Friday, July 23, 2010

Fed not looking to buy more mortgage securities, NY Times

So how in Gods name is the mortgage market to recover?

The Fed holds mortgage securities worth more than $1T, and is not eager to expand that portfolio further at this point, according to the New York Times

Need for electricity drives soaring global demand for coal

Coal consumption to produce electricity is expanding at a phenomenal rate worldwide, and the International Energy Agency projected that demand will keep growing rapidly for at least the next 20 years. Carbon capture and storage technology might solve the
problem of greenhouse-gas emissions, according to Der Spiegel, but they create another one -- a location for the captured gas, which can be dangerous in high concentration. Der Spiegel

The immediate fallout from "Financial Reform"

Umintended consequences strike again. Dodd-Frank is already an economic disaster: German Banks are fleeing the NYSE, parts of the Mortgage market are shut down or operating with emergency exemptions and under temporary rules from the SEC, Fannie and Fredie are bankrupt..why dont they have to operate under the same rules?

.At least 2 issuers pull sales of asset-backed bonds: Ford Motor Credit and at least one other issuer reacted to problems with credit rating agencies by pulling planned sales of asset-backed bonds, fund managers and traders said. Rating agencies are no longer allowing issuers of asset-backed securities to use their ratings in bond
prospectuses because of liability raised by the regulatory overhaul. Reuters

.SEC temporarily eases rules for issuers of asset-backed bonds The Securities and Exchange Commission is aiming to help issuers of asset-backed bonds comply with rules that are part of the regulatory revamp by temporarily allowing them to omit credit ratings on their filings. Meredith Cross, director of the corporatefinance
division at the SEC, said credit rating agencies are not allowing borrowers to include rankings in registration statements. "This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply," Cross said. Bloomberg

.Germany's corporate giants pull out of the U.S. stock market The biggest companies in Germany are walking away from the New York Stock Exchange and other U.S. securities markets, deciding that financial regulation, lawsuits and accounting rules in the country are more trouble than they're worth. Deutsche Telekom and Allianz are the latest German blue-chip corporations to flee Wall Street. Germany's DAX index of prestigious, household-name firms once had 11 companies on the NYSE, but the number has fallen to four.
Spiegel Online

The Tax Tsunami On The Horizon

Todays Investors Business Daily Editorial says it all...goodbye any economic recovery

Many voters are looking forward to 2011, hoping a new Congress will put the country back on the right track. But unless something's done soon, the new year will also come with a raft of tax hikes — including a return of the death tax.
Through the end of this year, the federal estate tax rate is zero — thanks to the package of broad-based tax cuts that President Bush pushed through to get the economy going earlier in the decade.

But as of midnight Dec. 31, the death tax returns — at a rate of 55% on estates of $1 million or more. The effect this will have on hospital life-support systems is already a matter of conjecture.

Resurrection of the death tax, however, isn't the only tax problem that will be ushered in Jan. 1. Many other cuts from the Bush administration are set to disappear and a new set of taxes will materialize. And it's not just the rich who will pay.

The lowest bracket for the personal income tax, for instance, moves up 50% — to 15% from 10%. The next lowest bracket — 25% — will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.

But the damage doesn't stop there.

The marriage penalty also makes a comeback, and the capital gains tax will jump 33% — to 20% from 15%. The tax on dividends will go all the way from 15% to 39.6% — a 164% increase.

Both the cap-gains and dividend taxes will go up further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000. Other tax hikes include: halving the child tax credit to $500 from $1,000 and fixing the standard deduction for couples at the same level as it is for single filers.

Letting the Bush cuts expire will cost taxpayers $115 billion next year alone, according to the Congressional Budget Office, and $2.6 trillion through 2020.

But even more tax headaches lie ahead. This "second wave" of hikes, as Americans for Tax Reform puts it, are designed to pay for ObamaCare and include:

The Medicine Cabinet Tax. Americans, says ATR, "will no longer be able to use health savings account, flexible spending account, or health reimbursement pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin)."
The HSA Withdrawal Tax Hike. "This provision of ObamaCare," according to ATR, "increases the additional tax on nonmedical early withdrawals from an HSA from 10% to 20%, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10%."

Brand Name Drug Tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax goes to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Beginning in 2019 it falls to $2.8 billion and stays there. And who pays the new drug tax? Patients, in the form of higher prices.

Economic Substance Doctrine. ATR reports that "The IRS is now empowered to disallow perfectly legal tax deductions and maneuvers merely because it judges that the deduction or action lacks 'economic substance.'"

A third and final (for now) wave, says ATR, consists of the alternative minimum tax's widening net, tax hikes on employers and the loss of deductions for tuition:

• The Tax Policy Center, no right-wing group, says that the failure to index the AMT will subject 28.5 million families to the tax when they file next year, up from 4 million this year.

• "Small businesses can normally expense (rather than slowly deduct, or 'depreciate') equipment purchases up to $250,000," says ATR. "This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be 'depreciated.'"

• According to ATR, there are "literally scores of tax hikes on business that will take place," plus the loss of some tax credits. The research and experimentation tax credit will be the biggest loss, "but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs."

• The deduction for tuition and fees will no longer be available and there will be limits placed on education tax credits. Teachers won't be able to deduct their classroom expenses and employer-provided educational aid will be restricted. Thousands of families will no longer be allowed to deduct student loan interest.

Then there's the tax on Americans who decline to buy health care insurance (the tax the administration initially said wasn't a tax but now argues in court that it is) plus a 3.8% Medicare tax beginning in 2013 on profits made in real estate transactions by wealthier Americans.
Not all Americans may fully realize what's in store come Jan. 1. But they should have a pretty good idea by the mid-term elections, and members of Congress might take note of our latest IBD/TIPP Poll (summarized above).

Fifty-one percent of respondents favored making the Bush cuts permanent vs. 28% who didn't. Republicans were more than 4 to 1 and Independents more than 2 to 1 in favor. Only Democrats were opposed, but only by 40%-38%.

The cuts also proved popular among all income groups — despite the Democrats' oft-heard assertion that Bush merely provided "tax breaks for the wealthy." Fact is, Bush cut taxes for everyone who paid them, and the cuts helped the nation recover from a recession and the worst stock-market crash since 1929.

Maybe, just maybe, Americans remember that — and will not forget come Nov. 2.

Thursday, July 22, 2010

Joblessness is down in 39 states, but few jobs are being created

A decline in unemployment in 39 U.S. states and the District of Columbia last month is another sign that job seekers are giving up the hunt, not that the labor market is strengthening, experts said. Only 21 states posted a net job gain in June, compared with 41 in May, the Labor Department said. Nationwide, private employers added 83,000 workers.

Another sign of a failure of current US economic policy.

Rising yuan pushes China's exporters to innovate and introduce tech

A strengthening yuan is forcing China's exporters to move up the value chain and become more innovative, said Zhang Yansheng, a researcher for the National Development and Reform Commission. Ge Yafang, head of Black Peony, which exports clothing to the U.S. and Japan, said if the firm hadn't shifted from dependence on cheap labor to a technology-driven operation, the rising yuan would haven driven it into bankruptcy.

An opportunity for US companies to gain sales in China?

Weaker EU members' dependence on the ECB is at a record high

Data show that weaker members of the EU are more dependent on the European Central Bank than ever before. The revelation comes as European regulators prepare to release results of stress tests on 91 banks, part of efforts to reassure markets
about the stability of the financial sector. However, sources said some regulators are urging that results be released before the start of trading in Europe, rather than after, as planned. The Wall Street Journal

Bernanke discusses the Fed's stance on economic uncertainty

Ben Bernanke, chairman of the Federal Reserve, said the central bank is prepared to stimulate growth if the U.S. economy deteriorates, but officials are also ready to increase interest rates and rein in its balance sheet. "We will continue to carefully
assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability," Bernanke told the Senate banking committee. Bloomberg

Wednesday, July 21, 2010

America's AAA Rating Is Cut in Land of Bubbles

“While Moody’s and S&P ignore the wreckage that America’s finances have become, Beijing-based Dagong Global Credit Rating Co. is uncorrupted by the system that enables developed-world debt addicts to appear fiscally clean. It rates U.S. debt AA, two levels below the top grade.
Dagong is right to turn the world of A- and Baa1 on its head even though rating China higher than the U.S. is hubristic at best. Anyone who thinks China deserves a top rating or is devoid of debt landmines isn’t looking very hard.”
William Pesek

Reform bill might halt the ABS market, insiders say

Another unintended consequence of legislation stifling another desperately needed industry.... pushing economic recovery further out into the ether.

Bank analysts and an industry group said regulatory reform legislation heading to President Barack Obama might hurt the asset-backed securities market by bolstering credit raters' liability risk. The major credit rating agencies informed the industry that underwriters will no longer be allowed to use their ratings in bond-registration statements because their risk of being sued has increased. Bloomberg

U.K. seems to be moving to monetize its debt

What makes you think the Fed (here in the USA) is not doing the same thing? Watch what is done, not what is said.

The British government denied that it plans to inflate away debt, but its actions suggest that is exactly what it intends to do, according to The Economist. A program
by the government's National Savings and Investments that paid the rate of inflation plus 1% was closed because of its runaway popularity. Meanwhile, the Bank of England recently bought more than enough debt to fund the deficit for a year, a classic debt-monetization technique that dates back to Germany's Weimar republic, The Economist notes.

The Statist Truth About China

China's Anxiety About Successful Companies ... China is turning independent coal-mines into state-run operations, showing its impatience with private companies that get too big. China's high-profile battle with foreign companies makes it seem as though those businesses keep the nation's economic planners awake at night. It has arrested a Rio Tinto executive on trumped-up charges, blocked Facebook and YouTube, and restricted (in practice if not in name) foreign firms from key industries such as oil, media, and metals. ... While the government has claimed it's putting forth better companies at the expense of weaker ones, the root cause remains that an ever-insecure China wants to rein in independent sources of influence (and wealth) that it feels have become too independent to control. This trend, known in Chinese as "the country advances and the private retreats," allows the government to increase its control over the economy by funneling resources and growth potential into more pliable state companies. – Newsweek

Tuesday, July 20, 2010

No relief is in sight for the U.S. housing market

It is clear that the U.S. housing supply was too big to be affected much by the tax credit for buyers, and for that reason, a bleak future awaits the market, according
to The Economist. "A durable solution to the crisis in housing needed to involve an answer to the epidemic of negative equity and a meaningful labour market recovery," The Economist notes. "America has neither."
The Economist
I'm concerned my outlook for further house price declines may be too conservative

Monday, July 19, 2010


The RISK page of the Volatility Laboratory presents a variety of risk measures for top US Financial Firms. These measures are updated daily and reveal several dimensions of risk. Some measure the risks of individual firms and others are firm contributions to the risk of the financial system and the economy as a whole. Historical estimates of each of these risk measures can be plotted to see the changing performance of individual firms.

The heart of the analysis is the analysis of Marginal Expected Shortfall or MES. This is a prediction of how much the stock of a particular financial company will decline in a day, if the whole market declines by 2%. The measure incorporates the volatility of the firm and its correlation with the market, as well as its performance in extremes. To estimate the equity losses in a future financial crisis, the debt equity ratio of the firm is combined with the MES to reflect the decline that might be expected in a crisis when many firms are undercapitalized. This is called ERISK. Finally, the ERISK measure is used to determine the capital shortfall that a firm would face in a crisis. When equity values fall below prudential levels, the debt loses value and creditors throughout the economy are impacted. The Systemic Risk Contribution, SRISK%, is the percentage of all capital shortfall that would be experienced by this firm in the event of a crisis. Firms with a high percentage of capital shortfalls in a crisis are not only the biggest losers in a crisis but also are the firms that create or extend the crisis. This SRISK% is the NYU Stern Systemic Risk Ranking of the US Financial sector. Some of the firms on this list are already under government protection. Their risk status is a reflection of the costs to the system if the government guarantees were suddenly withdrawn.

To sort the firms by any of these categories, simply click on the heading. To plot any of the series, click on the firm name and select the series to be plotted. You can select the time horizon of the plot. To see help, click on the "?s" in the page.

Systemic Risk Top Five

Bank Of America 15.86%, Citigroup 14.86%, Freddie Mac 10.46%, Fannie Mae 10.05%, JP Morgan Chase 7.71%

The Top Ten is rounded out with AIG, Goldman Sachs, Morgan Stanley, Prudential Financial, Hartford Financial Services Group.

Firms cancel health coverage:

The relentlessly rising cost of health insurance is prompting some small Massachusetts companies to drop coverage for their workers and encourage them to sign up for statesubsidized care instead, a trend that, some analysts say, could eventually weigh heavily on the state’s alreadystressed budget.
Given that Obamacare is based on the Mass model, then we are about to "bend the cost curve" the wrong way.

Direct investors are outbidding bond dealers for U.S. Treasurys

Wall Street bond dealers have been the major buyers of U.S. Treasurys since 2003, when the government started releasing data on buyers, but the pattern is changing. U.S. banks, mutual funds and foreign central banks purchased 57% of the $1.26 trillion in Treasury notes and bonds auctioned this year. Bloomberg•

Soething is changing in the world! But what prompts this, do you suppose?

Collapse of talks for a Hungarian rescue might trigger market panic

The sovereign-debt market might remain in turmoil for a while, after the International Monetary Fund and the EU walked away from discussions with Hungary regarding its budget deficit, experts said. The decision puts the IMF's $25.8 billion bailout for Hungary on the back burner. Bloomberg Businessweek so far market taking this in stride. There should be caution with Greece ahead of next disbursement of funds in August.