The general rule is that you should sell real estate when interest rates are at or near historic lows and you should buy when they are at historic highs. Look at this chart of interest rates and think about it:
Had you bought real estate in 1980 at the peak in interest rates and sold recently, you would have done terrific, especially if you would have sold like I did in 2005. Since about the year 2000 rates have been held artificially low courtesy of your morally and ethically challenged Federal Government. But think about the interest rate equation. Buying a home, if you can afford the financing, at a high rate of interest means that you will be buying when PRICES are low. Yes, your payments are higher, but if you are financing then you refinance when rates are low, like now. But what you don’t do is buy real estate when rates are low because that’s when prices are high. Once interest rates come up again, people will not be able to afford as much house and prices will continue to fall.
No, your government does not have the power to force rates low forever. They have reached their limit NOW.
And I’m not the only one who thinks so. Check out Mike Larson’s latest update from just this morning:
You’d think that after the dot-com bubble … the housing bubble … and the bubbles in commercial real estate and private equity, investors would have learned their lesson.
Nope! They did the same stupid things this fall …
• They chased long-term Treasury prices higher and higher (just like they chased Miami condos and Pets.com),
• They drove prices to loftier and loftier levels,
• And they relied on the Fed to save their bacon.
And now, they’re getting their heads handed to them! Long bond futures have plunged a whopping 20 points — from 143 in mid-December to less than 123 yesterday. The yield on the benchmark 10-year Treasury Note has exploded from a fall low of 2.06 percent to 3.11 percent this week — a gain of 51 percent. Key technical levels are giving way all over the place.
Fortunately, you had the market’s playbook. You were told in no uncertain terms — right here in Money and Markets — that the Treasury market was caught up in a huge bubble, one that was destined to pop.
As I said in early December: “The truth is the U.S. government is going to have to flood the market with a wave of Treasuries the likes of which the world has never seen. And just like any other market, the bond market reacts to supply and demand.
“Too much supply and not enough demand should drive prices lower.
“Bottom line: There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching.”
Now, let’s talk about why this is happening … where we’re headed next … and what the implications are for you and your investments.
The Biggest Debt Binge In World History
The immediate catalyst for this week’s bond market break? The Fed’s refusal to increase the amount of Treasuries it has committed to buy. The Fed said at a policy meeting several weeks ago that it would purchase up to $300 billion in Treasuries, and it didn’t alter that target at this Wednesday’s gathering.
But I believe the problem is MUCH bigger. For starters, as I mentioned in my Money and Markets column last week, the Federal Reserve has been backing up the truck and buying every crappy piece of paper it can get its hands on. Lousy residential mortgages. Crummy commercial real estate loans. Toxic CDOs, credit card bonds, student loans — the Fed is buying or loaning money against anything and everything!
I warned that at some point, this would be viewed as bearish for the dollar. I also said it would only add to worries about the perceived credit quality of the U.S. itself. We’re starting to see the dollar get clubbed now and clearly, U.S. debt is getting trashed.
It’s not just the Fed, either. The U.S. Treasury is doing its part, too. Indeed, we’re borrowing and spending the country into oblivion!
This week alone, Treasury sold a record $26 billion in seven-year notes, a record $35 billion in five-year notes, and $40 billion of two-year notes. Next week, we’ll get a record $71 billion in longer-term debt issuance.
Total net borrowing needs for the second quarter are now up to $361 billion. That’s up 27-fold from $13 billion a year earlier and more than double the previous estimate of $165 billion.
We just learned the Treasury will start selling 30-year bonds every month, as opposed to eight times a year. And speculation is running rampant that the U.S. will soon start auctioning off 50-year bonds! All this issuance is needed to fund a federal budget deficit that’s projected to hit at least $1.75 trillion this year and $1.2 trillion in fiscal 2010.
The Implications For You …
First, I’ve implored you to dump long-term bonds for several months now. If you followed that advice, you saved yourself a world of hurt. The average long-term government bond fund has already lost 11.2 percent in value this year, according to Morningstar, and we still have eight months to go!
Credit spread tightening has helped diversified, long-term bond funds perform better. But even they’re showing year-to-date losses, on average.
My advice remains the same: Get the heck out of the LONG-TERM part of the bond market while you can. Stick with SHORT-TERM Treasury bills. They are not subject to the same price risk and credit concerns as longer-term notes and bonds.
…Meanwhile, if you’ve been waiting to refinance your mortgage, I wouldn’t hold off any longer. The Fed has been trying to manipulate the bond market in order to hold rates down. But the cumulative “sell” decisions of investors around the world are starting to overwhelm Bernanke & Co.
Thirty-year mortgage rates are still hovering in the high 4 percent area. But they’ll climb if bond prices continue to tank.
Until next time,
Mike
The bond market Bozos of Greenspan and Bernanke espoused the Keynesian deficit spending mantra during down cycles but forgot that the other half of that equation which is that you must save money during the upcycles if you wish to even the cycles out. Simply printing during economic dips only leads to more economic distortions and digs us deeper and deeper into debt. Just remember that every time you hear the word “credit” you are in fact hearing the word DEBT. Our marketing based politically correct Alice in Wonderland World doesn’t like labeling things in a negative light. And that’s a big part of the problem. Can’t tell little Johnny that he can’t sing, you might bruise his ego. Of course encouraging off tune Johnny to sing only distracts him from gravitating to the things he is really good at. Funny how that works. Real praise for real performance. Real criticism when it’s deserved.
Well, sorry to the p.c. crowd, but this economy is riddled with debt, broken morals and ethics, a one way rule of law, math that does not work and is IMPOSSIBLE to pay back and I really don’t care if that brings you down. It must be dealt with NOW and by adults who can both tell and handle the truth!
Hey, at least Joe the Plumber here can sing the truth while another economic Bozo simply grins behind him – how true. And truer words were never sung, “…we owe our souls to the Federal Reserve.”
Two Trillion Tons - Sung by Joe the Plumber:
Now I know that a bond market collapse is not a funny subject matter, but you have to admit Joe the Plumber pretty much nailed it!
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