DROPPING BREAD CRUMBS SO WE CAN GET BACK

A LOOK BACK
As you read this post this morning I just wanted to highlight a key date that I said would mark the high point for the year.  It is sometimes easy to throw writing onto a blog post spouting guesses and hoping they come true, however this is not how I do my posts as I really try to put the most thoughtful ideas down and then stand by them.  Having said that, many of the calls I made in 13 PREDICTIONS FOR 2012 have been on the money or are trending in the right direction, others....not so much.  The biggest miss so far has been that of metals in that they simply have lagged and lagged, but perhaps a good old Euro collapse will fix that.  I am pounding on the table that you get out of gasoline related trades as for me, this is really the end of some really nice trades.

STUFF A LOAF IN YOUR SACK FOR THE TRIP
Here are the market levels for 4/30/12 as I suggested in the year-end post for 2011 that May 1 would be the time to get out.  Don't in anyway read that I am not impressed by the power of the performance of these markets, I simply think it is time to walk to the cashier and run out of the casino a winner.  Essentially, we need all the bread we can get.

DJIA - 13,213
SP500- 1,397
NASDAQ - 3,046

With these levels in mind we need to also know that the 10 Year US Treasury yield sits at 1.919% which is on trend to test all-time lows achieved in September and October of 2011.  While I'm happy I already refinanced, you might be able to do so at much lower rates very soon if any of my ideas come to fruition.  Could those 3% 30 Year mortgage rates I called for last year hit this year?  Maybe?

TAKE ADVANTAGE OF EVERY "EVENT"
And finally, the cynic in me thinks that everyone thinks that our President and government will pull out all the stops to grease the economic wheels and make everything wonderful for an easy re-election bid for our incumbent president.  I on the other hand don't see things coming out so swimmingly as market manipulation and coercion is really a messy thing and timing is really hard to get right.  I do like that kind of conspiracy thinking as you know, so in fact, I can see a well timed terrorist event or foreign policy crisis that will make us all question whether we really want a rookie in the driver's seat during a scary and dangerous period.  If he can kill Osama without hesitation and use drones to kill Americans without impunity abroad, isn't he the man for the job again?  As you know I'm not thrilled with the Republican nominee, so I hold my nose and at least hope that he is a little more of a capitalist and a little less of a communist than our current version of the most powerful man in the world.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

JACKSON HOLE LOOMS - DOUBLE SECRET QE?

MONETARY POLICY JACKSON HOLE STYLE
I'm back from a glorious vacation and I have found that the placid markets delivered a teeth clenching ride down last week and a euphoric blast higher this week.  Clearly the volatility tells us that everything is JUUUUST fine with the markets.

We have some interesting things cooking, but the one that is taking center stage now is the meeting of the world financial leadership in Jackson Hole, WY.  Recall, that this is where QE II was hatched last year right after Fed Governor Bullard suggested that further quantitative easing was the right prescription for the job.  I went back and found one of the most popular posts that I've written that was penned right about that time.  It might be worth the read as you'll note that I mentioned the impact that their efforts would have on mortgage rates. 


http://goatmug.blogspot.com/2010/08/throwing-down-gauntlet-august-macro.html

"This further highlights the notion that we will probably see mortgage interest rates at 3% or 3.5% in 2011. Isn't it funny how despite their efforts we continue to spiral the way of Japan. Want to get an idea for what it might look like right now? You can buy a Japanese 10 Year note and receive 1% on your money! Hello deflation! PUBLIC ENEMY # 1 - DEFLATION"

For a refresher, I'd also suggest you hit the Pulic Enemy #1 - Deflation post because it highlights the 2002 Bernanke speech where we get the entire road map of Ben Bernanke and get to read all of his arrogance and foolishness about his abilities to print and print and print to stave off deflation.  Well, we all are witnessing how Japan isn't such a bunch of idiots after all as we are finding that political will power (or better said, LACK OF IT) is a much more powerful force than Bernanke perceived.  Political leadership is not willing to do what is necessary when it comes to managing spending effectively and stamping out the influence of special interest groups.  When the "special interest groups" are the banking henchmen, it is even more of a problem and the hard medicine of taking writedowns and losses is not one that those guys eagerly accept. 

So, now more than one year after writing that post calling for mortgage rates with a 3% handle, we are getting closer and we are on the verge of receiving news from Jackson Hole that while we won't be receiving QE3 in the same monetization framework of the first two failed attempts, we'll see monetization through the use of repurchase agreements, reverse repurchase agreements, targeting interest rates to steepen the 2-10 year curve, and flattening interest rates on the long end.  We'll also finally see a termination of payments of interest on excess reserves held at the FED to stop the risk-less arbitrage that banks have been doing for oh so long.  Of course the impact won't really be that banks will lend, but we can always hope right. 

GOLD / INFLATION / PRINTING
As I wrap this post up I will close with this thought.  The markets are rallying because they are hoping and praying that some sort of QEIII will be announced.  As I mentioned I don't expect a formal QE3 announcement and neither does gold for now.  Gold is getting it's face ripped off.....all the way down to where it was a couple of weeks ago!!!  Coordinated margin hikes for gold futures trading has also conspired to drop gold almost $200 an ounce.  Call this crazy, but I could easily see the slaughter continue down to the $1450 to $1475 area that I had identified several months ago as my target for bigger and more buying.  Am I scared that gold is getting smashed, no, because effectively the FED is trying to monetize and will end up printing because that is what central banks do.  I will begin making purchases at we near the $1,600 an oz level and increase those purchases as we get to my target. 

I'll be posting select items from the monthly report.  As you know I never posted it and some of that data is stale.  I will pull out charts that are still useful and make a few comments, but nothing huge for this month since we only have a few days left!

It's good to be back and notice that nothing has changed except the un-reality of these markets.  Apparently the Euro-zone problems have all been fixed and I didn't get the memo!

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com

MR. ROBINSON MOVES TO A NEW NEIGHBORHOOD

Remember Mr. Robinson?  This brings back childhood memories doesn't it?




While it is fun to go back and watch those SNL episodes a real life Mr. Robinson is taking advantage of the real estate crisis in Flower Mound, Tx.  It seems like his neighbors aren't too happy, but I applaud his ability to do great research and use the system to his advantage.  I'm not really sure why his neighbors don't support his action other than the fact that it seems as though he may have the ability to get a better deal than they did.  Ultimately this could be a win-win for them and him.  I normally wouldn't play the race card, but it does seem as though that may be a factor as well.



Personally I'd rather see people take advantage of a bad situation versus have the asset waste away.  Think about how our government went out handing out the "bail outs" to our banks and industries.  What if they would have simply paid a check to each family for $100,000 or $200,000 but made the requirement that each person had to pay off outstanding debts with that newly printed money.  Essentially this is what happened, but the money skipped you and me and went to banks while they were able to keep your obligation as a liability on the books.  Isn't that simply a travesty? 

No, I'm no communist or socialist, but think about it.  Your government printed and borrowed money through huge deficit spending to "create" jobs that were green jobs or were going to be stimulative.  We've learned that the creation of those jobs cost more than $200,000 each and those jobs did  not last.  Have you forgotten all of the programs that have failed?  TARP, Cash for Clunkers, homebuyer tax credits, and Shovel Ready Jobs were just a few.  While the government was spewing money to huge multi-national firms that pay little or no taxes (GE) folks like the original owner of the house in Flower Mound were laid off and lost their homes to foreclosure.  In this case the mortgage company that actually wrote the loan (and kept it) also blew up.  Where were their bailouts?

Good for this guy, I hope he gets the property and I hope that he maintains the home and I hope the neighbors grow up.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

IT'S THE END OF THE LINE KID

http://www.flickr.com/photos/volk/ - Thanks Willy!

I don't know about you, but I've had just about enough.  I can only say that my frustration level in the last two weeks has been the highest in well, ever.  I basically hit the tipping point where I was ready to do many drastic things because I was tired and exasperated that reality had been suspended longer than any time period I would have expected or imagined.  What am I talking about?  Well, you see I have been brought to the breaking point by the fact that our markets have rallied and rallied and rallied while our world financial system has addressed absolutely none of the issues that created the original financial crisis in the first place.  Despite my many long purchases over the last two years, I have never once believed that things were all better and truthfully I still wake almost every morning and check the markets immediately to see that our futures markets would show us down 500 or 1000 Dow points or more.  Well, those days haven't materialized very often lately and I've had to say too often, I'm going to hold my nose and buy. Why am I writing this now?



RATINGS AGENCIES DO A HIT JOB (ITALIAN STYLE)
I'm writing this bearish confession I guess because I can't hold it in anymore.  Although it is obvious to readers that I've had a bearish leaning, I just can't express enough how badly we have attempted to paper over our mess.  Central bankers around the world have simply traded all the excessive credit on company balance sheets and transferred them to government or sovereign debt issues.  In the world monetary system the only thing we accomplished two years ago was to move the ticking debt bomb from the left pocket (private) to the right pocket (public tax-payer obligations).  While the USA has been the largest player in the use of that strategy, the ECB has been at work simply hiding and ignoring excessive debt problems within the EU zone.  We all know that Greece has received all the blame, but the reality is that all of these countries have created ponzi-schemes that were doomed to fail from the beginning.  Greece is simply the country that has reached there first.

Greece's small size has been one of the key reasons that the ECB and IMF have been able to extend and pretend and push these debt issues out farther than I anticipated.  If Greece were a bit larger or actually created something besides more pensioners we'd already been hitting critical mass.  However, last year during the first warning shot, the Europeans were able to play like the problems had been addressed and everyone gratefully carried on and witnessed an amazing comeback in equity markets as the world celebrated the genius of our financial maestros.  Unfortunately, there are larger Greece's that we've been talking about for some time.  I've often mentioned Portugal, Spain, and Italy since Feb 2010 and now it seems like the problem is just too big to ignore.  Just as the ECB and EU are struggling to get the Greek situation all taken care of, Italy has come under significant pressure from the one place we hadn't expected any real responsible analysis.....the rating agencies.  A couple of weeks ago Moody's announced that it was putting Italian sovereign bonds on the list for potential downgrade, (please note you of course wouldn't want to actually downgrade them).  While the warning was bad enough, what really rocked the financial world was that because of the large amounts of domestically held Italian bonds, 16 Italian banks that held those bonds were also subject to potential downgrade.  A couple of these banks are systematically important and connected with others in the EU to cause serious problems.  Uh oh. 

Italian Borrowing Costs Soar

So, once again we are back to square one where this bank could face trouble and if it goes down another goes down which kills this other one.  Through the use of extraordinary measures and suspension of rules and lack of regulation of the CDS markets we have managed to find ourselves and the world right back in the midst of another event.  The central bank leadership including the IMF don't have enough money to begin bankrolling a fix for an issue the size of Italy. Having said all of that, we are very close to the end of the line.  The end of the line is the place where EU membership falls apart, heroic measures are instituted and they fail, and our financial systems are blasted.  We have done nothing to slow down this train and we have only done more to harm ourselves in the process and made the inevitable collision more traumatic. 

SO IS THE COLLAPSE HERE?
Of course it isn't the end, but you can put a big "X" on your calendar on Friday, June 23rd to mark the day where the wheels began to fall off again.  We've already seen the ECB float the idea that it would buy back bonds from troubled countries, also that it would ignore rating agency ratings, and we've seen Italy demand lists of investors that are short Italian bonds.  We will see liquidity injections by the IMF (17% by the USA of course), we'll see suspension of laws, and we'll see the FED send out emergency swap lines and liquidity to save the world.  We'll even see Europe's heroic knight, the Chinese, kick in substantial funds to buy bonds outright.  Unfortunately, it won't work; the jig is up - sort of.
 
EUROPEAN DRAMA ON A GLOBAL STAGE
Crazy as this may seem I'm more afraid to trade now than I was when I was freaked out and near the point of hanging up my options trading account password.  The reason I say this is that now we can be certain that there will be no rules left standing in the way of the end result of sweeping these messes under the carpet, no matter the cost.  Threatening and bribery of rating agencies, suspension of laws, and outright theft of public funds are actions that I can guarantee that we'll see over the course of the next months.  We will see massive printing of funds to create enough money to buy these troubled assets.  This all means that we will see scary dives and euphoric rocket launches and volatility like we haven't seen in quite a while.  Oddly enough, we are going to see all of this theater against the backdrop of US earnings which will probably be better than most bears think.  I think companies posting decent results will make this such an interesting reporting period yet it may be overshadowed by the drama playing out across the pond, this will make it difficult to trade longs or short.

VALUE-LESS PAPER CAN BE VALUED AT ANY AMOUNT
Remember, our currencies are simply made up things. In the past, Indians traded hides because they had value.  The Euro has value because we all agree there is value there.  Back in the midst of the financial meltdown, our Fed and the FASB simply stated that all the worthless mortgages on bank's balance sheets were going to classified as "held to maturity" relieving them of the obligation to find a real price for these bonds.  How could they do this?  Because these debts are made up pieces of paper based on a fictional value of made up paper.  Essentially everyone with financial power in the world colluded and came to an understanding that the mortgage paper had a new value of par and with the wave of an imaginary wand, all things were made whole.  Now in reality we know this isn't true, but it doesn't matter.  I remind you of all of these steps because if you don't understand this and if you don't remember this you will end up frustrated and near the breaking point just like I was a week or two ago. 

Does it change the fact that the exponential growth of world debt is beyond the control of anyone?  Does it mean that there won't be some sort of breakdown in the future where the Euro implodes or the dollar falls apart?  No, not at all.  But it does mean that we need to keep in mind that no matter how bad it gets there will be only one response by those in charge of managing the mess, it will be to press on!  European leaders will buy loads of debt issued by insolvent countries, the Fed will buy US treasuries, China will keep making loans that ultimately will never be paid back, and all of it doesn't matter.  They must do these things because if they don't continue, power and wealth will shift out of their control.  I don't know if you've ever been in a position as executive, but typically it is very hard for those that have position power and decision making power to simply leave it and lose it.  Why would we expect anything different from those making economic and financial decisions for their countries?

TRADING APPROACH
As this mess continues to heat up, I think gold will again be the un-currency.  I have been trying to buy some gold in the last couple of weeks and I had a target of $1475.  I haven't been able to get it there and we probably won't for a while.  Eurozone depositors in the PIIGS have largely shunned depositing money in domestic banks and it is believable that many of those former depositors are trusting in the anti-currency gold instead of the Euro.  Like them, I believe that gold is probably a good play here (due to fundamental issues with the debt crisis).

While there may be a big temptation to hop on to any other commodity-like hard assets, remember, a collapse of the Euro will lead to a strong dollar temporarily, meaning that if you are in the US, the dollar will rise significantly and commodities priced in dollars should also drop.  I'd stay clear.

A strong dollar probably also means dropping stocks, I enjoyed my BRK.B short (here's to you Warren) from Friday, but remember each day will be met with a huge and focused media blitz PR campaign telling us how everything is under control and how amazing the business climate is for companies and how great the earnings numbers have been.  Great company results could have an impact to really jam the indices higher and this is what makes this such a dangerous game for shorts.  We know we will have good numbers and positive conference calls AND announcement after announcement by EU officials stating that everything has been fixed.  While the longer term story may be dark, the heroin junkie stock market can only be focused on the real story for a day or two and then it is back to reaching for that drug induced high.  As I have stated, the driverless train will have a fiery and awful crash when it comes to the end of the line, the frustration is simply that we don't know when.      

BE CAREFUL! 

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/



DISTURBING CONVERSATIONS ABOUT REAL ESTATE

I had an interesting conversation with an old acquaintance the other day and it reminded me that people make money related decisions without examining costs and benefits and they never look out farther than a few months.  In addition, I heard a radio program today that reinforced my view of the NAR folks (and their local associates) and realtors in general.  The conversation and the radio program have a lot in common so bear with me. 

While I'm sure writing this post will be therapeutic for me, my hope is that readers will lock in on the absolute concern I have for this economy and the need for us to make meaningful, thoughtful, and hard financial decisions quickly, and now before our options and our cash stores have been wasted.  Before we get too detailed, let's have a little background discussion first.

In the area of the country I live we have been blessed economically.  Despite the US recession, our region suffered very mildly, and now have largely come back to the same employment or even grown since the last set of highs in 2007 and early 2008.  Because this area is in the energy corridor we've have been insulated.  Having said that, the suburban areas in our city did not enjoy such luck.  Lower income areas surrounding the city did get hurt and home values fell some 10% to 20%.  Still, compared to areas like Arizona, Nevada, and Michigan, this is great.  Specifically, the person I had coffee with lamented that their home value had fallen 5% below what they purchased the home for 10 years ago.  In this case, that paper loss is about $10,000 assuming all closing costs and a recent market valuation by a realtor.

As I chatted with my friend I asked a few more questions about their situation and found that the family is really struggling.  After all of their paychecks and bills each month they need about $2,000 additional cash to be able to meet their expenses.  Needless to say, I was shocked.  When I hear that kind of talk and I think of that kind of situation I feel like we should be in crisis or battle mode, not enjoying a coffee at a Starbucks!  It seems that the major issue creating a hole in their finances is their home.  Fortunately for them they had about $70,000 in emergency reserves to draw on to help cover this shortfall.  I was happy to hear that they met with several realtors and had received estimates of their home's value and the found that they would probably end up with a $10,000 loss due to falling home values in their area.

I asked when they were going to list the home for sale and I was met with silence.  It seems like it was a hassle to sell their home right now (during the summer busy season when there are a lot of buyers)  and they were planning on putting the house on the market next June.  I said, "WHAT?" and she mentioned that it was just too much trouble to try to get things ready all the time and next year would be better and they could de-clutter their home between now and then.  Additionally, by waiting another year, the home values would come back a bit. 

I could see how committed to this line of thinking she was so I didn't go much further.  I proposed a couple of scenarios for her about selling earlier and tried to highlight how her cash position might be different yet there was no movement.  This is when I realized that I was not there at the Starbucks as a male Mr. Fix-it goat, I was supposed to be playing the role of the sympathetic "listening only, no fixing" goat.  Like a Phil Jackson having a total Zen moment, this powerful realization hit me and I suddenly found peace.  There was not a chance this person was going to listen to the words she might hear, so I simply stopped, changed the subject, and finished my coffee.  I hugged my old friend goodbye and wished her family well, knowing that she was only deferring her trouble and hurting her family's longer term position.

In my youth I would have pulled out some paper and charted scenarios to try to show and convince my friend that a move now was needed, but I've aged and learned and know better.  So here's the frustration.  Assuming that these guys do put their home on the market next June and their $2000 a month shortfall remains they will be at least $24,000 poorer as their cash reserves will be liquidated. (12 months till listing).

In addition to that, they then must hope that the home actually sells and it is sold in a reasonable time of 90 day or so.  That is another $6,000!  We must also hope that their loss on their home is only $10,000.  As I mentioned in the July update, we are getting indications that banks are not beginning to release underwater inventory and breaking up the log jam of non-foreclosed properties.  In other words, these banks are increasing the flow of supply on the market and that may be bad for future sales prices.  No matter what, let's just assume that they sell the home for a loss next year of $5,000. 

Here's how it could work out;

SCENARIO 1
$5,000 loss on the property
$24,000 income drain for 12 months before listing
$6,000 income drain while waiting to sell the property.
In total, these guys suffered a $35,000 loss but a net cash loss of $30,000 by staying in this home!
They have $70,000 in cash reserves and would end up with $40,000 in remaining emergency funds.  If they were able to trade down to a home that needed only $1,000 additional income from their reserves, they could live a little over 3 years in this situation.

SCENARIO 2
On the flip side, they could list the home this month and face this situation.
$6,000 income drain while waiting to sell the property.
$10,000 loss on the home.
A total of $16,000 in losses but only a $6,000 cash loss. 
Let's assume they buy a home or rent and can drop the out of pocket needs to $1,000 a month to be very conservative. That results in a $9,000 cash drain.
At the beginning they had $70,000 but suffered a $6,000 cash drain and then a $9,000 drop due to still falling short of their expense needs.  Their total cash remaining would be $55,000.  While not optimal, they could still live in this situation for more than 4 years.

The family would probably be better off in the second scenario as well as many of their other expenses like air conditioning and heating would drop because they would be in a much smaller home. 

The point of this is simply that while it would be an inconvenience to move now, it is still going to be a hassle that must be endured.  Why not go through the pain now and come out the other side with a larger war chest for the future?  Why not cut your losses on the home instead of gambling that things work out for the best?  What if things actually get worse and the home value drops? 

KEY POINTS
CONSERVATIVE IS GOOD!
In this economic environment with all of the uncertainty isn't it best to attempt to have the smallest amount of debt and largest amount of savings to ensure that you can stay solvent as long as possible?  I love how this family had a pretty big store of savings, I hate how they plan to destroy their cash by taking too long to act on an important decision.

YOUR HOME IS SHELTER, NOT AN INVESTMENT
Have you noticed that the "Flip This House" and Carlton Sheets infomercials are no longer on TV?  This is happening because people are still getting killed in real estate.  As home-buyers we need to get rid of the notion that we'll be able to sell our home in 3 year or 5 years for a mint, it just isn't going to happen again.  We need to buy affordable homes that provide for our needs.  We don't need a home or a mortgage that fits the description that my mortgage broker and realtor told me when buying our first residence.  They stated, "Buy a home that is big enough and costs as much as you can possibly get even though it is uncomfortable now, with raises you'll be able to grow into it ."  What happens if you lose your job or those bonuses and raises don't materialize?  What if the economy takes a nasty turn and we enter a double-dip?

RADIO, REALTORS, AND NAR ASSOCIATES ARE SALESMEN
When is the last time a realtor told you it was a horrible time to buy?  Exactly.  As I mentioned in the introduction, I heard a radio show here locally that interviewed the local version of the Chairman of NAR.  He explained that home values were increasing and that is might be a good time to get out there a buy a home.  The realtor that was interviewing him continued to hammer home the idea that investment rentals were such a good deal because rents were up and that first home buyers should get out there and buy.  While that all may be true we just don't know and these guys didn't reference once that values could easily go down.  I wonder what my friend's realtor told them 10 years ago?  Probably the same thing they are saying now and everyday..... Buy! Buy! Buy!.

Financial decisions can be tough and they can be scary.  We always need to seek wise counsel and also remember that many times doing nothing is a decision.  Inaction due to fear, uncertainty, or over-analysis can sometimes be very costly.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

BANKS LIE AND DEFAME THEIR EMPLOYEES TO KEEP THE FRAUD PLATES SPINNING

Check out this article from Bloomberg this morning.  B of A continues to deny (like all banks) that there was a problem with the way they handled the securitization process in rolling these into MBS.  Based on the testimony of a team lead in the mortgage litigation department at B of A, Linda DeMartini, we see that it was routine for B of A to hold on to the promissory notes and keep them in their name (possession) despite the fact they were required to sign the documents over and physically transfer the paperwork to the trustee (MERS).

Is it any wonder that MERS cannot produce the actual mortgages for all of these foreclosures?  Is it any wonder that some properties have been foreclosed upon by several banks?  Is it any wonder that NO documents can be found?

Of course B of A fired back that this lady was wrong and she didn't know what she was talking about.  All I need to know is if in fact she is wrong, where is the deed?  They haven't been able to produce one!

Enjoy - BofA Mortgage Morass Deepens on Promissory Notes Issues


TRADING UPDATE
As much as I think we are winding down this dump we've had since we highlighted issues in Euribor and CDS widening, the contagion that is bad fiscal policy in Europe has some pretty strong tentacles.  We are now hearing more about Portugal, Belguim, and others being targets of concern.  It won't be long till it is the USA.  Emerging markets and commodities have been whacked as we anticipated and for nimble traders heeding warnings you've done well.  For those that have toughed out the drawn down, you are ok as these currencies fall we'll see hard assets and the emerging markets rebound.  Be aware that emerging currencies will be the targets of their governments who will try to stem the flood of assets coming their way trying to get away from the disaster that is the Euro and the USD.  Rate hikes, capital flows taxes, and more will come so don't be surprised.  Personally I bought a large slug of silver in this weakness over the last week.  I anticipate that over the next year that this will prove to be one of my best trades.  It is a very long term and ill-liquid position so I won't provide much of an update other than once or twice next year.

GOATMUG

 

ROBOGATE THROUGH THE YOUTUBE LENS

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.

GOATMUG

EURIBOR RATES ARE CLIMBING - CANARY OR WASTE OF TIME?

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.  - http://www.homefinance.nl/english/international-interest-rates/libor/libor-interest-rates-eur.asp

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!

GOATMUG

WOULD YOU BUY THIS COMPANY?

There was once a company that needed some money to fund its operations. It had a core business that was plagued by pricing problems and management was simply trying to get financing in place to ensure that they could pay employees and meet obligations while the market sorted its problems out.

As you might guess, the company met resistance among its bankers and lenders as they were hesitant to lend money to a struggling business. As the bankers examined the books of the company they found that the company had some merit - there was tons of potential, great technology, an eager and talented workforce, and lots of capacity to grow. On the other hand, the financial evaluators found that the company had a habit of spending more than it made and over promising some employees benefits and perks.

As the sales of the product declined and prices fell due to poor demand, the company hardly changed any of its spending habits, in fact it actually increased spending to provide extra benefits for its workers.

Because the firm was a very large corporation, they often issued their own debt in the form of bonds. During the financial trouble, the firm's CFO and CEO noticed that the bonds that they sent to the market were often met with lackluster demand and therefore prices were low and (interest rates were high). The greater interest rates meant that the troubled firm needed to pay more every six months in interest costs for borrowing. The growing costs alarmed the CFO and CEO and they hatched a plan. As they sent new bonds to market, they would actually use other accounts and buy their own debt! In this fashion, they would actually bid for their own bonds and bid with lower interest rates to put a cap on the growing interest cost. For a while, the strategy worked great. By artificially buying the debt other buyers felt more confident about them and were willing to participate in the offerings. Soon though, the market participants began to question how wise it was to purchase the debt of a troubled firm at interest rates that were below the true cost of a similar risk. Once these participants realized this, they stopped buying altogether and suddenly the company had to buy almost all of the debt they were issuing. They essentially gained little additional money to fund operations because they were paying themselves. Incoming money was used to pay the old bonds.



SOUNDS LIKE A GREAT INVESTMENT RIGHT?

If you were a banker, would you lend money to this company? Would you feel comfortable buying the firm's bonds for 30 years at 4.5%? What if you knew that the company was not planning on reducing spending at all, in fact had plans to increase spending? What if the company had financial assumptions that projected that interest rates on their bonds would actually be the same rather than increasing over time?

If you answered no, you wouldn't lend money, I'm in total agreement. While I'm made a very simple example, you might have guessed that the imaginary company is actually our US government.

WHAT IS THE PRODUCT?
In my example I mentioned that the firm had one product. If you recall, Ben Bernanke and Hank Paulson told us that housing was so important to our economy that it had to be stabilized and bailed out. We had all sorts of failed efforts to save the housing markets, measures that included mortgage modifications, incentives to purchase houses, and even actions that allowed banks to delay writing off foreclosures without indicating their true value on their financial statements.

These steps may have had some stimulative effects in the very short run with a boost in sales in November, but ultimately we will see that intervention won't help as lenders and the government have realized that they must actually take lending standards to the level where only qualified buyers should be able to obtain financing. As standards are improved, fewer buyers will qualify and excesses in the quantity of homes available will then drive prices lower. In addition, foreclosures WILL be released from the inventory on banks balance sheets and this new supply will only add to this problem.

Remember, housing is the key to the reversal in fortunes for the consumer. Of course I don't believe this is the only product in the US, but our government knows that consumers have used our homes as an atm machine previously and the home truly was the only store of wealth for many. Without a reflation of the housing market, the US consumer has little ability to carry on under the past mega consumption binge that they used to. 70% of the US economy is based on what the consumer spends, not what we manufacture. If in fact there is a material shift downward in the consumer's level of spending, how might it impact growth in the US? Is it any wonder that our government wants the consumer right back where he was spending without regard for saving and assuming that home prices will levitate without end?



WHAT ABOUT THIS BOND MANIPULATION, DID THAT HAPPEN?

Of course it happened and is still happening. The Federal Reserve calls their manipulation "Quantitative Easing", just like the corporate example, the Fed is buying their own debt because they want to control the interest rates and thus are paying more than the market prices to keep interest rates low. Despite their best efforts we will see that interest rates will rise and this will hurt the US in several ways.



First, we will have to pay higher interest costs on all new debt. America is issuing huge amounts of debt because we are spending much more than we are making in the form of tax revenues. The impact of greater rates will be devastating.



Second, because market participants are smart they have stopped buying massive amounts of US debt in long term maturities, in other words they have anticipated that interest rates are going to go up and rising interest rates hurt long term bonds the most. To avoid these losses investors have shortened their purchases and are buying shorter term bonds, leaving the longer term purchases to the US Fed. Summing up, we (the Fed) has been buying all of its own bonds -- the very bonds that will decline in value the most as rates rise.



CAN THEY REALLY STOP?

Like all ponzi schemes and lies, we will see that the Fed's version will be difficult to stop now that it has been set in motion. The Fed has stated that they will attempt to extract themselves from Q.E at the end of March. This approach to removing the drugs from the junkie will come in several phases. First, the Fed states that they are going to stop purchasing treasuries. Second, they are stating that they will stop purchases of MBS or mortgage backed securities. They are the securitized mortgages that are the massive pooled mortgages of agencies like Fannie Mae and Freddie Mac. The Fed has been purchasing these agency pools in an attempt to keep mortgages rates low. The Fed's handiwork here is not small, in fact they now are approximately 80% of the securitized mortgage market. Do you think there might be a reaction in the market when the biggest buyer decides to stop spending? In addition, the Fed says that they are also going to increase the costs of borrowing overnight to banks. So, the $1.5 trillion dollar question is can the addict just quit cold turkey? The answer is no! We have a front row seat to see the impact on interest rates in treasuries and mortgages. I suggest that we all pay very close attention in the first couple of days in April and we'll need to watch interest rates to see how much they go up.



Many of you will say - yes, yes, we know all of this! I know, but frankly this is a summary of a conversation I had with a few friends over coffee. It is stunning to really document how brutal our country's leadership has been and how if it were a business we wouldn't just decline to purchase the stock, we would absolutely be shorting the heck out of it! The scary thing about our story here is that it really is happening! And the message we need to gather from this very simply example is that we need to construct an investment strategy that truly examines how risky US assets are and what the long term implications are for the US dollar.

TRADING STRATEGY
Given what we know of the situation above and the recent market correction, I believe that this sets us up perfectly for what we've mentioned quite often. We are looking for a move higher here, even to new highs of around 1175 on S&P500 and 11,000 on the Dow. This will extend the range we've discussed for 6 months. I believe this move will occur over the next 6 to 8 weeks, taking us through March and into mid-late April. At that point we will need to have exited trades according to my view that we'll begin to see a significant drop in late April and early May that will be as severe as anything we saw in 2008 and early 2009. Remember, identifying areas in a market range is tough, in fact I have noticed that my experience in trading has gotten better as I sell as we near the upper ranges I've identified - essentially paring my position as it moves up. In the same manner, I buy as I near the target lower range. I almost never reach the bottom range of a target so if I didn't have this discipline I would often never get the chance to enter a position.

One trading update - KSU neared $33.50 earlier yesterday and could have been a good exit at a 10% gain for less than a week. I do believe it will achieve that $33.50 - $34.00 range again and I would use that an an opportunity to sale 100% of the position or at least 75% of it. There is no reason to get greedy when I believe you'll have another chance to play that same range again. I like the company and I like the fundamentals, but you must stick to the levels we identified at entries and exits and be disciplined. You can move your stop up to $31.50 to ensure that you make a solid profit to protect your downside as well.

Continue to watch the fear index. As the market rallies, we will be watching this to come down significantly. If we see it in the 15 or 16 level this will be a signal to start selling long positions and perhaps even pick up VXX again. This would fit well if we get to those highs I talked about earlier.

I will post an update on a few more ideas I've identified, but want to make sure we have confirmation of this move before laying it out.

Beware as well, my friend Guy Lerner has posted an update on www.thetechnicaltake.com that suggests that folks were bearish as the market bottomed and now that the market has reversed, they are suddenly bullish again since the market has recovered a bit. I mention this because we all know that when everyone believes something, it is best to start betting against them. I like to add this piece of information because every trade can and sometimes does go wrong, you need to be prepared if it does.

Goatmug