Wednesday, October 13, 2010

Morning Note...


Futures are ~70bps higher this morning as the upside surge following yesterday’s dovish FOMC commentary (noting that QE2 is a near certainty in November) continues, and is further fed by bellwether U.S. corporate earnings and global equity strength.  After last night’s close, Intel (INTC; +1.3%) posted better than expected earnings…as did JP Morgan (JPM; +1.3%) early this morning (which is taking the financials higher).  Additional, railroad giant CSX (+4.2%) beat earnings estimates and delivered bullish economic commentary.  European markets are up nearly 2% as of writing, and Asia was up across the board overnight.  Oil +1.5%.  Gold +90bps.  USD -35bps.  The Wall Street Journal continues to discuss the potential foreclosure halt in the U.S. – would it lead the fragile real estate market towards a double dip?  Or would it provide a respite to the discretionary incomes of Americans currently facing foreclosure?  Incidentally, the Journal also takes Bernanke to task for the potential to repeat the past mistakes of Japan:

Mr. Bernanke's mission, in part, is to make sure the U.S. stays off the path trod by Japan. Yet it's proving harder than he thought when he was offering advice to officials overseas.

Japan's stock market peaked in 1989 and its property bubble popped two years later. Since then, it has averaged annual growth of just 0.7%. Its national government debt has soared to more than 200% of its national output. And in seven of the past 10 years its consumer prices have fallen.

All this happened even though the Bank of Japan has held short-term interest rates at or near zero since 1999 and has taken other stimulative steps such as buying government bonds and short-term corporate debt.

"I remember once making a comment in a Federal Open Market Committee meeting that this seemed easier when I was advising other people how to do it than when I was involved in doing it myself," says Donald Kohn, who retired from his post as Fed vice chairman last month. The comment, he recalls, was met with nervous laughter by other officials.

Mr. Kohn says he took two lessons from Japan: Be aggressive about providing stimulus to the economy in the early stages of a downturn and avoid canceling it too soon.

Before becoming Fed chairman, Mr. Bernanke led a band of U.S. academics who argued that Japanese officials weren't doing enough to jolt their economy out of its torpor. In a 1999 paper, Mr. Bernanke lashed out at Japanese officials, saying their country's woes were the result of their own "self-induced" paralysis. Japan's responses to deflation, he charged in atypically blunt terms, were confused, inconsistent and too cautious.

Mr. Bernanke has since told others privately he regrets the tone of those attacks. But the lessons he drew have played a role in shaping the Fed's responses to the economy and could shape decisions in the weeks ahead.

Regarding yesterday’s FOMC minutes and looming QE2, here’s a quick research piece from BofAMLCO (bold is mine, is QE2 priced in?):

QE2 - The 4 W's: When? What? Where? Why? The list of questions around QEII is endless. Here we attempt to answer some of the practical and theoretical questions.

When? The market seems satisfied that the when will be the FOMC meeting on November 2nd and 3rd with the minutes from the September meeting released yesterday doing little to quell this notion. Indeed, a CNBC poll suggests that 93% of investors questioned believe that more QE is coming with 86% of those seeing November as the most likely meeting.

What? The debate has now evolved to what they will do. There is little doubt that the November statement is going to look different from those preceding it as the Fed focus hard on their communication strategy. This has been well flagged by FOMC members in recent weeks. There is likely to be more emphasis placed on the inflation targets and the extended period may get beefed up. The views on the size of the potential QEII program vary. The speculated range is between $500bn and $1tn of Treasuries purchases, with equity investors at the higher end of the range and fixed income at the lower. Our view is that the lower end is more likely but the size remains of crucial importance. Much has been made of the capacity the Fed has to expand their balance sheet. There comes a point that the market fear over the size of the balance sheet overwhelms the incremental effect of more liquidity. Our Rates & Currency team feels that we are some way from this yet with another $2.3tn in the arsenal just to take the US to Japan's current balance sheet size as a percentage of GDP. This seems like one issue we can kick down the road for now.

Where? So, where will the purchases be targeted? Given the structure of the US Treasury maturities and the limits on the percentage of issuance the Fed can hold, purchases will once again be concentrated in the belly of the curve despite the Fed's desire to concentrate on the longer dates. MBS may be something that the Fed considers but in order to target other distressed areas of the market (CMBS, ABS markets) the Fed will require a change to their mandate.

Why? This brings us to the most frequently asked question on the QEII topic - why bother? Many remain skeptical on the likely effectiveness of QEII and in today's Situation Room, BofAML Credit Strategist Jeff Rosenberg outlines his view on why QEII is unlikely to work. Ultimately the Fed is pouring liquidity into a system lacking in growth. It is a mismatch and the costs of the strategy are likely to outweigh the benefits in Jeff's view. The abundant liquidity is raising the risk of asset bubbles in EM, much like in the US housing market before it. But liquidity is all the Fed has to offer with rates already on their knees.  They look ready to take their jugs out and start pouring again.

Here’s something scary from the NY Times:

N.Y. Faces $200 Billion in Retiree Health Costs…The cities, counties and authorities of New York have promised more than $200 billion worth of health benefits to their retirees while setting aside almost nothing, putting the public work force on a collision course with the taxpayers who are expected to foot the bill…The total cost appears in a report to be issued on Wednesday by the Empire Center for New York State Policy, a research organization that studies fiscal policy.


Thought this Bloomberg news story was interesting:

Krugman, Niall Ferguson Renew Debate Over U.S. Fiscal Stimulus 2010-10-13 06:41:01.277 GMT

Oct. 13 (Bloomberg) -- Nobel Prize-winning economist Paul Krugman and Niall Ferguson, author of “The Ascent of Money: A Financial History of the World,” clashed anew today over how to revive the U.S. economy. Krugman, 57, a Princeton University professor, is urging the Obama administration to undertake a second round of fiscal stimulus, while Harvard University historian Ferguson, 46, warns such a course may trigger a “debt spiral” in the world’s biggest economy. “The risk is that at some point your fiscal policy loses credibility in the eyes of investors,” Ferguson said at the World Knowledge Forum in Seoul. “Then, very quickly, you will find yourself in a debt spiral of rising rates, widening deficits, crumbling credibility and yet more rising rates.” The debate comes as minutes of the Federal Reserve policy makers’ meeting on Sept. 21 show they were prepared to ease monetary policy “before long” as growth slows and the jobless rate remains near a 26-year high.  “We actually never did significant fiscal expansion,” Krugman said at today’s forum, appearing beside Ferguson. “What does a trillion dollars of borrowing do to the U.S. long-run fiscal position? The stimulus right now makes almost no difference.” The administration’s two-year $814 billion stimulus program ends Dec. 31, and Krugman said two months ago another $800 billion is necessary. While the National Bureau of Economic Research said in September that the worst U.S. recession since the Great Depression ended in June 2009, the unemployment rate held at 9.6 percent last month.

Investor Confidence

Ferguson said the U.S. risks losing investors’ confidence as more spending exacerbates its weak fiscal position, adding the U.S. debt situation is worse than that of Greece. Krugman dismissed the comments, saying there is no evidence in the markets that bondholders will flee. “The markets are fine until they are not fine,” Ferguson countered. “For more than a year since our debate began, it’s the Chinese who’ve been consistently agreeing with me, saying that they regard the course of U.S. fiscal and monetary policy as dangerous,” the Harvard professor said. “So it’s not just me you are arguing with Paul, actually, it’s the Chinese government.” China in July held almost $847 billion in U.S. Treasuries, more than double the amount it held four years earlier. U.S. economic growth slowed to an annual rate of 1.7 percent in the second quarter from 3.7 percent in the first period. The growth figures are adjusted for changes in prices; nominal gross domestic product doesn’t adjust for inflation. The economy probably expanded at a 1.9 percent pace in the quarter ended Sept. 30, according to the median estimate of 62 economists surveyed by Bloomberg News. Krugman, a New York Times columnist, wrote last year during a previous clash that Ferguson “hasn’t bothered to understand the basics” of economics. Ferguson has said Krugman’s economic assumptions are based on a “flawed” reading of John Maynard Keynes’ model.

JEFF ups ALU.  BCS rumored to need a capital raise.  LLTC lower on earnings.  MGM to offer 41M shares and biggest shareholder Tracinda to offer 28M.  IBM tgt raised at BERN.  CLWR to raise $2.5 billion to $5 billion in wireless spectrum attracting T, VZ, DTE, TWC, and S. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  For many historians, this date in 1307 marked the origin of the ominous nature of “Friday the 13th.”  What happened?

Yesterday’s Question: What is the oldest known aquatic creature?

Yesterday's Answer:  The oldest known aquatic creature is the Quahog Clam…one that was 405 years old was found off Greenland!

Best Quotes:  Florida’s 30-Second Foreclosure Dash Hits Wall of Fraud Claims 2010-10-13 04:00:17.913 GMT

By David McLaughlin
     Oct. 13 (Bloomberg) -- Home to more foreclosures than 47 U.S. states, Florida sought to clear out its backlog with a system of special court hearings that dispensed with cases quickly, sometimes in less than a minute.
     Homeowners like Nicole West now threaten to slow that system, Florida’s so-called rocket docket, to a crawl. West, who has been fighting to save her Jensen Beach house from foreclosure, has leveled a new allegation in her three-year
battle: the entire process is based on fraud.
     West said her case is rife with the kind of flawed mortgage documents that have caused lenders including Bank of America Corp. and JPMorgan Chase & Co. to stop the process of foreclosures and evictions across the country. The banks said they are investigating homeowner charges like West’s that signatures were forged and documents were backdated.
     “It’s not right,” said West, 40, who lives about an hour’s drive north of West Palm Beach. “It’s like lying to the judge. It’s like lying about what’s really going on.”
     The bank moratoriums are already thwarting the initiative by Florida officials to clear jammed court dockets. Now, efforts by homeowners such as West to bring claims of fraud to the attention of judges are further prolonging evictions, and in turn slowing purchases of foreclosed properties.

                        Third-Highest Rate

     Florida has the third-highest foreclosure rate in the U.S.
behind Nevada and Arizona. One in every 34 housing units -- double the U.S. average -- was in the foreclosure process or bank-owned as of Sept. 1, data vendor RealtyTrac Inc. said.
     Florida’s legislature appropriated $9.6 million this year to pay semi-retired judges and case managers to clear the backlog of foreclosures. Some judges have been churning through cases at a rapid clip, such as those last week in Tampa who considered dozens of foreclosures per day, sometimes in as little as 30 seconds.
     The goal is to clear 62 percent of the backlog by next July, according to Craig Waters, a spokesman for the Florida Supreme Court. J. Thomas McGrady, chief judge of Florida’s Sixth Judicial Circuit, said he once thought that was achievable. Now that Charlotte, North Carolina-based Bank of America, New York- based JPMorgan and Detroit-based Ally Financial Inc. have put the brakes on foreclosures or evictions to look for irregularities, he said he’s “very doubtful” his courts can resolve that many cases. The circuit, which covers the area around Clearwater and St. Petersburg, has a backlog of 33,000 foreclosure cases, he said.

                          More Backlog

     “All of a sudden all of these issues pop up with the lenders,” McGrady said in an interview at his Clearwater office. “It’s going to slow down the whole process because there will be more backlog. We’re still getting 1,000 cases a month.”
     At the Clearwater court, lenders as of yesterday had canceled more than half of the 84 hearings to approve foreclosures that were scheduled for today, according to Ron Stuart, a court spokesman. Half of the 110 hearings originally set to take place tomorrow were canceled as well.
     Among the alleged defects the banks are examining are lender affidavits signed by people, often described as “robo signers,” who repeatedly failed to verify the accuracy of the information in the documents.
     In December, an employee at Ally’s GMAC Mortgage unit said his team of 13 people signed about 10,000 documents a month without verifying their accuracy, according to a deposition taken in a foreclosure case filed in West Palm Beach.

                        False Affidavits

     Ally has been accused of committing fraud by submitting hundreds of false affidavits in foreclosure cases, according to a lawsuit filed last week by Ohio Attorney General Richard Cordray. Ally said in a statement that it “believes there was nothing fraudulent or deceitful about its foreclosure practices.”
     “Every homeowner that’s in foreclosure now should be questioning,” said Matthew Weidner, an attorney in St.
Petersburg who defends homeowners in foreclosure cases. “Every homeowner that’s already been foreclosed and lost their home should be questioning. Anybody who’s behind in their mortgage should be questioning. This entire system is now a great big question mark.”
     Florida Attorney General Bill McCollum, meanwhile, is investigating four law firms in the state that specialize in foreclosure cases on behalf of lenders, according to Ryan Wiggins, his spokeswoman. Yesterday, McCollum said he requested meetings with firms including Bank of America, JPMorgan and Goldman Sachs Group Inc. unit Litton Loan Servicing to “discuss ways to promptly and effectively redeem the integrity of the foreclosure process.”

                      ‘Unfair and Deceptive’

     McCollum accused law firms of “unfair and deceptive actions” and said thousands of foreclosures that had been approved by judges may have been the result of improper actions by law firms. He said the firms appear to be “fabricating and/or presenting false and misleading documents.”
     Florida state Judge Janette Dunnigan in Bradenton fined a Fort Lauderdale law firm, Smith, Hiatt & Diaz PA, $49,000 and ruled it was in contempt of court after finding it was repeatedly unprepared or failed to show up for foreclosure hearings in her court.
     The law firm operates “in utter disregard for the consequences to other litigants,” the judge said in a Sept. 2 order. “Their disobedience of court orders is constant and flagrant.”
     Roy Diaz, a partner at the law firm, didn’t return a call seeking comment.

                       Under Investigation

     Also under investigation by McCollum is Lender Processing Services Inc. The Jacksonville-based company has produced documents known as mortgage assignments with signatures of the same person that vary “wildly” from document to document, according to the attorney general. The documents are necessary for banks and mortgage servicers to show they have the legal right, or “standing,” to pursue foreclosure lawsuits. McCollum is investigating whether the documents have been forged.
     Michelle Kersch, a spokeswoman for Lender Processing, said the company hadn’t been contacted by the attorney general and would cooperate with any inquiries.
     McGrady, the chief judge in Florida’s sixth circuit, said his courts have seen “‘some very sloppy practice” by lawyers for mortgage lenders.
     “I’m disappointed that perhaps they’ve taken advantage of a system that was set up to allow them to obtain their foreclosures in a reasonably fair and expeditious process, and they may have abused that,” he said.

                      Nine Million Mortgages

     As many as 9 million U.S. mortgages that have been or are being foreclosed may face challenges over the validity of legal documents, according to a report yesterday by Morgan Stanley.
     About 2.5 million homes have been repossessed since 2005 and another 6.5 million mortgages are in foreclosure or may be soon, the New York-based firm wrote in a note.
     At the George E. Edgecomb courthouse in Tampa, about a half-hour drive from McGrady’s court, two senior judges hold hearings four days a week on approving foreclosures. Last week, one judge, Sandra Taylor, had 51 cases on her docket in one day.
     Taylor considered the requests for foreclosure judgments in a fifth-floor conference room. Sitting at a desk at the end of a conference table, she used a speakerphone to talk to attorneys for the banks and mortgage servicers who called in instead of traveling to Tampa. At her side sat a court assistant, next to a cart stacked with manila envelopes.

                          Don’t Show Up

     Most homeowners whose property was at issue didn’t show up to fight. It took Taylor about 30 seconds to approve some of the foreclosures and set a sale date after lender attorneys summarized the case and the amount owed.
     “I wish there was more we can do,” Taylor told one homeowner after approving a foreclosure. She said there was “no legal reason” why she shouldn’t approve it.
     Another homeowner who lost her home last week, Ingrid Young, 44, defaulted in 2008. She told the judge she couldn’t afford the $1,900 monthly payment for her Tampa house because she only earns $1,800 a month.
     “I am in default, and I do realize that,” Young said.
     Her employer had cut her hours, and unless she finds another job, she can’t afford the mortgage, she told Taylor.
     The judge approved the foreclosure after persuading attorneys for Citigroup Inc. unit Citimortgage to set the sale date in January.

                       ‘Very Sad Business’

     “It’s a very sad business,” the judge said afterwards.
     Such fast-track hearings are still happening elsewhere in Florida, according to lawyers and court personnel. Weidner, the homeowner lawyer, criticized judges for continuing to hold “rocket docket” sessions amid the current controversy.
     “Inside these courtrooms, judges -- the bad ones -- are just granting summary judgments like nothing’s happening, like it’s business as usual,” he said. “They’re abdicating their responsibilities to be real judges.”
     Several Florida judges said their job is not to advocate for homeowners or investigate the accuracy of documents. Courts depend on homeowners or their attorneys to raise objections, they said.
     “We’re processing thousands of cases where no one is really contesting them, and in those instances, something like that just would not be brought to our attention,” said W.
Douglas Baird, a judge in Clearwater. “It’s not a situation where the courts have the ability to go through every document that’s filed and challenge and question those documents.”

                          Save Her Home

     West, the Jensen Beach homeowner fighting to save her home, has a Nov. 4 hearing in Stuart, Florida, where lender Deutsche Bank AG may seek approval of a foreclosure, she said. Deutsche Bank is the trustee representing holders of mortgage-backed securities, according to court filings.
     She and her husband, Tim, said they plan to seek a postponement of the hearing to give them time to question two individuals who signed relevant affidavits.
     Four employees of Lender Processing Services signed assignments transferring West’s mortgage, according to an affidavit submitted on her behalf by Lynn Szymoniak, a West Palm Beach attorney. They signed the documents as officers of American Home Mortgage Servicing Inc. and Option One Mortgage Corp. even though they were actually employed by Lender Processing Services, according to Szymoniak’s affidavit.

                      Signed and Notarized

     These assignments were signed and notarized more than a year after Deutsche Bank filed the foreclosure suit. For that reason, the Wests question whether the bank has the legal right to file a lawsuit seeking foreclosure. Scott Helfman, a spokesman for Deutsche Bank, declined to comment.
     They signed “thousands of documents each week as needed in foreclosure cases, without any personal knowledge of the documents, often without any authority from the entities they claimed to be their employers and, in most cases, without ever reading such documents,” Szymoniak claimed in court papers.
     Kersch, Jacksonville-based Lender Processing’s spokeswoman, said in a statement that its subsidiary, Docx, executed the documents and that “it had proper authority and review processes in place.”
     West and her husband said they received a foreclosure notice in March 2007 after Option One Mortgage Corp. allegedly refused their payments. Deutsche Bank claims the Wests owe a total of $541,925.02 in principal, fees and interest, according to court papers. The home is worth about $200,000, she said.

                       Fixed-Rate Mortgage

     In 2005, the couple tried to refinance by getting a fixed- rate mortgage to replace an adjustable-rate one. According to West, Option One said it was willing to provide a fixed-rate loan. When the couple went to sign the paperwork, West alleged that Option One, which is now part of American Home Mortgage, changed the terms of the loan to an interest-only mortgage for five years. West claimed she was subsequently threatened with a lawsuit by an unidentified title insurance company employee if she didn’t accept that deal.
     West said she was “scared to death” and agreed to take the new loan. Their monthly payment went from $1,900 to $3,100, she said. They kept up with it for about two years until Tim West lost his job in January 2007, she said. Option One promised a loan modification the next month and wouldn’t accept their mortgage payments, West said. In March of that year, West said she received a foreclosure notice from Deutsche Bank.
     Philippa Brown, a spokeswoman for American Home, declined to comment.
     West said she hopes to persuade state Judge Elizabeth Metzger at her hearing next month to block the foreclosure because it’s based on fraud. She said she’s willing to negotiate a modified mortgage that she can afford as a compromise.
Frankfurt-based Deutsche Bank and Option have never tried to negotiate, she said.
     “I think a judge who’s truly interested in justice will not tolerate anybody trying to pull the wool over their eyes,”
West said. “She’s my last hope that something can be done to save my home.”
     This case is Deutsche Bank National Trust Co. v. West, 07- 00311, Florida Circuit Court of the 13th Judicial District in and for Martin County (Stuart).