BofA lays off property appraisers

Perhaps the property rebound, a la Housing Bubble 2.0, isn't so strong after all, given that interest rates have been rising and job growth is not booming yet.  Bloomberg reports (LINK, bold emphasis added):

Bank of America Corp., the second- largest U.S. lender, cut about 5 percent of staff in its appraisal unit last month as the firm rid itself of delinquent mortgages, said two people with knowledge of the move.

The job reductions at LandSafe, a business with more than 1,000 employees and acquired in the takeover of Countrywide Financial Corp., began Feb. 22, said the people, who requested anonymity because the dismissals were private. Appraisers, who estimate the market value of properties, and regional managers were cut, Tracy Sanderson, a LandSafe senior vice president, told staff in a Feb. 25 e-mail.

“While we have known we were overstaffed since the fall, we did everything we could to delay impacts as long as possible,” Sanderson said in the memo obtained by Bloomberg News. “We were hopeful that our volume would return and potentially reduce the number impacted.”...

About 70 percent of work done by LandSafe appraisers was related to transactions for soured loans, including the auction of bank-owned properties and short sales in which a borrower’s home is sold for less than the amount owed, said one of the people. The bank’s expected increase in originations this year isn’t enough to offset the drop in work resulting from having fewer delinquent loans to service, the person said.

The rest of the article discusses, among other things, declining mortgage volumes for the industry as a whole, which lately have mostly been refis rather than new loans.

This is not a disaster per se, but given the bullish action in bank and homebuilder stocks, it makes me wonder if the Street is not ahead of itself on this theme.

Another Non-Barking Dog

A dog that did not bark today was the stock market. After Monday's drubbing, bulls wanted to stage a "Turnaround Tuesday". Instead, with less than an hour to go in the regular stock trading session, stocks are flat with the VIX down (a lower VIX indicating less fear in the marketplace as judged by certain options activity). However, Treasuries reversed from down in price to up in price, joining gold in the plus column.

Meanwhile, my favored proxy group for the fundamentals of the economy, namely large financials, are depressing. JPM, generally considered the best of the TBTFs, is weak again today. BofA stock looks horrible, as do C and AIG. A high-quality not-quite TBTF, the President's banker (Northern Trust) also has a failing chart. DE and CAT don't have hot charts, either.

I recently read an erudite piece out of Cumberland Associates that "sell in May and go away" historically has not applied when some circumstance or another that in my approaching dotage I cannot remember is present, as it was when the writer wrote that. But at least for industrially sensitive stocks and commodities, today's action is more consistent than not with the thesis that for the next few months, investors' trading accounts are better off on defense than offense.

Disclosure: I am short BAC and NTRS, though I am long a much greater quantity of offsetting longs in a similar investment niche. I am also long gold in various forms and have certain other longs and shorts. My major recent asset allocation change has been to sell out of almost all foreign currency positions and energy stocks as soon after the reported "hit" on Mr. bin Laden occurred and silver and oil began crashing, and replace much of those positions with long Treasury bonds and most of the rest with cash.

Copyright (C) Long Lake LLC 2011

New Year Theme Similar to 2009: Too Much Debt

I owe he as you owe me and you owe he and we all owe together. (Apologies to Lennon/McCartney and I Am the Walrus.)

It's the debt, stupid. With the U. S. and other countries such as Australia and I believe the U. K. at record levels of debt to GDP, the web of who owes what to whom is more and more complex, and using a different metaphor, the ladder of debt is higher and less well-supported. All the "extend and pretend" accounting schemes have delayed recognition of the problems of the banks, and the stock charts of every large bank in the U. S. show weak long-term charts, even JPM. Past may not be prologue, but the charts of the top tech and medical companies show long-term accumulation.

And count me skeptical that China's any better.

Our government has done exactly the wrong thing by dealing with the housing collapse by guaranteeing more low-downpayment loans. At least the large complex financial institutions have sold stock, and while Citi and probably BofA are truly impaired, at least they have repaid TARP by selling equity rather than borrowing.

Anyone who is not in power in Washington who predicts on the record whether inflating prices or deflating prices are to come in 2010 is pretending. There are too many known unknowns and possibly unknown unknowns to even guess. Increasing economic activity is baked in the cake and baked in the markets for the next 6 months; but could even the modest tax increases that likely would come with healthcare "reform" legislation plus the expectation of the 2011 expiry of the Bush tax cuts derail the recovery just as a tax increase in Japan about a decade ago was said to have helped turn the economy down? Or could economic vigor in the BRIC countries pressure the price of oil enough that our economy turns down even without any monetary or fiscal tightening? Or will the economy just sail along given all the pro-cyclical stimulus, and perhaps China's property situation will turn into a burst bubble.

It smells like an interesting year.

Copyright (C) Long Lake LLC 2009

On a Good Screed, the Economy and the Markets

Barry Ritholtz at The Big Picture has a guest post by the former head of Fast Money, Dylan Ratigan. In Why Keep Geithner, he puts forward a nice screed. It is good to see a former MSM guy speak out in this way. Where I disagree(d) with him is that I always thought that Mr. Volcker was just an old guy who the Obama campaign kept around for show, that a President Obama was getting too many campaign contributions from Big Finance (but would have been a credible vice presidential candidate), and I opposed Mr. Geithner from the get-go, given his obvious central role in the financial scam(s) of last year plus his tax fiddlings.

Switching to the economy, the Institute for Supply Management reported strong numbers re manufacturing today. The manufacturing downturn is over for now; this is not a big part of the economy.
Jobs and consumer spending data are poor. Once again, gold prices went up more than stock prices. The data point in that ISM report that struck me as supportive of a fundamental reason for that trend is that many commodities were reported to have gone up in price, but no shortages were reported. In other words, this is looking like a sort of reply of the False Recovery from the 2001 recession. Total debt to GDP is at new record highs. One has to assume that lots of leverage has been underpinning the markets.

Too many market leaders since the March stock market lows have truly poor stock charts while the averages hold up to suit me. This is typical of an evolving correction. I am out of almost all stocks on a tactical basis. A suspicion is that this market is similar to that of 1975, with a halfway-completed structural bear market after a huge rise off of a scary bottom. Just as this market has retraced half its losses, it would be reasonable to expect it to retrace half this year's gains off the bottom. Assuming Citi does not follow CIT into bankruptcy in a Lehman-like manner, then it would be reasonable to look for a second and final leg up, as in 1976, as the toxic effects of leverage tend to get hidden until the Fed tightens. And if the economy is so weak that the Fed never tightens, I have no idea what things will look like.

In any case, market risk is very high in my opinion. Revelations re Mr. Geithner, Citi, BofA, Hank Paulson, or an unexpected source could cause at least a short-lived panic and could cause a gap opening. In the meantime, any disappointment on jobs may not benefit the Treasury market as that would imply the likelihood of yet more Federal debt issuance or obligations.

Copyright (C) Long Lake LLC 2009

Of Roll-Ups and Markets

Roll-up #1:  BofA, originally a modest Charlotte, N. C.  bank, then the pretentiously-named Nations Bank, then a truly national bank with a name to match after merging with/taking over the San Fran-based BofA, has announced an upside "earnings surprise".  The stock has more than quadrupled since its low point this winter.  How any financial journalist/editor team can use that term "earnings surprise" to refer to a TARP recipient with the journalist equivalent of a straight face is, well, a surprise.

Because with Big Finance it is all politics, all the time, their stocks are unanalyzable and therefore  untradeable, as stated here a while ago.  Having been short financials or long puts these entities on and off since last year and having stopped that behavior with AXP around 10 and BofA around 4, my temptation is to go to the well one more time.  Too far too fast at the very least; but why fight the Fed?  Perhaps systemically less important entities such as AmEx (AXP)?  TBD . . .

To both explicate some current issues and show how confusing matters are with Big Finance, please see the post from last night by James Kwak (h/t Naked Capitalism) at the Baseline Scenario, titled More Accounting Games, which both explains the lack of real importance of converting preferred stock to common stock and then goes on to clarify/correct one of his points.  

Roll-up #2:  Oracle (ORCL) is buying Sun Microsystems (JAVA) for about $7.4 B, or about $6 B after net cash.  ORCL currently has a negative $3 B tangible net worth, after years of profitability and only one quarter of a dividend payment.  Basically, ORCL has used most of its positive cash flow over the years to buy its common stock from people and institutions who no longer want to own it, without rewarding the long-term holder with dividends until very recently.

ORCL has turned into another Citigroup, it would appear, or perhaps a once-superior acquirer, namely Nations Bank.  Yet even Wachovia and Fifth Third were until not long ago viewed as very well run banks that were also great roll-up acquirers.  Wrong!

ORCL stock has, on the heels of well-received earnings, punched above its 50 and 200 day moving averages for the first time since last August.  One wonders if if the company will be viewed as making a material error by acquiring an unprofitable hardware/software company at a premium valuation.  If so, and if the stock collapses in any way similar to what happened to Pfizer when it plummeted much more than the market after announcing the Wyeth takeover, that might be a bad metaphor for the market as a whole.

Other comments:  Following the bear market script, the best chart performers of last year, namely Treasuries, gold and the two Dow 30 winners, WMT and MCD, are underperformers the last few months, with charts that look similar to various falling markets and stocks from last year.  Short term, no asset class looks attractive.  Longer term, the view here is that belief in paper/fiat money will continue to be eroded as everyone sees how easily trillions of dollars have been "poofed" into existence by the strong will of the Establishment.  The greenback is a Federal Reserve note, and the Federal Reserve now holds assets that are increasingly dodgy.

Re the argument that stocks are a good inflation hedge, the truth is that they were in the early-t0-mid 1980s,  but only after immense inflation had driven up the nominal value of various assets and after a commitment to a disinflation/high growth (Volcker/Reagan) economy had been made.  Matters are more fundamental now:  the survival of the central bank absent a bailout, the survival of a now-lapdog FDIC (which should NOT be participating in PPIP), and any belief that the reserve currency of the world is being managed responsibly.

Thus it appears likely that on a secular basis, more rather than fewer people will seek out alternatives to the dollar as a store of wealth.  The Euro?  Too risky.  The Deutschmark?  Yes, but sorry, see the Euro.  The yen?  Laughable.  The yuan/renminbi?  Premature at best.

Except for the dollar, there is only one "thing" that will get one past border guards, out of prison, and that in general will be accepted where feasible in a transaction.  The fact is that everyone reading this knows what that mystery "currency" is.  Case closed.  Longer term investors should consider accumulating on weakness.

Copyright (C) Long Lake LLC 2009

Where Has All the Money Gone?

The world has gone mad today,

And good's bad today,

And black's white today,

And day's night today . . .

Anything goes.

-Cole Porter, "Anything Goes"

Shortly after Barack Obama gave an interview to the New York Times in which he confided that Team Obama pays no attention to bloggers, the blogger barbarians are at the gates of the castle of Big Finance.  This time, they have the law with them.  It has now been revealed that NY Att'y Gen'l Cuomo is squeezing BofA's CEO Ken Lewis; BofA has been sued for enabling the alleged Cosmo scam on Long Island; and now it appears that the law is coming down on AIG, initially in the person of Joseph Cassano, who ran the AIG Financial Products division that (in) famously sold credit default swaps (i.e., insurance against bonds defaulting) without reserves. And so on and so forth.  As with Watergate, the revelations are beginning to cascade.  Perhaps people will reflect that Bernard Madoff was not just some scamster but was a founder of the NASDAQ, a major player in it, and that the NASDAQ per se largely functions as a scam from the standpoint of the average "investor".  And why are Citi and BofA reported to be buying broken CDOs at 30 cents on the dollar while carrying them on their books at 80-90 cents?

Why does Chris Whalen of the Institutional Risk Analytics, who testifies before Congress and does business in the financial arena in America, say in a post this week that:

 As we said of Mexico two decades ago, Americans now live in a Mafia State that is beyond control.

Our political class is entirely captive of Wall Street, the result of decades of corruption and moral decay. Our nation's capital is controlled by a criminal gang that masquerades as an elected government. . .

"Based on our projections and channel checks, we think that maybe the Fed staff got it wrong and put down the likely loss rate instead of the fanciful LT recovery rate embraced by Bernanke, Geithner and Summers. Truth is, the LT recovery or "Loss Given Default" (LGD) rate experience of 20-30% (which are the LT LGD rates used by Moody's, S&P for internal loss rate projections) are holding true in this cycle as in previous economic downturns and may actually be optimistic compared with the actual realized loss."

With most of the RES and CRE collateral we see in the channel trading in the 30s, it is only a matter of time before the markets force Bernanke, Geithner and Summers to abandon their desire to subsidize the large, insolvent banks and finally embrace liquidation. As we told our friend David Kotok at Cumberland Advisers, just remember to buy the bonds, not the equity, no matter what investment situation you may be considering during most of 2009. In the current environment, be a creditor, not a shareholder.

DoctoRx here.  Now that financial company insiders have been able to both sell and short-sell more stock at inflated prices after the last manipulated rally, the truth comes out.  The CEO of Morgan Stanley is reported yesterday to say to his employees that 2009 will be tough, and in the last fewdays Tim Geithner has said that the banks are not in fact all that well-capitalized, a fact supported by the CEOs of BofA and JPMorgan Chase.  And as far as the bonuses go, not to worry, as predicted here recently:

Bank of America May Raise Investment Bankers’ Salaries by 70% 

By Jacqueline Simmons and Josh Fineman

March 27 (Bloomberg) -- Bank of America Corp. plans to increase some investment bankers’ salaries by as much as 70 percent following the takeover of Merrill Lynch & Co., people familiar with the proposal said.

Bank of America, which has received $45 billion of taxpayers’ money, may raise the annual base pay for some managing directors to about $300,000 from $180,000, said the people, who declined to be identified because the final numbers are still under discussion. Salaries for less-senior directors would climb to about $250,000 from $150,000, and vice presidents would get $200,000, up from about $125,000, the people said.

“We regularly review our compensation programs,” Bank of America said in an e-mailed statement. “Such a review is particularly appropriate during such challenging times. While various alternatives are being considered, no decisions have been reached.”

DoctoRx here:  The anonymous Email is an obvious lie.  The only non-decision may be the exact salary numbers.

Adjusted for inflation/deflation, the stock crash of the last 17 months is worse than that of the Great Depression at the same time frame, and the same things are happening.  Spain is in deflation, with an unemployment rate of 14%; its Prime Minister said the unemployed may as well just f--- because there's no work to be had.  Mish at www.globaleconomicanalysis.blogspot.com has two recent posts, one about banks walking away from foreclosures because the properties aren't worth foreclosing on; and one on cities abandoning parts of their own municipalities and shrinking.  The accounting standards board, FASB, is revealed to be a bunch of lap dogs.  Last year, it refused to implement its rule requiring the Citis of the world to take on-balance sheet their SIVs, providing a pitiful non-reason for its reversal.  Now we have:

 Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes 

March 30 (Bloomberg) 

Four days after U.S. lawmakers berated Financial Accounting Standards Board ChairmanRobert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.

The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.

FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.

Officials at Norwalk, Connecticut-based FASB were under “tremendous pressure” and “more or less eviscerated mark-to- market accounting,” said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. . .

Please review the first paragraph immediately above.  Bloomberg says that this rule change would "improve profits" at Citigroup.  WRONG.  It would improve reported profits.  Economic profits cannot be changed by an accounting change.  Who will be fooled by FASB's supine behavior?  Only the small investor, that's who.

The noose and the cops are closing in on the Establishment.  Newsweek's pitiful attempt to smear Paul Krugman went nowhere.  Felix Salmon at Portfolio.com reported:

Newsweek's Fearful Krugman Profile

Evan Thomas has a profile of Paul Krugman on the cover of Newsweek. The 2,825-word article has six on-the-record quotes about Krugman; none of them -- not even the one from his mother -- are particularly flattering. No one is quoted saying a single nice thing about Krugman's economics or his opinions.

Salmon got it right with his title.  Newsweek and the Establishment are afraid of the truth.  While DoctoRx and Dr. Krugman have different political philosophies (big vs. small government), Dr. Krugman believes in "speaking truth to power", as his party liked to say when they were out of power.  As this blog has noted on numerous occasions, Dr. Krugman has been critical of Barack Obama's economic policies before Mr. Obama became President Obama.  

One can pick one's preferred time of when things went seriously, structurally wrong.  The Left goes back to Reagan.  I would more simply go back to the Asian contagion, when the average U. S. stock peaked around 1997-98, but the bubble was then perpetrated.  Ever since then, bubbles have been blown and burst.  However, there are now no bubbles left in the stock market, as all stock groups are in well-defined downtrends, and forget about real estate.  Only gold and Treasuries/government mortgage-backed securities are in defined up-trends.  One suspects that that's where the big money has been flowing, as the public continues to disbelieve that these markets are toppy. Even the ad for gold in the Super Bowl was for the public to sell its gold, not to buy it, and thus did not signify a top.

Some major unanswered questions include:  

1.  How will the financial fraud on the public, which is well on its way to being revealed for all to see and is thus coming to a climax, be resolved;

2.  In the midst of the worst financial crisis since the 1930s, how did America get as President the single least experienced President in its modern history, whose political career most resembled that of Robert Morse in "How to Succeed in Business Without Really Trying"?  (Remember the song, "Oh, I Believe in You . . .?);

3.  How much wealth will be/is left after all that has been looted by the banksters  and the insider/CEO has been revealed;

and

4.  Where have the looters been stashing their gains?

For individual investors, their pecuniary interest is actually most importantly revealed by #4.  This is where technical analysis, with trend-following rather than assuming reversion to the mean, may help.  After all, if you're a looter, your wealth has to be somewhere.  It's not logical for it to be sitting in T-bills just waiting for stocks to bottom "tomorrow" if you know that you and your ilk have appropriated for yourselves more than the public can imagine.  If it's in T-bills, it's to protect capital against deflation; in deflationary bananas, stocks have no bottom.  Back to Whalen:

"As global deflation proceeds, those with cash shall be king . . ."

This could be the financial equivalent of Watergate, and potentially more consequential.

Copyright (C) Long Lake LLC 2009

Li Whiz!

Infectious Greed links today to a Wired article, "Recipe for Disaster", about the origins of the CDO mess. The piece highlights a mathematical formula developed by Dr. David Li. More interesting perhaps is a WSJ article linked to in the Wired article from 2005 about the same topic: "Slices of Risk: How a Formula Ignited Market that Burned Some Big Investors".

The 2005 WSJ article begins:

When a credit agency downgraded General Motors Corp.'s debt in May, the auto maker's securities sank. But it wasn't just holders of GM shares and bonds who felt the pain.

Like the proverbial flap of a butterfly's wings rippling into a tornado, GM's woes caused hedge funds around the world to lose hundreds of millions of dollars in other investments on behalf of wealthy individuals, institutions like university endowments -- and, via pension funds, regular folk.

Please read the whole thing. It is astonishing, 3 1/2 years later, to see that the WSJ was reporting that the three largest U.S. banking institutions had about $3 Trillion of exposure to CDOs and credit default swaps, the underpinning for which related to a theoretical complex mathematical formula (which is shown, incomprehensibly, in the Wired article). Dr. Xi's own ambivalence about his formula comes through, as does, in retrospect the arrogance, greed and stupidity of the financial companies that knew they were risking vast sums of money they did not have.

Now that these companies, Citigroup, BofA and JPMorgan Chase, are all being kept "alive" by taxpayers, it is even more maddening to realize that all their risks were disclosed long ago.
This makes the call by such interested parties as Bill Gross of PIMCO (the world's largest bond fund) to protect those who own corporate bonds of these companies nothing but self-serving claptrap. Every systemically important owner of the bonds issued by these financial holding companies knew or should have known that these were risky bonds.

No one but depositors should be protected from the insolvency of these companies. The sooner the guillotine falls, the better. And it looks as if Europe's big banks are in the same boat.

The good news is that all this is intangible stuff. The gamblers who lost need to pay the price. For every losing bet, there is a winner on the other side. Losing gamblers who can't pay their debts can suffer the consequences by working things out with the winners who can't collect. Government, through its various powers, needs to make this process happen ASAP and has been way behind the curve for years.

The productive capacity of the world is undiminished. The powers-that-be need to let failing companies fail and work together day and night to cancel out enough debt and other aspects of the over-financialization of the Western world so that normal business can continue and resume.

The shape of the financial markets is indicating that the more basic the asset, the better. Thus, gold and governmental debt show strength. Unpredictable, hidden "stuff" such as that within JPMorgan Chase and GE Capital are seeing money rush out. Unlike GE stock, which might go to zero, oil has a real use and will not go to zero so long as modern civilization as we know it exists.

So long as business and government continue to flail away and thus fail us, the debt deflation will continue. In that situation, short-to-intermediate highly secure credits, such as U.S. Treasury debt or demand deposits in a strong bank with FDIC coverage in addition, appear to be appropriate for funds that are not allocated as pure risk capital.

Copyright (C) Long Lake LLC 2009

Merrill, $15 Billion, and BofA

Zero Hedge blog raises the following question:

Was Merrill Casualty #3 of The Basis Trade After DB Prop and Citadel
Posted by Tyler Durden at 9:48 AM

"In a bet gone very bad, that if true would make Jerome Kerviel's $5 billion loss at Soc Gen seem like amateur hour, the WSJ reports ($$$ link with hat tip to portfolio.com) that the main reason for Merrill's massive $15 billion Q4 loss was due to some very large basis trades gone horribly wrong. We wrote briefly about the basis trade here but now with attention turning more firmly to this topic, it is worth revisiting."

If you're a pro, you might find the entire blog interesting and comprehensible. I'm not and don't get most of it. However, here's what I think I do get. Merrill is suspected of gambling on the eve of being sold for $29/share. It had no need to risk scuttling the deal by gambling. Every gamble of this nature has a counterparty taking the other side of the gamble. That counterparty makes an equal profit to the loser, minus transaction costs if any.

In an article titled "BofA had role in Merrill bonuses", The Financial Times reports today that "In the wake of Mr Thain's dismissal last week, sales and trading chief Tom Montag, his top deputy, received a promotion. Mr Montag's department was responsible for at least half of Merrill's $15bn loss in the fourth quarter."

Why promote a loser such as Mr Montag. Did BofA make a profit as a counterparty while Merrill took huge losses?

Even Inspector Clouseau knew that every misdeed needs a motive. The motive here that makes sense is to dump on Merrill to make BofA look good.

Copyright (C) Long Lake LLC 2009