Article I wrote for the Scotsman Guide Dec issue.

http://www.scotsmanguide.com/default.asp?ID=5341

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1341.4 -0.8 -0.06%
Eurostoxx Index 2471.7 -22.2 -0.89%
Oil (WTI) 101.61 -0.2 -0.19%
LIBOR 0.4931 -0.002 -0.40%
US Dollar Index (DXY) 79.952 0.225 0.28%
10 Year Govt Bond Yield 1.96% 0.03%

Global equity markets are weaker this morning as European leaders delay a vote on the Greek bailout until 2/20.  The finance leaders were able to squeeze some more concessions from political leaders, but there are still differences over surveillance and control. Separately, Moody’s threatened a downgrade of the global banking sector. Bonds and mortgage backed securities are slightly lower as well.

GM posted a record profit! I am sure tomorrow’s editorial pages will be filled with columns praising the auto bailout and using this earnings announcement as justification. Well, if you repudiate your debt and get rid of all that pesky interest, you had better post record earnings.  GM’s numbers were still below estimates and the stock is down a couple of percent pre-open. As an aside, Chrysler has to issue senior secured debt at 8%.  That is a usurious rate for senior secured debt. See, that is what happens when you re-order the priority of creditors. Investors remember.

Economic data this morning:  Producer Price Index more or less in line with expectations, running at 4.1% annually.  Initial Jobless Claims continue to fall, coming in at 348k vs 365k expected. We are more or less back in the historical “normal” range. Housing starts came in at 699k, above expectations, but still very low. In prior recessions, housing starts bottomed at 750k – 850k.  The last time we were above 1 million units was June of 2008.  1.5 million is normal. The lack of residential construction has been the achilles heel of the recovery so far.

Chart:  Housing Starts:

The minutes of the FOMC meeting were released yesterday. They really don’t add anything to what was said in the press conference after the rate decision.  The minutes don’t really address the question most had regarding the recent good economic data. “Many participants noted some indicators bearing on the economy’s recent performance had shown greater-than-expected improvement, but a number noted less favorable data…” The tone of the minutes was that the economy was improving, albeit slowly, and there is no reason to take our foot off the gas for the moment.  Maybe the Fed believes the Greek negotiations are simply a big kabuki dance and that a default is unavoidable.

RealtyTrac has released its U.S. Foreclosure Market Report for January 2012. Key Quote: “Although overall foreclosure activity was down from a year ago for the 16th straight month in January, we continue to see signs on a local and regional level that the frozen-up foreclosure process is beginning to thaw.” They predict increasing foreclosures in the coming months especially given the settlements in early Feb between the nation’s largest lenders and 49 state attorney generals. Clearing out the shadow inventory of foreclosed homes is a necessary but not sufficient condition for a recovery in house prices.

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1347.8 0.8 0.06%
Eurostoxx Index 2535.2 22.2 0.88%
Oil (WTI) 99.73 1.0 1.03%
LIBOR 0.51 -0.003 -0.63%
US Dollar Index (DXY) 78.556 -0.182 -0.23%
10 Year Govt Bond Yield 2.04% 0.06%

Markets are up slightly on a better than expected initial jobless report. Initial Jobless claims were 358k last week versus 370k expected.  The ECB maintained rates and Draghi sounded bearish tones regarding the European economy.  Headlines are coming across right now that claim Greek leaders have agreed on an austerity package.

Bloomberg is reporting (on the pay site, not the free site) that the price of Bakken shale oil has fallen out of bed (down 25%) in the last week.  There are no futures contracts on Bakken so it can’t be traded, but it demonstrates how volatile oil can be.  The reason seems to be a lack of demand from the refineries, so the oil is backing up with nowhere to put it. Refineries are probably changing over from heating oil production to gasoline production right about now.  I plotted the prices of Brent, WTI, and Bakken oil over the past year so you can see the volatility.

It looks like we have a settlement with the banks and the state AG’s over foreclosures.  $26 billion from 5 banks.  $20 billion is to be used to cut principal balances and to refi current, but underwater, homeowners.  So, of the AGs and the banks, who won?  Both.  The AGs get their scalp, and the banks will be able to count losses already taken towards the settlement. (You owe $100 on your $70 home.  I’ll be a nice guy and cut your principal to $90.  Of course, I probably am already carrying the loan at 90 on my books anyway).  On the refis, the banks will be simply cutting the interest rate on a $100 loan, which stays marked at $100. So no write downs there either.  My guess is this will be earnings-neutral near term and may cause analysts to take down next year’s numbers a little. But that’s it.  So you might want to resist the urge to take some SKFs (Proshares Ultrashort Financial ETF) on the open.

Will it help support the housing market?  Maybe at the margin.  It is no silver bullet – consider my example above – will the homeowner who now owes $90 instead of $100 go out and spend more money?  Probably not. Plus a chunk of this is simply a direct transfer from the government to borrowers since Ally Bank (the old GMAC) is owned by the government.

Finally! A MERS Lawsuit

So NY has filed suit against a number of big banks over MERS practices. I don’t know what kind of monetary damages for affected homeowners or how much in penalties might be in the mix. Maybe one of you can enlighten me. See link from PL HH: A.G. Schneiderman Announces Major Lawsuit Against Nation’s Largest Banks.”

The OK SCt recently took the unusual step of taking original jurisdiction of a pair of appeals of summary judgments in foreclosure cases with robosigning issues. In both cases Deutsche Bank was plaintiff and won by summary judgment at trial court. SCt released two unpublished opinions a couple of weeks ago remanding with instructions. As I understand it, they did not rule on the merits of the assignments at issue. But local attorney friends tell me it is notable that they took jurisdiction (as opposed to the typical assignment to a Court of Civil Appeals) and was quite unusual. They say the SCt is sending a message.

And what is going on with the supposedly imminent global states settlement with the banks on robosigning issues? john/banned says some AG’s have until February 6th to join, but beyond that I’m not sure of the status. Anybody have news?

So legal actions on MERS practices seem to be picking up steam. Will these lawsuits only catch the little guys? It seems to me that the big banks were the movers in setting up MERS and they had a duty to see that it functioned properly and legally if they were going to use its services. They did not, so should they now be penalized for that failure? Any thoughts on what is to come regarding MERS?

[Edited to add global settlement question.]

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