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One must give a tip of the hat
to the Wall Street conmen for engineering a reasonably robust stock rally. The
Dow and S&P were led by financials. The Financial Times out
of London
claims ‘no real money’ was behind the stock rally of over 20%. They
must mean huge short covering, enhanced by pressure tactics from Wall Street
brokerages themselves. They must mean Working Group For Financial Markets
putting to work some of their ‘Black Bag’ money. They must mean
influenced arbitrage games from preferred versus common shares, which harmed
the public but enriched the insiders. Amazing how a better financial journal
on US topics comes from outside the Untied States. A movement pervaded Lower Manhattan offices to formally call in all Citigroup shorted shares on
loan. Whether legal or not, it helped cause a big bank stock rally. Other
‘C’ share games were played that enabled preferred shares to
serve as collateral on common share shorts, as the plebeian shares descended
to $1/share value. Never lose sight of the fact that Plunge Protection Team
funds came in large part from missing $1.5 billion in Fannie Mae funds from
1988 to 2000, specifically out of the HUD offices in Houston (Papa Bush
regional home) and in Oklahoma City (Clinton home region), whose funds keep
America strong. Then you have all the absurd giant steps backwards to permit
big banks to ignore Mark-to-Market and just conjure up asset values from
indefensible models, with blessing from Financial Accounting Standards Board
and the USCongress. This reform?
As citizens pay their income
taxes, and observe the ‘Tea Parties’ around the nation, think
deeper than the many plain shallow placards with great intention. The
original Boston
event prompted a Revolutionary War. The battle cry was over taxation without
representation, a tax levy on tea to the colony, without a voice in the King
George court. With the USCongress taking orders from Wall Street and having
votes bought by lobbyists, the focus should be not on high taxes or low
taxes, but taxation without proper representation by members of the
USCongress. The august body in the USCongress has received countless million$
from Wall Street firms and Fannie Mae, along with dozens of other firms embroiled
in the banking crisis that has destroyed the US banking system. Thousands of lobby groups have taken
control of the USCongress, including the Council on Foreign Relations and
AIPAC. My firm belief is that bribery is the way of the House & Senate. The
people have little or no voice anymore, which is the basis of any charge of
tyranny.
In order to remedy the banks and
recapitalize them, our banking and government leaders must find more
intricate methods with greater confusion and more hidden requirements to
enable the big banks to be replenished at federal expense, while the public
remains ignorant, and Main Street is directly and plainly neglected. The TARP
congame has been discredited. The Public Private Partnership Investment
Program is a revamped TARP sham. Listen to the Jackass on a radio interview
(CLICK HERE), that covers many aspects of this disguised carry
trade program, criticism from watchdog and Nobel Prize winner Stiglitz, the
interior battle between the FDIC and Dept Treasury, and how the requirements
for its official ‘Fund Manager’ are only met by the five Wall
Street banks that committed the majority of the bond fraud. Geithner plans to
build a bus to transport capital to big banks, called ‘The Geithner
Summers Structured Investment Vehicle’ after the infamous SIVs.
Forget economist forecasts, both
inaccurate and old-fashioned. New research shows corporate bonds have been
far better at predicting where the USEconomy is headed than one might expect.
The great churn to subsidize and redeem the Wall Street banks has brought
them off their knees, now ready to lend again at a minimal level after their
fraudulent chapter. Their insolvency will remain for another year or more. Signals
from the corporate bond spreads suggest strongly that the USEconomy will
falter worse. In the autumn of 2007, before conditions began to falter,
corporate bond prices raised the red flag. The spread between corporate bond
yields and USTreasury yields had begun to widen as the mortgage crisis showed
its subprime prima facie that summer in 2007. More declines are coming,
signaled by current corporate bond spreads.
GOLD TO RISE ON
FURTHER MONETARY DEVALUATION
Staggering additional monetary
inflation comes, initially from programs by the USGovt and USFed to date. More
monetary debauchery is right around the corner, to be extremely clear by
summertime. Bank losses will become a national nightmare, seemingly never
ending. Only deception buttresses the bank sector now, their specialty. Both
central bank and USGovt funds will become an absolute torrent when they
finally come to grips with the bank losses upcoming and the momentum for
USEconomic downturn toward depression. Vicious feedback loops at finally
in high gear. When the printing press becomes more heavily relied upon, the
clarity of USDollar support also coming from USMilitary actions will render
the gold & silver assets more desirable safe haven investments. Furthermore,
USFed authorities must be deeply worried about the seeds they are planting
for future price inflation. The USFed just purchased $1.5 billion in Treasury
Inflation Protection Securities (TIPS) in an unprecedented maneuver. No
longer does the TIPS tell of inflation expectorations. What on earth is going
in on their tiny minds?
The story not told often enough
is the utterly huge short gold futures contract positions put on by JPMorgan
immediately when the USFed announced its $1 trillion monetization plan in
mid-March, and the additional batch of gold short contracts they put on
during the G20 Dollar Funeral event in early April. Perhaps the USDept
Treasury can access some of the $1.9 billion from the AIG car insurance
business unit sale to Zurich Financial to fund more market corruption and
interference, with a simple handoff from to their free market brothers at
JPMorgan. Still, despite all the harmful, unregulated, and relentless
pressure put on precious metals, their prices refuse to be pushed down. The gap
between the physical gold price and paper COMEX price continues to widen. The
story behind the scenes that captured my attention centered on German demands
to return all their gold bullion held in custodial accounts on US soil. The deep source contact said something like, “the German demand is making
the US bank nazis sweat bullets. Pressure on COMEX will get much
worse.” Expect even more pressure on the June gold contract than
was seen with the March gold contract, as far as delivery default is concerned.
Deutsche Bank saved the COMEX bacon with a last minute 850,000 ounce
delivery, courtesy of the Euro Central Bank at the eleventh hour. Such are
the games not told on national financial networks, but which are central to
Hat Trick Letter analysis.
The gold price is busy carving
out the Right Side Handle to a messy Cup & Handle reversal pattern, one
which is testing the patience of yellow metal investors. When the weekly
stochastix cycles down a little farther, the consolidation should be at an
end. We observe not so much a battle of monetary inflation versus asset
deflation, as with free market pricing structures versus disruptive USGovt
custodial management that will someday be chronicled as the most corrupt in
modern history. Asian and Arab creditors to the USTreasury Bonds are not
pleased with what the management of either the USGovt bond securities or
gold, and they hold both in great volume. The target for gold remains almost
1300, with a breakout inevitable.
The silver chart looks even more
bullish. Instead of a clear reversal pattern, it shows a recovery pattern
that struggles to find strong footing on the less stable 20-week moving
average. Its move to reach old highs will be easier, once near-term
resistance is overcome. The 50% retracement of the long run from last October
to February would paint a line at the 12.3 level for Fibonacci support. He
was a friend of Botticelli, Lambourghini, Zepharelli, and great grandfather
to Roubini, surely good company to keep. Look for an upcoming crossover of
the 20-wk MA (in blue) above the 50-wk MA (in red), a powerful technical
bullish signal for moves to approach the July and March 2008 highs. It is
also inevitable.
ROOT CAUSE OF BANK
LOSS
The two root causes of the deep
historically unprecedented US bank losses from bond assets and credit
portfolios are housing price declines and home foreclosures. For to claim the
banks have stabilized without the home prices or forced foreclosures is
absurd on its face. What has changed would please US Federal Reserve Chairman
Ben Bernanke, market psychology. He favors inflation expectorations for
USTreasury Bonds over monetary growth, as the USDollar is debauched into
oblivion. He favors consumer sentiment for the USEconomy over retail store
shutdowns and shopping mall vacancies. The Wall Street maestros sold the
investment community a bill of phony goods that will be evident by summer. They
engineered a bank sector rally based on falsified earnings reports, orders by
the USFed to keep the Bank Stress Tests secret until May, a return of the
uptick short stock rule, and a return to valuing bank assets by creative
methods based upon valuation models. Those hidden proprietary models contain
a scad of silly assumptions like a 7.0% jobless rate. The March data already
gave us 8.5% on that meter, but the reality-based Shadow Govt Statistics
claim the jobless rate (when people without jobs are counted) is 17.0%
actually.
Housing prices continue down. The January
Case-Shiller housing index for 20 cities showed a minus 19.0% change from a
year ago, a statistic remarkably free of USGovt garbage adjustments. It is
just the change from Jan 2008 to Jan 2009, no frills, no deception. The key
point of the C-S housing index is that it has been in decline for consecutive
months going back to the beginning of the officially recognized recession in
December 2007. The other key point is that all 20 cities are in price
decline, all of them. My forecast in the Hat Trick Letter, given in year 2005
and repeated in 2006, was for a seemingly endless housing decline in a
powerful unprecedented bear market, in essence a double correction since
Greenspan diverted the expected bear from its path in 2001, denying him his
due. The price decline dictates impossible conditions to refinance
under-water home loans, which applies to almost 30% of US homes with
mortgages (loan balance exceeds current home price). Falling home prices
encourage homeowners to stop making mortgage payments, viewed as throwing
away money down a toilet.
Although repossessed bank-owned
(real estate owned) REO liquidation sales make up 60% of total sales in the
gogo states, REO listings make up only 33% of total listings. Banks are
holding back inventory, amidst a flood. In doing so, they hide losses. Incredibly,
exactly half of ordinary home sales outside bank liquidations are short sales,
meaning sellers must produce cash above the sale price in the lawyer’s
office. Individuals who own homes falling in value, whether sapped of equity
or running negative equity, are unable to tap credit lines from Home Equity
Lines of Credit (HELOC). Worse, as a household with negative home equity
usually contains people who stop spending in normal fashion. The USEconomy is
thus deeply affected by declining home prices. Banks in particular stand at
the apex of losses, since their borrowers lose credit worthiness, and loan
instruments are leveraged. More data and analysis is provided in the April
Hat Trick Letter macro economic report just posted.
Sweetheart analyst Meredith
Whitney expects home prices to fall another 30%. US banks and mortgage
lenders would have much worse crippling losses ahead. She expects such losses
would finally kill a long list of US banks, large and mid-sized. She makes a
great point, saying “Home prices cannot bottom while liquidity is
still contracting from the economy.” She predicts that
peak-to-trough home price declines will average 50% nationally before the US housing crisis ends. We are halfway to the bottom, and likely have seen half of the bank
losses to come. Whitney is known for her bearish calls, largely correct to date.
Home foreclosures continue up. The biggest single
factor behind a home foreclosure is job loss with discontinued income. The
second biggest factor is unexpected medical expenses, which extends to other
family members like parents. RealtyTrac just reported today that home
foreclosures for the first quarter of 2009 are up 24% from a year ago. In California, where the moratorium has lifted, foreclosures rose by 80% from February to
March, hitting 50 thousand!!! The April increase could be well above 100% in
makeup mode. JPMorgan, Wells Fargo, and Fannie & Freddie each lifted
their moratorium. Incredibly, prime mortgages delinquent over 60 days more
than doubled in 4Q2008 to 2.4%, when compared to the first quarter 2008. A
uniform upward uptrend in the delinquency rates has occurred over the last
several months. Nobody in Bank Land prefers to discuss the rising defaults of
the prime mortgages, which include Pay Option ARMs, Intermediate term ARMs,
and more. The prime default rates are much lower than the subprime and Alt-A
garbage loans (often with no income, no documentation, no assets, and no
verification), but the volume of prime home loans is huge, resulting in great
potential for future bank loss. The adjustable rate mortgage default flood
has begun, with full warning given to Hat Trick Letter subscribers several
months ago. Mark Hanson has been indispensable source of great information.
Mr Mortgage, as he is known, has
a great website (CLICK HERE) chock full of
relevant timely data that is well ahead of the pack. His work is often quoted
on national financial networks. He points out that Jumbo loans now
comprise 31% of all fresh loan defaults. So the foreclosure problem has
hit the high end, where losses per loan to banks will be much greater. All
the delay in lifting the conforming Fannie Mae loan limit from $417k to $729k
led to severe damage to high end property prices. Then you have the
‘Revolving Door’ of federal modified home loans. The 1Q2008 vintage
modified loans defaulted 41% of the time after eight months. The 2Q2008
modified loans had a 46% default rate down the road. The third quarter trends
are worsening, according to the Office of the Comptroller of the Currency
(OCC) and the Office of Thrift Supervision. Data is not yet available. The
Federal Housing Admin is the new subprime slime lender, under the USGovt
leaky roof. At end of February, a huge 7.5% of FHA loans were deemed
‘seriously delinquent’, up from 6.2% a year earlier, typically with
under 3% to 5% down payments. The FHA share of the US mortgage market soared to nearly 33% of loans originated in 4Q2008, from about 2% in
2006. More data and analysis is provided in the April Hat Trick Letter macro
economic report just posted.
THE NEXT SHOE –
COMMERCIAL MORTGAGES
The bank sector is debating this
topic now, complete with considerable denial and departures from reality
(what the facts state). Inside reports speak of grand internal sandbag
projects by big banks to brace for the coming storm expected. The
delinquency rate for commercial mortgages has more than doubled since
September to 1.8% this month, on $700 billion in securitized loans,
according to Deutsche Bank. This market is usually highly stable. The current
delinquency rate is just below the peak in 2004. Some experts anticipate the
current commercial slump will exceed that seen in the early 1990s. Foresight
Analytics of Oakland California estimates the US banking sector could
suffer as much as $250 billion in commercial real estate losses in the
current crisis. They project that over 700 banks could fail as a result
of their exposure to commercial real estate. That is five times the charges
on commercial real estate debt between 1990 and 1995. Deutsche Bank estimates
the default rates on the $700 billion of commercial mortgage backed
securities could reach 30%, and aggregate loss rates could reach 10%.
Besides securities backed by
commercial real estate loans, about $524.5 billion of whole commercial
mortgages held on portfolios by US banks and thrifts will come due between
2009 and 2012. Nearly 50% would not qualify for refinancing in today’s
credit environment, estimates Matthew Anderson at Foresight Analytics. Lenders
generally reject loans over 65% of a commercial property value. General
Growth was a victim today of inability to refinance and roll over their debt.
They had strong fundamentals, but unfortunately bankers do not. More data and
analysis is provided in the April Hat Trick Letter macro economic report just
posted.
BANKS ARE NOT READY
FOR MORE LOSSES
The official FDIC Banking
Profile report from the fourth quarter of 2009 reveals that failing loans
have risen faster than reserves. The big banks cannot bring in new capital
(from TARProgram, USGovt-sponsored carry trades, or equity investors in Saudi Arabia ) to match growth in their losses. This has caused the ‘coverage
ratio’ to plunge below 100%, cut in half since 2005. It is below 80%
actually (shown in red). The big banks must dig into earnings to build loan
loss reserves. Case in point JPMorgan today, adding $4.2 billion into loss
reserves. Case in point Capital One yesterday, reporting credit card
charge-offs of $526.5 million. Banks remain behind the curve. Banks
face multiple fronts for profound losses, as mortgages are but one factor. Recall
the Bernanke claims in 2007 that subprimes would be contained, no broad
contagion to bonds would occur, the USEconomy would be insulated, and the
total bank losses would be under $200 billion. What a hack! But then again,
he is just a dumb professor, now a full-time lithographer. It seems the gold
journals contain numerous better bank analysts and economic forecasters than
the good chairman.
Michael Mayo of Calyon
Securities gave warning of broadening bank losses, which actually roiled the
stock market when released. He said, “Mortgage related losses are
about halfway to their peak, while credit card and consumer loan losses are
only a third of the way to their expected highest levels. The
nation’s largest banks may be transitioning from a financial crisis
marked by write-downs of capital, to an economic crisis featuring large loan
losses.” And then the headline catching report from Calyon
Securities suggesting that total bank loan losses could reach 5.5% by the end
of year 2010.
Jim Willie
CB
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