Mortgage Workout 3: Benefits to Mortgage Holders and Homeowners under water on the Mortgage

a. Current law-abiding households who are are seeing negative real value of their primary residence will be able to remain in their homes at affordable cost with a potential for some upside appreciation in the value of their property; and they get to see a participation in the realization of that potential together with Government on sale of their property.
b. Banks and other mortgage owners will have a value, real and ascertainable, assigned to each and every such distressed mortgage. AND they will have, therefore a viable asset to sell to mortgage repackagers on Wall Street; this frees up capital to lend out on new mortgages under more appropriate terms (20% downpayment, 30% max housing cost to household income)
c. Government gets a real, visible path to recovery of money appropriated to this program, with interest.
d. Government will be helping citizens who most need help and restoring their confidence in The American Dream.
e. Government will restore confidence in the banking system worldwide by establishing a system of mortgage valuation that establishes a valuation methodology that could easily be cloned by private investors and capitalized on by the Financial Services industry worldwide.
f. Bankers and other lenders will now have a method of assessing the value of collateral offered interbank and lending between institutions, currently effectively at a trickle, can be reinvigorated.
g. No new government burocracy needed. FNMA/FHLMC become effective arms of the Federal Reserve who is charged with housing stability as a third mandate.

The result will be a very viable, self-funding solution to the current housing/banking crisis.

Mortgages then become easy to value as the underlying properties have a recognized value. Homeowners have an affordable mortgage payment, freeing up discretionary income for spending on other goods and services.

Most importantly, homeowners will not be tempted to walk away from unaffordable payments, or houses worth less than they owe. Foreclosure or bankruptcy can be avoided completely.
There is a very real potential for gain for the Government. Interest on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established.

The banking system is unclogged and consumer confidence is restored. All without requiring additional tax burdens on unborn generations.

Mortgage Workout 2, Updated: Funding

FUNDING for this Program:

Congress will authorize Treasury to issue up to $700 billion annually in 30 year Treasury bonds, at prevailing rates, to implement this program. ( and use the unspent $300 Billion unused funds already voted in the TARP)

These funds will be placed in a separate segregated Federal Reserve Bank administered fund that cannot be invaded by anyone or used for any other purpose than mortgage refinancing. These funds will be used to purchase mortgages on PRIMARY RESIDENCES from homeowners at the value of the amount of principal outstanding on these mortgages.

Chairman of Fed to be responsible for disbursements and oversight of the program so co-ordination with Monetary policy will be maximized.

Reporting: to Congress on program status twice a year.

A Mortgage Workout for the People of the USA 1: The Plan Revised and updated

This is a plan I first suggested two years ago and again on Inauguration day, to help every citizen of the USA whose current mortgage obligation exceeds the value of their primary home.

Principle no 1: No household should pay a housing cost (mortgage payment: principal + Interest only) that exceeds 30% of their gross income( before any deductions) as reported on their latest Federal Tax Return.

Principle no 2: The Federal Government will refinance existing mortgages, through The Federal Reserve Bank; (buy the existing mortgage and reissue a new mortgage to homeowner). This will apply ONLY to homeowners whose mortgage debt on their PRIMARY residence is larger than the current value of their property.

Principle no 3: New mortgages issued under this program, based on household ability to pay, will contain a provision that allows The Federal Reserve Bank to recover, on sale of secured property, 80% of the difference between the nominal value of the new mortgage issued and the then sale price of the property, until full amount of original refinanced mortgage is recovered. The Federal Reserve Bank will be allowed to charge a 0.5% fee in addition to 30yr Treasury Bond rate to cover cost of implementing the program.

Principle no 4: Federal Reserve Bank will be allowed to continue to repackage these new mortgages in CMO’s etc for resale through traditional resale channels.

WEEK ENDING 11/13/09

Overview
While the unemployment rate climbed to a 26 year high of 10.2% in October, initial claims for unemployment aid, which are generally considered a gauge of the pace of layoffs, fell last week to a seasonally adjusted 502,000. more...

US MARKETS
Treasury/Economics
Treasury yields oscillated in a very narrow range this week, with relatively low yields and volatility an ideal scenario for the Federal Reserve as it seeks to navigate the economy. more...

Large-Cap Equities
The stock market rallied for the second straight week on continued corporate mergers and acquisitions activity and the G-20 agreeing to maintain their stimulus efforts, supporting prospects of an economic recovery. more...

Corporate Bonds
Investment grade primary activity got off to a running start this week with over twenty issuers coming to the market. more...

Mortgage-Backed Securities
Complacency is a mortgage investor’s best friend. With Treasuries stuck in a range for another week, mortgages outperformed Treasuries as spreads inched closer to their all-time tights. more...

Municipal Bonds
Yields on municipal bonds are lower this week inside of 20 years of maturity, but higher in longer maturities. more...

High-Yield
The high yield market is facing a flood of new deals, with over 15 deals totaling some $6.5 billion set to price this week and early next. more...

INTERNATIONAL MARKETS
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +6.7% this week, while the Russian stock index RTS went up +6.1%. more...

Global Bonds and Currencies
Major non-US sovereign bond markets were generally slightly firmer overall in the past week despite a surge in risk appetite which pushed equity prices to their highest levels this year. more...

Emerging-Market Bonds
Emerging market dollar-pay debt spreads were tighter this week. Encouraging economic data kept risk appetite strong as equity markets made new highs for the year and credit spreads tightened. more...

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Your Duck is Dead; cost of medical care

A woman brought a very limp duck into a veterinary surgeon.

As she laid her pet on the table, the vet pulled out his stethoscope and listened to the bird’s chest.

After a moment or two, the vet shook his head sadly and said, “I’m sorry, your duck, Cuddles, has passed away.”

The distressed woman wailed, “Are you sure?”

“Yes, I am sure. Your duck is dead,” replied the vet.

“How can you be so sure?” she protested. “I mean you haven’t done any testing on him or anything. He might just be in a coma or something.”

The vet rolled his eyes, turned around, and left the room.

He returned a few minutes later with a black Labrador Retriever.

As the duck’s owner looked on in amazement, the dog stood on his hind legs, put his front paws on the examination table and sniffed the duck from top to bottom. He then looked up at the vet with sad eyes and shook his head.

The vet patted the dog on the head and took it out of the room.

A few minutes later he returned with a cat. The cat jumped on the table and also delicately sniffed the bird from head to foot. The cat sat back on its haunches, shook its head, meowed softly, and strolled out of the room.

The vet looked at the woman and said, “I’m sorry, but as I said, this is most definitely, 100% certifiably, a dead duck.”

The vet turned to his computer terminal, hit a few keys, and produced a bill, which he handed to the woman.

The duck’s owner, still in shock, took the bill. “$150!” she cried, “$150 just to tell me my duck is dead!”

The vet shrugged, “I’m sorry. If you had just taken my word for it, the bill would have been $20, but with the Lab Report and the Cat Scan, it’s now $150.”

Weekly Wrap 10/30/09

Last week we discussed the volatility in U.S. equity markets, and that not only continued this week it became more aggressive. But unlike the prior week's modest moves, the major averages closed sharply lower this week as the dollar rebounded against the other major currencies. The S&P 500 lost 4%.

Once again the declines were broad-based as all ten sectors in the index ended lower, led by Materials (-7.1%) and Financials (-6.9%).

The dollar was the biggest, if not the only, catalyst this week. In fact, the charts of the major indices are almost exact inverses of the U.S. Dollar Index (DXY). A weak dollar benefits the economy as it boosts exports, and investors are trading stocks based on the moves in the currency.

For example, equities attempted to rebound at the open Monday, but the attempt stalled and a spike higher in the DXY late that morning led to a spike lower in the major indices.

The volatility really came through in the last three sessions of the week.

A third day of gains in the DXY on Wednesday led to sharp declines in equities.

Then a reversal in the greenback and modestly better-than-expected GDP figure on Thursday helped equities regain the prior day's declines. The Advance reading for third quarter GDP came in at 3.5%, its first gain in four quarters, slightly better than the 3.2% consensus.

But those gains were short-lived as a resumption in the dollar rally on Friday led to the major indices making fresh week lows.

Third quarter earnings season did continue this week, but there were fewer big names so they took a backseat. For the most part companies continued to beat on the bottom lines, but top line figures and guidance were mixed.

Another rounds of longer-term Treasury auctions also took a back seat -- $123 billion in 5-year TIPS and 2-, 5- and 7-year Notes -- as they no longer seem to have as direct an influence on the equity markets.

Looking ahead to next week, third quarter earnings season will wind down with even fewer big names on the calendar. The dollar will most likely remain in focus until the end of the week, when the always highly-anticipated Nonfarm Payrolls figure is released for October.

Index Started Week Ended Week Change % Change YTD %
DJIA 9972.18 9712.73 -259.45 -2.6 10.7
Nasdaq 2154.47 2045.11 -109.36 -5.1 29.7
S&P 500 1079.60 1036.19 -43.41 -4.0 14.7
Russell 2000 600.86 562.77 -38.09 -6.3 12.7

Quotable

1 WITCH. Thrice the brinded cat hath mew'd.
2 WITCH. Thrice and once, the hedge-pig whin'd.
3 WITCH. Harpier cries:—'tis time! 'tis time!
1 WITCH. Round about the caldron go; In the poison'd entrails throw.— Toad, that under cold stone, Days and nights has thirty-one; Swelter'd venom sleeping got, Boil thou first i' the charmed pot!
ALL. Double, double toil and trouble; Fire burn, and caldron bubble.
2 WITCH. Fillet of a fenny snake, In the caldron boil and bake; Eye of newt, and toe of frog, Wool of bat, and tongue of dog, Adder's fork, and blind-worm's sting, Lizard's leg, and owlet's wing,— For a charm of powerful trouble, Like a hell-broth boil and bubble.
ALL. Double, double toil and trouble; Fire burn, and caldron bubble.
3 WITCH. Scale of dragon; tooth of wolf; Witches' mummy; maw and gulf Of the ravin'd salt-sea shark; Root of hemlock digg'd i the dark; Liver of blaspheming Jew; Gall of goat, and slips of yew Sliver'd in the moon's eclipse; Nose of Turk, and Tartar's lips; Finger of birth-strangled babe Ditch-deliver'd by a drab,— Make the gruel thick and slab: Add thereto a tiger's chaudron, For the ingrediants of our caldron.
ALL. Double, double toil and trouble; Fire burn, and caldron bubble.
2 WITCH. Cool it with a baboon's blood, Then the charm is firm and good.

William Shakespeare

Quotable: For Missing the Unmissable

Quotable
For Missing the Unmissable
Bernanke, the most passionate cheerleader of Greenspan’s follies, is picked as his replacement, partly, it seems, for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just reflected the unusual strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year) event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices, new opaque financial instruments, heroically increased mortgages, lower lending standards, and internationally networked distribution. For these accumulated benefits to society, he was reappointed! So, yes, after the fashion of his mentor, he was lavish with help as the bubble burst. And how can we so quickly forget the very painful consequences of the previous lavishing after the 2000 bubble? Rewarding Bernanke is like reappointing the Titanic’s captain for facilitating an orderly disembarkation of the sinking ship (let’s pretend that happened) while ignoring the fact that he had charged recklessly through dark and dangerous waters.
The Other Teflon Men
Larry Summers, with a Financial Times bully pulpit, had done little bullying and blown no warning whistles of impending doom back in 2006 and 2007. And, famously, in earlier years as Treasury Secretary he had encouraged (I hope inadvertently) wild and reckless financial behavior by helping to beat back attempts to regulate some of the new and most dangerous instruments. Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks. And there are several others (discussed in the 4Q 2008 Letter). You know who you are. All promoted!
Jeremy Grantham

Market Reflections 10/22/2009

Earnings were mostly positive Thursday, led by 3M and McDonald's and including two from the financial sector: PNC and Travelers. After-the-close earnings were especially strong including big surprises from credit-card issuer Capital One and good results from both American Express and Amazon. Economic news was mixed as a gain for the index of leading economic indicators, a gain skewed by its heavy weighting on the yield curve, was offset by a slight rise in initial jobless claims. The dollar gained back some of yesterday's steep loss, up 0.2 percent on the dollar index to 75.14. Commodities were little changed, holding onto yesterday's big rallies in oil and base metals.

Market Reflections 10/21/2009

Deepening weakness in the dollar is heightening talk that policy makers are pursuing a deliberate, thinly masked devaluation policy to raise inflation in a move to monetize the government's debt. This talk has been going on all year in the commodities markets but is now appearing in broader research including today from Morgan Stanley which says there is "the possibility that central banks might want to engineer controlled inflation to reduce the public debt burden." Until an exit strategy is announced, traders are saying that foreign investors will seek to protect themselves with non-dollar assets and that the markets will taunt the Fed by selling dollars and buying commodities.

The dollar index fell a steep 0.7 percent to 74.99 with the dollar testing the key $1.5000 level against the euro, a break of which may, according to traders, trigger intervention from the ECB. Oil hit new 2009 highs, rising $1-1/2 to end at $81 with copper and zinc also hitting 2009 highs. Gold led commodity gains earlier in the month and, pressured by profit-taking, was unable to make much ground, ending only $5 higher at $1,060. Earnings news was mixed, headed by a huge loss at Boeing which continues to suffer from costs associated with prior production delays. Charles Schwab, citing the drag from the dollar, is recommending that U.S. investors seek companies in sectors with broad international exposure including technology, materials, industrials, and energy. The S&P fell 0.9 percent to 1,081.

Market Reflections10/20/2009

A soft housing starts report that included a decline in permits sent the S&P down 0.6 percent to 1,091, offsetting a run of strong earnings reports led Tuesday by heavy equipment maker Caterpillar. The dollar index firmed slightly to 75.52. Commodities were little changed with oil ending at $78.50 and gold at $1,056. Money moved into Treasuries where the 10-year yield fell 5 basis points to 3.34 percent

Market Reflections 10/19/2009

Stocks continued to rise, making new 2009 highs boosted by Fed Chairman Ben Bernanke who did not offer any timeline for a change to a less stimulative monetary policy. The S&P gained 1 percent to end just short of 1,100 at just under 1,098. Earnings after the close point to big gains tomorrow with both Apple and Texas Instruments easily beating expectations on both earnings and sales.

Low interest rates interest in the U.S. vs. expectations for rising rates in other economies continue to hurt the dollar. The dollar index fell 0.4 percent to 75.34. The decline in the dollar pushed commodities higher especially base metals where copper gained 10 cents to $2.93. Oil, ending at $79.25, continues to firm on what appears to be an approach to $80. Gold ended at just over $1.060.

GE heading for bankruptcy

Porter Stansberry writes:

GE says it "brings good things to life," but in fact, over the decade, it has mostly been about bringing good debt to life. For many, many years, GE relied on its triple-A credit rating to borrow money cheaply in the 30-day commercial paper market and then lend it out at a much higher rate, via things like credit-card receivables. These kinds of financial strategies worked well during the debt-financed boom of 1995-2008. They don't work anymore. In fact, without a government guarantee backing its debts, GE would have already gone bankrupt.

Here are the core facts: GE owes its creditors $518 billion. That is not a misprint. It owns tangible net assets of only $17 billion. Thus, on a tangible basis, it is currently leveraged by more than 30-to-1. That's unheard of for a major industrial company. A 3.3% decline in the value of its asset base would wipe out all of its tangible equity. But here's the real problem. Last quarter, the company produced $2 million in operating income. Again, that's not a misprint. On $17 billion in assets, the company earned only $2 million. So... what will happen to GE if (or when) the free market sets its borrowing costs?

GE spent $4.3 billion on interest in the last quarter – thanks to the government's guarantee. So on an annualized basis, GE is now spending roughly $17 billion to service its $500 billion in debt. That's an annualized interest rate of 3.3%. This is not sustainable. Sooner or later, GE is going to have to pay a market interest rate.

Currently, the yield on high-yield corporate debt is around 10%. GE is now rated two slots above "junk" by Egan Jones, the only reliable ratings agency. So let's assume GM could still qualify as an investment-grade credit – which is a generous assumption. GM would pay something like 8% on its debt in a free market. That would cost more than $41 billion a year. Last year, GE earned $45 billion before interest and taxes – in total. It spent $33 billion of these profits on capital expenditures and necessary investments – expenses required to keep the business going. That left it with about $12 billion in what we call "owner earnings." That's not nearly enough money to pay the interest on its debts – whether they're backed by the government or not.

Imagine if the interest on your mortgage consumed 91% of your pre-tax earnings. Could you possibly avoid bankruptcy? No way, right? But... there's a big difference between owing the bank a few hundred grand and owing folks more than $500 billion. Last year, even though GE couldn't actually afford its debts and required a government bailout, it spent $12.4 billion on dividends for common stock holders. That's 20% more than it spent on dividends in 2006! (GE finally cut its dividend by 70% in February. It will be eliminated soon, I promise. Its creditors will finally wake up and demand it.)

Today the stock market values GE at $171 billion. In fact, the common stock – every single share – is not worth one penny. Plan accordingly.
Porter Stansberry

What is a Real Earnings Surprise?

By: Michael Vodicka
Zacks Investment Research

Have you ever wondered why some stocks skyrocket on a positive earnings surprise while others fall off a cliff? In this article we are going to tackle this little-understood issue. Better yet, I will share with you two ways to profit from earnings surprises. More on that later.

3 Reasons Stocks Can Drop After an Earnings Surprise



Estimates vs. Whisper Number: The standard definition of an earnings surprise is when actual earnings come in higher than earnings estimates. But those estimates are the “published” numbers from the brokerage analysts. Quite often investors tend to develop their own unique set of expectations based on sentiment, sometimes referred to as a “whisper number”. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease the market’s inflated expectations. This is the most common reason why some stocks fall after a supposed earnings beat.


Quality of Earnings: The highest quality earnings come from having robust revenue growth. This means that the company’s products or services are in high demand and should stay that way. However, far too much of the earnings being reported these days are generated from cost cutting and other "accounting gimmickry". The problem is that the benefits of these moves don’t last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop.


Forward Guidance: Plain and simple, when you buy a stock you are taking an ownership position. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down…and go down fast.


2 Ways to Make Money on Earnings Surprises

So now that we have outlined things that can wrong after an earnings surprise, let's shift gears and talk about something even more important: how to turn a profit from earnings surprises. Here are two ways to go about it.

Good Way: Buy shares in any company that had an earnings surprise and then rose the day following the news. These stocks experience what academics call the "Post Earnings Announcement Drift". Studies clearly show that these stocks usually outperform the market over the next 9 months. Conversely, you should sell any stock in your portfolio that misses its earnings number as it is likely to underperform the market for the next few quarters. The downside of this approach is that there are literally thousands of stocks to choose from every quarter.

Best Way: Look for those rare opportunities where investors simply guessed wrong about a company's earnings prospects. Specifically, find companies with shares that were declining for about a week prior to the earnings report, yet amazingly produced a big earnings surprise. Sure, the price will jump at the open following the news, but our research clearly shows that the stock will continue to rise over the next couple weeks as investors play catch up.

Where to Find These Stocks

Most of the information to find these "Best Way" earnings surprisers is publically available and free. But I don't know of anyone that puts it together in an easy-to-use format that will help you consistently find these winners.
Mike focuses on finding the best momentum stocks for Zacks.com customers. He is also the Editor in charge of the Zacks Surprise Trader service. Learn more here:
http://www.zacks.com/registration/surprise_trader_long_form.php?adid=ST_WEW_MIKEV_10.17.09

Market Reflections 10/15/2009

Oil shot higher Thursday in reaction to a steep draw in gasoline inventories, a draw reflecting improving demand but more reflecting lower output from refineries which have been complaining about weak margins. Oil convincingly broke through resistance at $75 to end at $77.50 with traders talking about $80 based on momentum alone. But a move toward $100 will take strong evidence of demand growth outside of China.

Good news for Friday's stock market hit after Thursday's close with IBM, Advanced Micro and especially Google beating expectations. The S&P ended 0.4 percent higher at 1,096, poised to take out 1,100 in what will inflict even greater agony on the bears. Citigroup and Goldman Sachs both released mixed results before the opening, with big credit losses at Citigroup pushing back prospects for the bank's return to profitability. Gold, which many say is overdo for consolidation, moved lower, losing as much as $20 to $1,045 before bouncing back to $1,050 at the close. The dollar for once wasn't center stage Thursday, edging 1 tenth lower on the dollar index to 75.47.

Credit in America

From The Economist out of London. The headline reads "Credit in America: Slim pickings, no appetite". In a nutshell, the story notes that the level of credit is dropping, bank lending is contracting, loan losses are climbing, and people are paying down debt and saving more. They conclude the article thusly... "With loan losses unlikely to peak until well into 2010 and banks likely to keep failing until at least 2011, the real credit crunch may still lie ahead." [And that's a very optimistic time line as well. - Ed] I thank P.S. for sending me this story... which is well worth the read... and the link is here.
http://www.economist.com/daily/news/displaystory.cfm?story_id=14636886&fsrc=nwl

Quotable

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”

Marcus Tullius Cicero

Market Reflections 10/14/2009

Solid gains for retail sales outside of ex-clunker autos fueled a strong rally on Wall Street with the Dow Jones industrial average rising past 10,000 to end at 10,015 for a 1.5 percent gain. The S&P gained even more, up 1.8 percent to 1,092 and is approaching the 1,100 level that bulls had been hoping to reach by year end, let alone October. The S&P is up an amazing 64 percent from its March low. September's gains along with those so far in October are embarrassing the bears who nevertheless continue to warn that the market is moving too far and way too fast. Strong results from Intel late yesterday and promises of more were also behind today's strength.

Wednesday's overnight session saw strong trade data out of China, data that raised expectations further of a widening interest rate differential between the U.S. and other economies. And investors are seeking yield, pushing the dollar index down a very steep 0.7 percent to 75.46. At $75.10, oil firmed a little more than 50 cents but is only flirting, not breaking through, $75, considered to be hard resistance at the outside of an existing range beginning at $65. Gold may be flirting with another breakout, this time to $1,100. Gold ended steady at just under $1,065.

Market Reflections 10/13/2009

Soft earnings at Johnson & Johnson weighed on stocks Tuesday with the S&P ending 0.3 percent lower at 1,073. But strong results after the close from chip makers Intel and Altera, which both raised sales estimates, point to strength for overnight trading. Strong sales and guidance for yet stronger sales are what the bulls are looking for this quarter.

Talk that U.S. interest rates will remain low continues to hurt the dollar with the dollar index down 0.4 percent at 75.82. Oil got a boost from the dollar's trouble, ending $1-1/2 higher at $74.50. Gold, steady at $1,065, is also benefiting from the dollar's weakness.

Market Reflections 10/12/2009

Stocks extended their winning streak to six straight sessions with the S&P ending up 0.4 percent to 1,076. Volume was light due to observance of Columbus Day at foreign exchange and bond desks. Oil was a feature Monday, rising nearly $1 to $73 as a cold front sweeps the nation. Shares of oil companies rose more than 1 percent.