MBS Fallout: Mark to Market by Other Means?

I have a million things to do before I leave on Friday!

MBS Fallout: Mark to Market by Other Means?
The pyrotechnics were blazing today as news story after news story brought more and more information and developments in the mortgage saga. There is plenty of commentary out there so I just want to add a few thoughts to the debate.

He Said, She Said
The buyers of pooled MBS want the banks originating them to buy them back because they believe they were either mislead on the asset mix covered or the underlying assets were not handled correctly leading to impairment of the whole lot. In either case the banks will say "it was all right there in the literature we provided" and the buyers will say "you did not model the samples correctly vastly overstating the quality of the pool!". He said, she said indeed. How will this settle out without the legal process getting involved?

Even Though You Know How the Movie Ends, It can Still be Hard to Write the Story
There is no way the story will read as:

After moving heaven and earth and a moon sized pile of cash to save the big banks, Bank of America and Citigroup will now be broken up, bond investors dealt a severe haircut, and fraudulent activities will be prosecuted.

Not. Gonna. Happen.

So what will happen? It is way to early to know. I think Blackrock and PIMCO both know very well that BAC cannot buy back all that paper without going to the markets for serious cash. So why did they issue this note today? There is more going on here and only time will give up the answers. I know plenty of bloggers are getting the champagne on ice for the monster bank blow up, they may be waiting a long time to pop that cork.

Mark to Market by Other Means?
By far the most compelling issue to me is how this process will affect what banks hold on their balance sheet. The monster rally in the markets were largely driven by the ability of the banks to scrap mark to market accounting and go with mark to whatever you feel like accounting. If a serious look is performed on the MBS pools to determine how degraded they were and thus need to be bought back, those assets are going to have a well known clearing price! This would be mark to market by other means and thus poses a severe risk to the banks. Needless to say some kind of deal will have to be reached to prevent this.

Final Thoughts
The smoke screen being run by the banks right now is that they want to boil this all done to whether people are being foreclosed on in error. I have no doubt that in 99% of the cases the home mortgage holder is about to be foreclosed upon correctly. That really is not the issue. What is central is how fraud and corner cutting during the boom times left a mess of broken chains and packaged garbage.

Think of where we are right now, I promise it will either make you laugh or cry:

The entire US Banking system will need to have either another massive handout or some way of legalising fraud will have to be put in place to get them off the hook.

That is the condition of our finance system. Well worth saving at the tax payers expense?

Have a good night.

Thinking Out Loud

It has been almost hurricane like outside today! The winds are very strong. I replaced a light on a lamp post near the road but I could not do any yard work because the wind just blew everything around. Too bad, HA!

What I Said
As the details of the foreclosure/loan packaging mess keep coming to the surface, here is what John Carney is thinking right now:

So here’s what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.

Of course readers will know I thought this on day one of the news. I cannot imagine a way the banks cab get what they have coming after all the money that was spent on them. The wild card? Get enough lawyers involved and a few sympathetic courts and this could move to a place where new legislation could be blocked. I would not hold your breathe though.

Thinking Out Loud
After re-reading the article over at The Automatic Earth I linked to last night I had a few thoughts I wanted to jot down.

I think the huge problem the FED is having here is that they really do not understand where we were just a few years ago in regards to demand from consumers for credit and "stuff". I use the term "stuff" because I mean everything from TV's to furniture, everything.

So how I see it is that from 2004-2007 people had the dial set at 11 for all out consumption and then some:

During this time not only did people (in general, not every single person obviously) spend every cent they made, they went out and spent all the cash they could suck out of their homes as well. The credit markets were a huge pool to draw on and people did. I will not rehash all those numbers but the spending frenzy was immense, the dial was turned to 11.

The bad thing is that the old "11" has now become the new "need to return to" level. Right now most people are still spending every single penny they have, but they cannot access extra credit because they do not have any home equity left. Even if they do, unemployment and stagnant wages are putting the breaks on credit appetite.

What Ben Bernanke and the FED, Paul Krugman, CONgress and everyone else seem to be missing is that spending and demand are still highly elevated and probably at the maximum level possible given the income side of things.

I have written that stocks going to the moon is not a pot of gold for normal people because they either do not own much stock or if they do it is held in plans like a 401k or other retirement vehicle where getting to that money is not an easy (or cheap) thing to do. We can be thankful for that at least. In this sense I do not see the S&P at 1600 as adding much if anything to consumer spending. Some may argue that higher stock prices will encourage business to expand or grow, but grow for what? Expand into what? All time low borrowing costs are here to stay and there is no hurry to get bigger in the face of flatlining demand. Business may borrow money, but they will most likely just do stock buybacks with it!

The issue with the monster tsunami of liquidity the FED keeps deluging the world with is this:

There is only a small place for all the cash to go in the end!

Right now where is money running?:
-Bonds
-Commodities
-Some equities (AAPL, NFLX, GOOG, and like others)

How will this re-ignite massive consumer over spending? How will higher input costs for business make them want to hire more people?

The FED is getting more and more scared and now we even have this kind of thinking going on out loud:
FED's Evans Suggests a Price Level Target
Discusses aiming for higher inflation in the short term (sure buddy!) to make up for lost time. This kind of discussing is abhorrent!

So the FED would like to make cash trash and get people to run out and spend due to fears their cash will not go as far tomorrow? This is a path forward? Again, here in the real world things are different on the ground.

If inflation heats up and even the average joe knows about it, what do you think is going to happen? Here again, the FED has no real ability to see things as they are.

The US is broadly a service based economy. This means we make "services" as our primary way to make money. So if cash is going to go away to inflation in a hurry, would you buy a vacation to Disneyland (which would add revenue to service based industry across the board) or are you going to buy food? If your savings are getting smaller all the time, is a plasma TV sure to be outdated by the time you get it to the car in the parking lot going to be your first purchase or will you look to make sure you have heating oil covered for the winter?

Backing away from the small scale one person model, what about big business? Will you look to hire more people that are going to make more money or will you streamline even further? Will you try and procure your materials and energy in bulk to dodge higher input prices going forward? I think so. This adds nothing to the service sector, but it will add revenue to producers and manufacturers in China and Japan. I think Australia is exporting more materials to China than ever as well.

In the end I think the policy right now would be great if we were a net manufacturer or a net materials provider. We are not! We will need to buy more expensive things due to higher costs and this will hit the service sector! It seems all backwards to me.

On another side of things I have an issue with the Central Bank discussing so openly the idea of scaring you into spending using fear. So far only us economic minded folks have any clue what is happening, if there is a Nightly News Special on how to get the most for your ever inflated away cash there is going to be an ugly panic!

Along these lines I have always said a serious currency issue will not happen slowly and with broad signs for all to see. You will just wake up one morning and it will "be on". I get a chuckle when I read folks say if things get bad they will have time to see it and get out of various positions. Yeah, you and a million other guys! Wait until all your stocks go no bid after a dollar scare and let me know how those stop losses worked out for you.

I am not saying this will happen. I think the FED will likely fail for the reasons I outlined above. Should they succeed I can then put the more ugly scenarios on the table at that time. It's a real mess out there right now!

A bit outdated (here the Saudis are the big dogs!) but this clip from "Rollover" was making the rounds and it is worth a look:


Have a good night.

Price This In

Seems a few lines and ideas struck some readers as either pretty good or fun last post! I do aim to please after all.

Tomorrow is Friday Night so get those requests in. There will be NO Friday Night next week as I will be on New Providence Island getting warm.

Do Not Out Fight the Machines
Not sure how I missed this story, but I saw it on CNBC this morning which means it has to be old:
Norwegians Convicted for Outwitting 'Trading Robots'
The crime you ask? You cannot guess?:

Two Norwegian day traders have been handed suspended prison sentences for market manipulation after outwitting the automated trading system of a big US broker.
Prosecutors said Mr Larsen and Mr Veiby “gave false and misleading signals about supply, demand and prices” by manipulating several Norwegian stocks through Timber Hill’s online trading platform.
Anders Brosveet, lawyer for Mr Veiby, acknowledged that his client had learnt how ?Timber Hill’s trading algorithm would behave in response to ?certain trades but denied this amounted to market manipulation.
“They had an idea of how the computer would change the prices but that does not make them responsible for what the computer did,” he told the Financial Times. Both men have vowed to appeal against their convictions.

How is this a crime? I guess because the HFT computers don't really place real orders, just screw with prices using false and misleading signals it is different somehow. In any case, don't fight the robots, your fate is sealed! I would hope they appeal as this would make an excellent test case. I would donate to the legal defense.

Google Misses Estimates
Yes, they missed my estimates.

Google (GOOG) had earnings up tonight and beat Wall Street estimates for $6.69 (hee hee who got that number out?) by posting $7.64 a share. Too bad EconomicDisconnect's estimate was for $8.50 a share so GOOG missed wildy actually. How did I come up with my estimate? Who cares, how does anyone? If GOOG has beaten the Street's estimates 92% of the time by 5% or more why the hell would anyone even care what they estimate earnings at? Mine and theirs carry equal weight in real terms, but not in terms of "the game". I guess unemployed people buy a ton of crap they find through Google. I use Yahoo myself but I am old school.

Latest Estimates for Foreclosure-Gate
While we are talking estimates, here are two I saw today for Foreclosure-Gate Fallout (FGF) that I will update daily as I see them:
Jeff Gundlach Expects The Foreclosure Moratorium To Have Negligible Impact On MBS
No real numbers but lets say $0-$100 million in dead tree work

or

Around $400 Billion as says Market Ticker (almost any post) as he types fast and furious in glee.

Quite a spread. Can CONgress act before the election or will we see a Christmas Night at 11:59pm ramrod screwjob go through? You know where I am betting. (see the Montreal Screwjob here, it's not what you think!)

Related: JPM is looking to sell $4 Billion in 10 and 30 year debt even as they sit on piles of cash so high you could measure the distance to the laser range finders on the moon in $1 dollar bills! Houston we have a problem, or share buy back by issuing debt?

Price This In
It can get annoying to hear so many talking about how resilient/strong/upbeat/moving up the markets are like either that matters to anyone in the real world (those without $500k plus trading accounts they can lightning trade .5% moves during the day) or even like the so called awesome markets are not being actively targeted by free money and liquidity from the highest levels. I love chartists and I read quite a few, but the lack of a macro lense can get annoying at times.

So here is your homework assignment (should you choose to accept it!) price out the S&P under the following scenarios:

-QE 2.0 at either 300 Billion total one shot or 15 Billion on a monthly basis (almost 1/10th POMO, another stealth QE)?

-August 2011, when unemployment is at 9.8%, GDP has registered a 0.4% number, and tax receipts are still in the dumps?

-Ok, in the above example now add QE 3.0 expectations?

-Say in 2013 we are on QE 7.0 or whatever, have stocks moved up the whole time (DOW 30,000 here we come!) or has anyone figured it out?

Now I can offer these questions are are too far out for anyone to really be on the hook for, but so was where we are now a year ago; a slowing economy that is not adding jobs and banks that may still be facing real issues. Yet we are approaching serious all time highs in equities!

I am getting angry with myself for talking about things stock market related so much. Stocks are a sideshow (for regular people) but easily influenced so that is where the bulk of the work is being done. I guess I just try to do what I can.

Final Notes
So what do you see first off? A duck or a rabbit?:

From one of the first Optical Illusions ever explored! I will put a poll up to get votes! Please vote!

Last note;
I will probably stay light until I leave for vacation next week. Mostly fun stuff and light fare. When I get back I will be looking to make a few changes around the site so I would welcome any and all input! What do you want to see more of? Less of? What topics? Macro? Micro? Boxing? Really all, I would like some input so I can formulate a plan.

Have a good night.

In the End, There Can be Only Friday

Another week in the books and it was a long one! Full day of yard work on tap for tomorrow. I will be having my last large cookout on Sunday so I should have some food pictures up Sunday night or Monday. A few things to touch upon and then off to the show.

Notaries, Foreclosures, and Congress Bits
A bit of drama today revolving around Foreclosure-Gate saga. Yves Smith had a tip that big time investor John Paulson was sending henchmen to Washington to try and get the notary bill pushed through:

Apparently he still has a substantial long position, because today a Paulson operative was making the rounds in DC, throwing temper tantrums about the impact various investigations might have on the residential mortgage backed securities market. He was particularly upset about the fact that the theory that we have discussed on this blog, that the problems facing deals where the notes were not properly conveyed (which we think are pervasive) are not easily remedied. As we have discussed, the “fixes” for the note conflict both with the provisions of the pooling and servicing agreement and New York Trust law.

What a loser.

There was plenty of confusion around if the bill could be passed (over-ride pocket veto) due to the Senate still being in session. Maybe there was enough concern that the clowns in DC would pass this thing at midnight (like the unlimited FRE/FNM assistance at Christmas!) so the president himself showed some balls and outright vetoed the bill once and for all. Thanks CONgress, try again? Thanks Mr. President, at least now a bailout will have to be debated before we all get screwed.

The only other economics story I wanted to touch on is a wonderful piece over at The Automatic Earth which is this weekends must read:
Wile E.'s Suspended Reality
Snippet to get you to go over there:

According to the official mantra, letting the main banks go belly-up would kill the entire system. Letting millions of Americans go belly-up, not so much. It's all a matter of priorities, don't you know, and you, yeah you, are not the priority.

Indeed.

In the End, There Can be Only Friday
Friday is like a peek inside my mind, I know, that is some scary stuff!

Will Anyone Listen?
I got an email tip that robots have been made that are using brain transplants from living things! One step closer every day it seems:
The Singularity is Near: Robot with Rat Brain
10 years from now when you are fighting a resistance war against the machines (if you live) they will all say "Economic Disconnect KNEW this would happen!".

Cool
Two items caught my eye today:
Japanese Flower has Biggest Genome in the World

A rare flower known as Paris japonica has a genome 50 times bigger than humans'. With 149 billion base pairs of DNA, it's the biggest genome in the world, and stretched out end-to-end it would be taller than Big Ben.

I am not sequencing that thing!

The Thing will Have a Prequel
If you know the old film with Kurt Russel, you will be excited! April 2011.

Comedy Stop
I found some top flight funnies for tonight!

If you have ever done work at an academic lab this song by UCSF Biology Grad students will crack you up to no end:
Priceless!

I found this one and I knew I had a winner! Please load "Pole Dance Ruins Wedding" and enjoy!:

And do not ask me how I came across a pole dancing video......

Finally I actually had to ask myself what I would do in this situation as the opportunity would be golden indeed:
The Opportunist

I am going to make this into a poster I think!

Films for Review
Some films you may want to check out. No embeds to save space, but the link will be a cool scene I promise.

-I really like GATTACA.
-I cannot believe some folks think "Tombstone" was a better film than "Wyatt Earp" and thus they must be crazy as there is NO comparison at all.
-Do not bother with the remake, stay true to the real "Red Dawn".

Rock Blogging

Out on the street, I'm stalking the night
I can hear my heavy breathing.
Paid for the kill but it doesn't seem right
Something there I can't believe in.

Reader Scharfy wanted a little Glen Fry and "Smugglers Blues" and I think it makes a great open:

"You be cool for 20 hours and I'll pay you 20 grand"
Nice! Great pick.

Reader C-T wanted some Talking Heads with "Naive Melody" and I had forgotten this tune:

Thanks!

Gawains requested "Sabbra Cadabra" from Sabbath so how can I dsay no?:

Hey Gawains, if you have the time I would love your full take on this document mess we are in. You are on the ground after all and a guest post spot is always yours if you want it!

I really think I have had this one up before, but a search cannot find it! In any case, I had the film "Tough Enough" on my mind and so enjoy "Rainbows Never Touch the ground" from the film:

I like it.

Step it up with Rob Base and "It Takes Two":

You remember that one?

Two to go! Two songs to say so much.

Please enjoy John Stewart's masterpiece song "Gold":

All time classic, and yes that is Stevie Nicks on support vocals! Too sweet.

Oh, it is last call! I hate last call! Still, it is what it is.

EconomPic started off with his video of the week (just 1 Jake??? LOL) and of course that got me thinking about the amazing talent that was Layne Staley and how he threw it all away for garbage.

Anyways, here is a live acoustic version of the Alice in Chains song "Would". I was going to try and play a newer version with the new lead singer, but he sucks and is no match for Staley:

Just unreal. For the full on studio version go here.

Have a good night.

Goody Bag

What a busy week! Busy at work, busy tape watching, busy at home. Just busy. I need a break. Mixed goody bag tonight, too much stuff going on. Tomorrow is Friday night and thus requests are welcomed.

Extreme Kid Dynamite
Kid Dynamite has a post up today titled:
Kid Dynamite Slaughters a Cow
And no this does not involve my northern neighbor using alcohol to roll with some unsuspecting college ladies in his youth or taking some huge pot off a tourist in Las Vegas in Hold'Em, he actually helped butcher a cow! I kid (pun intended) you not! Check it out if you like but note MY WARNING, IT IS GRAPHIC! Way to go man.

Foreclosure-Gate
Today had a few wrinkles in the tale of foreclosure fraud saga. First off, a bill was sprinted through the Senate (it had already passed the house on many occasions) that would have made changes to notary laws in relation to interstate commerce. I am no lawyer and I hate this stuff because I don't have a grasp on it, but there is evidence this new law if signed by the president could be played to help skirt around the lack of proper documentation rampant in these matters.

In a move worthy of hefty praise, President Barrack Obama used the "pocket veto" by which he will not sign the bill into law by just letting it exist in limbo. While I think the original plan for this bill may have made sense, there is NO reason now to rush it through until a better grasp on the laws regarding foreclosures can be examined. I offer well deserved thanks and praise for President Obama on this one, it was the right thing to do and went against the house, senate, and banking lobby all at the same time which I love.

Calculated Risk has a guest post by Tom Lawler up that asks:
Foreclosure-Gate: Who Will, and Who Should Pay?
Lawler has been creepy spot on with his housing sales numbers so I read him close! He thinks mortgage servicers will have to pay. That would be nice, but the taxpayer is the easier option!

I will say two things about this. First, I still believe that some new law will be passed to make all the short cuts legal and absolve the banks. There is NO WAY the banks are going to have to open the books and really be checked on this, I am not sure it is even possible. So far I am the only writer that has predicted this and has since the beginning. It does not fit the narrative that banks get clocked.

On the other hand, and second (on purpose I did that!), this story made the NBC Nightly News with Brian Williams and it lead the whole show! That is serious coverage. People are pissed about this (why now, why not before you lunatics!). There is no way a law can be done before the elections. I can see a new CONgress after the election passing a law to save the banks and then hope that voters forget (they will) but that will take time. One can hope for something real change.

SLV Was Good to Me
Back on August 30, 2010 I entered into my biggest trade ever. By trade I mean something I was using in a very short term time frame, maybe a month give or take. I was attracted to a silver play due to macro factors and this coupled nicely with an attractive chart pattern that I favor. I decided to make a move, which I covered here, to go for the gold, I mean silver!
(NOTE: In the post I stated about 50% of my trading portfolio went into this trade, and the exact number was 58%)

I placed my sell order last night for the whole position. Why?:
-My first target (most confidence) was $22 which was already passed
-My upper target was $24 which was getting a bit tired looking
-$23 split the difference, and I wanted to give NOTHING back
So here is the breakdown:
Buy $18.70, sell $22.88 (where my orders where filled)
Short term gain of 22%!

In case you are wondering, I had no idea gold and silver would get moved lower today so much, I just made the move last night.

I am ahead of my own yearly target for 10% returns and I have enough extra to rock on out to the Bahamas on October 22-October 25th so there will not be a Friday night post that week! Here is where I will be:

I would buy you all a drink, but it is all inclusive!

I Submit as Evidence Exhibit A
Some call me a nut job. Some call me a "gloom and doomer". Some label me as a pessimist. Do what you want I say.

I have spilled pixels enough on the ruinous policy of asset bubbles, I don't want to go over all that again. Instead how about a headline and a chart?

From this morning over at Reuters there was this gem which I saved a screen shot of in case it changed (it had not at time of writing; if it does change or get lost I have the picture):
Fed is banking on phony wealth effect
A nice section:

So, there you have it: pump up asset prices and hope that people spend some of the ephemeral gains. The idea that people will spend more if their houses and other assets rise in value is called the wealth effect, but this policy creates only pretend wealth.

Nasty!

I know plenty out there think they will of course wind up with all the loot at the end. Some will, but not me and no one I know! You cannot invest in such an environment, only bet or trade if you want to call it that. When every few years some monster percentage of your "gains" in whatever vanish, what can you do?

Pragmatic Capitalist was kind enough to supply permission to repost this chart (last one in this post) that shows the extremes which we can expect to continue should the FED/Whole crew succeed in their goals:

The red line is the "plan" for recovery. How is that going to happen?

The title of the post was excellent as well:
DID THE CONSUMER EVER RECOVER FROM THE NASDAQ BUST?
I can only answer, No. But they thought they did.

My man Mark is a huge believer in long term trend lines, and I am as well. I think you can figure these out on your own.

Shout Out
For my man that has a reputation as being a bit testy on the trading desk, I offer my version of:
ANGRY G!

My man!

Have a good night.