Thursday, October 21, 2010


Chris Whalen is interviewed on Bloomberg about the MBS issue and the ramifications for investors.  Chris details how he thinks these losses will ultimately be put into an RTC type vehicle.

What is catching about this 7 minute interview is that he suggests that this will be a non-event driven event, meaning that there won't be some big implosion, but rather a cancerous attack on bank earnings.

I'd love to have more details on what he mentions here, but he also suggests that JPM did a very good job of doing their paperwork.  He doesn't say more than that, but as you know, I love long/short plays.  I don't think I'd actually pull the trigger and go long JPM and short someone like BAC, but it is an interesting thought.

Ultimately he ends with the idea that investors in MBS might just have no recourse whatsoever if they cannot amass at least 25% of the issue.  If an investor can obtain 25% then they can compel the trustee to sue the creator of the security, otherwise, no recourse may be the result.  YUCK!  Can you imagine buying a complete fraud only to find out that you have no ability to do anything about it?


Be Careful! (Hat tip to Karl D)  If you want to drink from the fire hydrant on this continuing issue, please check out his site daily. -


Wednesday, October 20, 2010


I've taken a bit of flak over the last several days from people suggesting that I'm over-focused on banks.  Yes, I look at them, and yes they are important, but I need us to be on the same page regarding the concerns I have and where I think we are in general.

Ok, I've written about how dirty this whole process has been where banks have tried to forge documents and attempt to create titles where they have been lost.  These are juicy details and this is exactly the kind of item that makes a good story for a blog, but this is not really why this issue is such a big one.  The more important issue is that when the big banks were wrapping these mortgages into huge pools and securitizing them (slicing and dicing them into parts so different pension plans and investors could buy based on credit rating), they represented to them that they actually had recorded all of the documents for clear title and guaranteed or warranted that the MBS buyers were getting a solid legal claim to mortgage backed assets. 

What the sub-prime collapse and the subsequent real estate implosion has shown us is that the banks and their clearing system (MERS) did not actually do what they promised they would do by filing all the paperwork and ensuring that the MERS trust actually owned the notes and had a claim as a lien holder on the real estate asset.  By NOT doing what they promised in the prospectus or security documents, they committed fraud.  In addition, they firms are claiming that the securitizers that packaged up the deals didn't actually put the quality of loans in the deals that they promised.  This is the issue, and this is the big problem.  What this means is that the buyers of the MBS now potentially have a claim to get 100% of their money back on the investment because the trustee or the servicer, or the originator didn't actually create the MBS in the manner that they stated.  Remember, the buyers of these securities are not Joe 6 Pack.  The buyers of these MBS securities were insurance companies, mutual fund companies, hedge funds, governments, and private equity funds.  The buyers of these deals were big money players that then often leveraged these bets 10:1 or 30:1.  The total amount of mortgages wrapped up in these deals is numbering in the trillions!  So, are any of the buyers of these asking the originators to take them back?  Yes!

I hope this provides some clarity regarding the view of the banks.  In addition, it is important to look at the chart for a technical view.  It is so interesting to me as I look at this 200 day view of XLF (big banks) that it simply cannot push through $15.00.  Look at the 5 or 6 attempts since June of 2010 to go higher.  Even in the last week we could just touch $15.00 only to be rejected.

As I am typing this, the market is ripping higher after yesterdays 165 point Dow thrashing.  This is the environment we live in now.  I truly believe that the market will not be allowed to decline for more than a day or two until after the elections.  If there were a string of 5 or 6 down days that would certainly ensure a resounding Democratic defeat.  The ability of the market to stay positive gives the incumbents a chance to retain a glimmer of hope to retain power.  Please note, that if Republicans do win, I actually believe banks will rally as the street will believe it will be business as usual and the Republicans will assist the banks in getting through this mess.  Hopefully that belief is misguided as I'm sick of the corruption and bailouts at taxpayer expense.

Be careful!


Sunday, October 17, 2010


John Maudlin puts together information from several sources that helps describe the why the housing issues related to MERS and the subprime foreclosure mess is not gone, but in fact going to be the undoing of all of this "recovery" we've had in the last year.

If you are pressed for time skip directly to the section that says - THE FORECLOSURE MESS.

It is interesting that the XLF (Banking Index) got to $15.00 where I said was the level for breakout.  It NEVER busted through, and now, just days later is down to $14.35 some 4.3% in two days or so.  THIS IS A SIGNIFICANT WARNING that if anything we will see a reversal to the bottom of the range at 9,900 or 10,000 on the DOW.  It is no accident that after President Obama failed to sign the National Notarization Act that the banks began their descent AND they halted all foreclosures.  This was their hope to skirt the laws again.

Read this, as it isn't some tea-party controversy that I'm making up, this is a critical issue that will lead to correction here prior to the elections. 

Be Careful.


Wednesday, October 13, 2010


More housing discussion.  Mr. Cho is the one who really gets it in this discussion.  It was intentional and outright fraud from the beginning and it was all going good until you had to foreclose on people.

This will be interesting even if it gets papered over in the end.


Greetings everyone!  The monthly update is a few days late as I'm busying partying like it is 1999 since the Dow is over 11,000!  The crazy march higher continues to vault us to higher and higher levels and like all investors in all manias, we shall continue pouring fuel on the speculative fire until there is nothing left to burn.  I've eluded to how this feels so much like 1999 and 2000 and also like 2007, but that doesn't make it easier to endure the unstopping, irrational, and unfounded rally onward.  At some point it won't move higher, but till then I will continue holding my nose and attempting to identify where the action is turning (if it ever does). 

One other note.  I'm not a particularly sentimental guy (my wife is laughing at the understatement in that comment) and so the first year anniversary of the Goatmug Blog came and went in August without even a passing reference from your scribe.  Now, as I upload these comments, notice that this is the blog's 100th Post.  So, thank you for reading and thank you to those that comment.  I appreciate that you take a few moments to stop by and read these random thoughts.

Let's dive into it.

As I've written recently, the markets will not go anywhere without bank participation.  We have many overhead issues like a terrible rate curve, Robogate, and bad loans on balance sheets, but that is not keeping those major banks from attempting to break out.  I've captured an updated shot of the XLF here and my thoughts are that if this etf can break just a bit higher through $15 we should see the 16.85 area in this issue.

RAILS - AAR.ORG and Railfax
Rails continue to show increasing levels of traffic versus 2009 levels, but they remain below 2008 numbers.  We are seeing an increasing trend of mothballed (stored) rail cars coming back into the moving inventory.  Some 17,000 rail cars were brought back into service in September, so this should be an indication that rails are seeing demand and a need to put these things to work.

VEHICLES and SCRAP tonnage are ways to measure the economic health of the country.  Both metrics continue to increase and show continued economic improvement.

COMMERCIAL REAL ESTATE - Moody's MIT Transactional Pricing Index -
If there is one other area that continues to languish other than housing, it is commercial real estate.  MIT and Moody's recent national price index shows that there is not a recovery in commercial real estate pricing.

CO-STAR -  Remember, Costar's data is as of July, so no new changes appear here.

The housing rally appears to be cooling after the government induced frenzy abated.  Home prices now have begun to drop and I fully expect to see this trend to continue.  As I mentioned several times earlier this year, the interference in the  home market by the government is causing lots of damage.  We can clearly see that the government's use of enticements to purchase with the first time home buyer's credit and other programs caused buyers to rush in and therefore to have prices launch higher.  Now that those programs have concluded, we are seeing a regression of prices that are more "normal".  There are several differing opinions as to what the fall out of ROBOGATE will be as inventory is essentially pushed aside and becomes unavailable.  Some believe this will actually make prices for available non-foreclosed homes go higher as there will be a demand for the reduced inventory.  That may be true, but I doubt it.  As I made reference to earlier, I think any foreclosed home (even previously foreclosed) will now be sold without title insurance which means cash buyers only, and this also means it will be priced at rock bottom prices.  Other non-foreclosed homes may fare better, but prices will still fall.

The Monster Employment Index continues to improve.  This suggests that employers are listing more jobs on their sites.  There is no breakdown on if these new added positions are temporary or contract positions.  This is a great development.

CFO Optimism Survey - Duke University -
CFO's optimism dropped significantly in September.  We can only guess why!  Specifically, the CFO's attitudes about the recovery of the economy are on par with where they were in September of 2008.  While the executives are a bit more positive about their own firms, they certainly did get more pessimistic.  It is interesting that this is a real trend.  When people are asked about their own situation, they are now suggesting that they are ok, but then when asked to comment on the outlook and conditions of others, they get downright bearish.  I guess CFOs are no different.  This type of negative world view does not foster the return to the "old" normal of spending and living La Vida Loca as my friend Ricky Martin would sing.

The scrap metal index continues to move higher.  Alan Greenspan used this as a gauge for economic health and improvement.
The WLI data is also improving as the alarm bells for the double dip recession are turned off.  As we've commented several times, this data set seems absolutely driven by money supply variables.  As liquidity is withdrawn, we'll see these numbers fall.  Until that time, we will not see a drop in the WLI nor any other investment index or asset. 

As of yesterday, the Financial Conditions Index hit a flat zero and today's market action should push the FCI into positive territory.  This data would suggest that there is an expansion underway and there is no recession!

This indicator continues to suggest that the market will go south.  Remember, Coppock is a 14 month rolling average and therefore is very slow to give a signal.  In fact, the Dow would actually need to hit 12,250 in order for it to reverse and signal a buy.  I don't use the COPPOCK for much besides a confirmation, but the indicator would miss another 10% move up here if the DJIA actually did run to that number.

Baltic Dry Goods Index looked as though it was consolidating and now appears to be moving higher. 

Look out below!  No abatement in the free fall here.  If the FED and Treasury have some plan to glide us into a safe place while they work out the balancing act of higher national debt and a devalued currency, it will be great to see.  I do anticipate a post election move up in the value of the dollar as they're going to have to let off the accelerator at some point.

I've posted 1 week and 6 month Euribor rates here.  Since 9/30/2010 these rates have been climbing and I've been monitoring them.  These rates are the highest they have been in a year.  I'm not sure if the move up is a sign of distress in the market, or a comparative move up in regard to a change in economic outlook and rate projections for the Euro area.  Given that the United States continues to want to go the opposite direction and drive rates lower, is this move simply a reflection that the investment world knows that Europeans are not going to go lower and therefore will be higher?

We know that Irish banks and other banking institutions in Europe are still wounded.  My concern is that we'll see another credit deterioration again due to problems in Europe.


I have to wrap this up quickly.  No matter where we are here in this current rally, we need to remember it is largely based on the USD.  September was an incredible month where the major indicies were up about 9% for the month.  Is it any wonder the markets were up so much when you consider that the USD was down 7%?  As long as the Euro is higher, Dollar is lower, and the FED is talking about continued or more buying of treasuries (QE or QE2) then we will have more of the same.  Wheat, Corn, Sugar, Oil, Gold, Silver, etc will all go higher, and so will emerging markets investments.  We don't have to be too smart to continue riding the train and letting the conductor (Ben) keep punching our ticket.  We just want to make sure that we are looking out in front of this train to ensure that the tracks haven't been blown up.  So, I wish I could be more sophisticated, but the trade we've advocated for months is still the trade of choice.  Commodities and anything outside the US will do just fine.

Be careful!


Monday, October 11, 2010


I have eluded to Robogate in my last couple of posts but haven't written much more.  If you haven't heard, Robogate is a scandal where bank foreclosure processors have been processing foreclosure documents on properties that they have not validated the ownership of the property and have not confirmed that they even have all the documents in legal order to proceed to court.  What is worse is that in some jurisdictions, banks must actually present the real documents in court to prove that they have legal rights to move forward. 

The term ROBO is a reference to the fact that in many states, processors must have the actual loan documents and paperwork in hand to foreclose, yet the processors were signing, notarizing, and verifying hundreds and thousands of properties a day.  I'm sure certifying all the documents is a pains-taking process and plowing through the hundreds if not thousands of document packets a day is impossible.  The fraud was then compounded as bank officers would then sign a affidavit stating that they had legal ownership to the property and were taking to steps to obtain the properties.

Here is the problem.  In many cases, the banks that were foreclosing did not have good loan documents, didn't actually have legal title to the property, or actually had no claim at all on the home!  In other cases three or four banks were claiming they owned the property.  Finally, many properties that were rolled up into MBS or mortgage backed securities didn't have any paperwork at all.  There have been instances of banks breaking into homes and changing the locks only to determine that it was the wrong address, that the home owners actually owned their home outright!

If you thought that the housing market was going to be fixed soon and we were clearing this inventory out (since 67% of all sales in the last several months have been foreclosure sales to investors) you would be absolutely wrong!  In response to the concern for the actual legal right to foreclose on any property many state's Attorney Generals have asked for a moratorium on all foreclosures.  Ally, B of A, and others have voluntarily complied.  Title insurers are not going to underwrite title insurance on any foreclosure - and would you blame them?  So, this means that there will only be cash buying of any previously foreclosed on property.  If an investor buys the property, he is crazy not to have title insurance!  The trust of all of this is that the housing market for all of this inventory is going to grind to a halt.

What is worse now is that if you own a home in an area with lots of foreclosures, you will see a big drop in the values of those surrounding properties, which means further declines in your own values.  Prices last month were already beginning to fall, now this should accelerate this problem.

Last, one of my favorite things about Youtube is the funny interpretation that folks put on these war videos.  Hitler couldn't be more frustrated if he was in charge of Robogate!  Whoever wrote this one has inserted poor language.  Please don't watch if you are offended by strong language (text).

This is a total mess and this issue will not go away.  This will simply foul up so much with the banks, real estate industry, and Main Street.  Look for a new RTC (which should have been done a year ago) to be created to deal with this all out fraud.


Friday, October 8, 2010


The equity markets may be off to the races again, but Libor and Euribor rates have been signaling increased distress over the last week.  I've been monitoring these since quarter end and we have seen a distinct move up.  Yes, the move up in rates is tied to concern in Europe over Ireland and the rest of the PIIGS, but you certainly haven't heard much about it in the media.  Here is a snapshot of the rates.  I can't get a full listing of the chart I watch, so please click here for a full run down.  -

Euribor rates

If you pay attention to any of the news all you will hear about is ROBOGATE and the impact on the processing of foreclosures.  Yes, this is an issue and I will write a post about it, but it is just another item being discounted and ignored by the equity markets now.  Dollar devaluation ..... errrr....QE 2 is the savior and this is all the markets are banking on.
Ags are running, metals are running, equities are higher, and yes even bonds are somehow higher!??  These days I feel like it doesn't matter what, it is all going higher.  It's not a waste of time, but God help us if we don't get QE2.

Be Careful!


Thursday, October 7, 2010



Once again we have growth in the number of families using foodstamps to purchase food.  July's data continues to reinforce that Joe 6 Pack is struggling.  When we look at the data on a monthly basis, we see that then number of individuals receiving assistance has grown to 41,836,330 which is a monthly increase of 1.36%.  Not only is this growth a concern, but the rate of change of that growth is also accelerating.   In addition, the year-over-year data shows a staggering 16.7% increase in the number of individuals on foodstamps just from July of 2009!

The down and out guy isn't doing better and the CFOs are getting sour.  Obviously these folks aren't getting the message that Wall Street is sending that the good times are here again!

Source date is from the SNAP program website -


Wednesday, October 6, 2010


The quarterly Duke CFO survey was released and what can we say, CFOs just aren't as excited as they were.  Somehow the kool-aid has not made it to the interior offices of the corporate towers where the bean counters are usually nestled. 

Here are the highlights......


Optimism about the overall economy fell at 53 percent of U.S. firms and increased at only 14 percent. The optimism rate of 49 is a level not seen since the first quarter of 2009, when CFOs rated the economy at 40.

“The CFO optimism index has proven to be an accurate predictor of future economic performance,” said Julia Homer, executive vice president for content at CFO Publishing LLC. “Therefore, this dramatic drop in optimism bodes poorly for the economic outlook. Half of CFOs say there is only a six-month window -- and another one-fourth believe it’s a 12-month window -- during which they can maintain current levels of business activity without improvement in the overall economy.”
“The math is simple. A) Banks are sitting on cash because of their poor health and general uncertainty. B) Small and medium-sized firms have employment-generating projects that they cannot get financed because banks will not extend credit. C) In usual circumstances, small and medium-sized businesses account for the majority of employment growth. A+B+C implies we are stuck at 9 or 10 percent unemployment,” Harvey said.

Harvey added that “recent regulatory reform has not helped. Only 5 percent of CFOs consider the Dodd-Frank legislation as a positive -- and that number excludes all firms in the finance industry. The main concerns about the recent reform are that it will lead to increased compliance costs and make borrowing more difficult. CFOs also expect higher banking fees. Some of these increased costs and fees will be passed on to customers, and others will hurt the bottom line.”
The CFO's are telling you that all is not fixed.  What made their outlook change from just a few months ago?

Reports like these continue to give me pause on joining in the full blown bullish party.  We've positioned ourselves well since Fed President Bullard's speech in the first week of August, but this type of data continues to reinforce exactly why the FED is continuing its drum beat and repetition of the mantra that they will continue to provide liquidity and will continue to step on the gas.  Clearly they are not going to stop the beating of the dollar either!  The Fed sees this type of stuff way before we do and this is a great data point to remind us that all is not really better.  All stock markets may be heading higher, although it isn't because there is growth or real value, it is because the dollar is being debased. 

One last comment on the dollar.  Remember how I allude to the dollars decline as a well choreographed dance to the bottom?  Well, that is exactly how I see it.  We've tumbled very far very fast and now it seems about like it is time to make a measured move higher just to give all the other central bankers some relief.  That of course means that we may see a pause in the gains in shiny things like gold and silver.  Personally I would not add to my metal and commodity positions here and I would not be short the dollar.  Just a warning.



Everyday I am amazed at how prescient authors like George Orwell and Ray Bradbury were in picturing the odd reality we'd face here in 2010. 

Geithner warns in a Bloomberg report that currency devaluation is dangerous and damaging.  This is pretty funny given that the powers in charge have managed to crush the value of the dollar some 7% JUST IN SEPTEMBER! 

Obviously other countries are not going to sit idly by as we essentially put a tax on their currency and make their goods more expensive (meaning less purchases by us).  China, Brazil, Europe, and others cannot stand to have us continue our policies lest we damage their exporting economies.  Japan has tried like crazy to stop the trend as the Yen is at a 15 year high relative to the USD.  Imagine the heads that are rolling in the currency management department in China where they have lost almost 7% on their treasury holdings this month simply due to the currency moves!  A $100,000,000 loss in a month sort of hurts I would guess.

This is funny to watch as we are seeing a full measure of double speak, but this is the stuff that trade wars and essentially currency wars are made of.  Our actions to devalue have very real consequences for other countries and it is now a situation where it is every country for themselves.  Expect tariffs on manufacturing producers like Boeing and Caterpillar as this heats up.