Market Talk

Or, at least, Google was weighing on the market. Stocks certainly have taken off since our report at 10:30 in the a.m. Guess the markets put those disappointing earnings reports behind them, and are buying the Fed’s argument that there isn’t any inflation, at least any that’s going to last.

Good luck with that one.

Big show today. We covered Bank of America’s earnings, the SEC’s likely settlement with the banks over the issue of mortgage-backed securities, and the potential Groupon IPO.

Compliments to the Bank of Japan, for keeping it real.

While the Federal Reserve continues to pretend its easy money policies aren’t juicing commodity markets, the BoJ isn’t afraid to acknowledge the obvious. Colleague Kevin Kingsbury alerted us to this commentary issued by the BoJ last week titled: “Recent Surge in Global Commodity Prices – Impact of financialization of commodities and globally accomodative monetary conditions.”

And if anyone knows a thing or two about accommodative monetary conditions, it’s Japan.

The report certainly gives credit to global economic growth for pushing up commodities, but it also says “speculative investment flows into commodity markets have amplified the intensity of the price surge.”

Here’s a sentence from the summary that should have Bernanke, Dudley and other deniers at the Fed turning crimson: “Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”

Dateline Washington: “Treasury Secretary Timothy Geithner on Tuesday told policy makers and entrepreneurs that U.S. small businesses need greater access to capital in order to spur innovation,” Newswires’ reporter Jeff Sparshott reports today.

“The financial crisis caused a great deal of damage to the capacity of innovators to access capital, and we can’t promote innovation and investment in the United States unless we help innovative companies get the funding they need to succeed,” the secretary continued.

Makes for a nice sound bite, but it seems Geithner hasn’t kept his finger on the pulse of small business. They aren’t clamoring for capital. In fact, here’s what they said about credit markets in the latest monthly survey by the National Federation of Independent Businesses:

Overall, 92 percent reported that all their credit needs were met or that they were not interested in borrowing. Eight percent reported that not all of their credit needs were satisfied, and 51 percent said they did not want a loan.

NFIB said a net 11% reported loans “harder to get” compared to their last attempt — asked of regular borrowers only — up from 10% in January. The organization also says 28% of owners said weak sales continues to be their top problem, and “the historically high percent of owners who cite weak sales means that, for many owners, investments in new equipment or new workers are not likely to ‘pay back’.”

Seems pretty simple, but it’s really more business that small businesses need, not more capital, right now. And demand spurs innovation (remember necessity is the mother of invention?), not capital. Sounds like Geithner, and the White House, doesn’t get that.

Treasury Department will begin unloading its $142 billion stash of mortgage-backed securities in an “orderly wind down” beginning this month, which raises an interesting question: Will these sales shed any light on the valuations of MBS that commercial banks are still sitting on?

Banks have not been eager sellers of their inventory of troubled MBS and other non-performing real-estate loans, as bids for the stuff have generally been well below what the banks are willing to accept. And as long as FASB isn’t forcing banks to mark these securities to market, then there’s no strong incentive to sell.

But the Treasury has incentive to sell, noting in its Q&A on the wind-down that its “mission does not typically include managing a large mortgage portfolio.” At least Treasury’s willing to admit it now. The Fed hasn’t yet reached that conclusion.

As of now, Treasury plans to sell $10 billion in MBS per month until it’s all gone, but could suspend sales “if market conditions become less favorable.” Any suspensions or slow pace of sales should offer some gauge on whether bidders continue to low ball, or if Treasury — like banks — is still asking too high a price for the debt.

Treasury says it’ll post its portfolio holdings at the end of each month,  including any sales that were completed, broken down by coupon and agency here.

It’s no secret that banks are parked over a mother lode of bad loans, mainly residential and commercial mortgages, and they prefer to not publicly acknowledge (by marking to market) what those loans are really worth. That tactic has helped banks recuperate and appear healthy, but it’s a stance that’s also costing at least of few jobs, in a roundabout way.

We’re a little late to this story, but our new-found fascination with state WARN notices led us to find one from a California company called Kondaur Capital, which said about a month ago that it plans to lay off 161 workers by April 18. A little searching brought up an article last month by the accomplished Paul Muolo at National Mortgage News.

Seems Kondaur buys nonperforming loans, and finds itself needing to layoff workers because there aren’t enough bad loans available to buy.

Come again? Aren’t banks still sitting on mountains of toxic debt? Can’t find enough to buy? Continue reading…

I have long thought that the scuttling of mark-to-market accounting as codified in FASB 157 is one of the most overlooked causes of the sudden, almost overnight improvement in the state of the banking sector that started near the market lows in 2009.

It was also a prime, prime example of crony capitalism. The banks wanted to get rid of mark-to-market, they needed to get rid of it, because if they had to mark all the lousy, bad loans to anything approaching reality, we’d suddenly find ourselves with a lot of suddenly insolvent banks. So the banks leaned on Congress, Congress leaned on the FASB, the FASB quickly caved and today we’ve got a bunch of zombie banks on our hands complaining that they’re burdened by too much government oversight.

But ultimately, there will be reckoning. It may be a sudden panic and collapse, or it may be more subtle, a slowly crumbling edifice that nobody notices is crumbling until one day it’s gone. At some point, though, somebody has to pay the piper. Who do you think that’ll be?

Our elected and appointed officials, in our name, abolished accounting rules that were inconvenient. Turned Fannie and Freddie into massive Hoover vacuums to suck up every bad mortgage in the nation. Debased the dollar. Spent trillions in government money and guarantees to protect a small band of connected players. We haven’t charge a single responsible person with any crime, criminal or civil.

Know the saying about not being able to spot the mark at a card game? You’re the mark, bub.

Barry Ritholtz breaks this thing down. Please go read the entire post. Here’s a snippet:

Many of the bailouts, mortgage mods and behaviors we have today exist to serve a single purpose: To allow the banks to kick the can down the road as far as they possibly can when it comes top their dual portfolio of bad mortgages and bank owned Real Estate (REOs).

Consider how ironic this is: From the GSEs becoming a dumping ground for every crappy mortgage to the failed policy of HAMP/mortgage mods, to the arbitrage between the the Fed’s ZIRP policy and Treasury’s 10 year bonds, nearly every reaction to the financial crisis has been a willful, concerted effort to kick the can down the road.

Rather than go Swedish, and force a shorter painful pre-packaged bankruptcy process, we have opted to take the long slow route.

The problem is with this strategy is we have more cans than road.

(Now, really, honestly, I planned to write this before Barry did a post about my Cramer post; this isn’t some mutual admiration society (although I do know and like him,) and it’s not like Barry needs the traffic boost from us.)

Is there anything these guys don’t profit off of?

From Newswires’ Brett Philbin:

Financial exchanges and investment banks are well positioned to benefit from energy/commodities volatility related to turmoil in the Middle East, Credit Suisse says. While commodities typically account for 8%-13% of revenue at Goldman Sachs (GS) and Morgan Stanley (MS), firm says year-to-date trends support its expectations for a strong sequential quarter rebound in fixed income sales and trading, helping to offset more muted investment banking activity. Says commodities could be a focus of 1Q EPS reports for GS and MS; adds IntercontinentalExchange (ICE) has 70%-75% of its revenue tied to commodities, while for CME Group (CME) it’s 30%-35%.

Amazing, isn’t it? Commodity prices spike, causing an upheaval around the globe, and it’s just one more source of profits for Wall Street. You know what else? When prices drop on the other side, these guys’ll make money off that, too. It takes some outrageous cataclysm to knock these guys off their stride, and when that happens they just call in some favors down in Washington, and down comes the bailouts.

Actually, there is one thing that is like kryptonite to financial markets: a central bank that’s tightening monetary policy. While Ben Bernanke certainly didn’t say he’s going to tighten policy in today’s Congressional testimony, he didn’t say the Fed would be looking to expand its QE program, and that was enough to spook the markets.

The Dow’s been off as much as 97 points (although, of course, somebody’s got to process those trades, right?) Don’t forget that even beyond any direct QE support, the Fed still has interest rates at a recklessly accomodative zero. The Greenspan Fed was able to tip the global economy into a near-death spiral with only a 1% rate. The Bernanke Fed may finish the job yet.

From Newswires Tom Fairless in Frankfurt:

Use of the European Central Bank’s emergency marginal lending facility rose further Thursday after hitting its highest level in more than 19 months Wednesday, the ECB said Friday.

This thing set off some bells yesterday when the borrowing spiked up Wednesday night to about 16 billion euros (daily average was around 700 million), highest since mid 2009, but no one could discern any stress in the financial system. Well, maybe they’re not looking hard enough because the borrowing was up big again last night, as Fairless notes.

The first time was generally played down as some aberration, perhaps even a fat finger, and it seems observers are still working that line. Maybe one time,  chalk it up as some kind of mistake. But two days in a row? This just doesn’t smell right, folks.

Story quotes Unicredit economist Marco Valli who says the borrowing may reflect “that a bank or banks are tapping the overnight facility as they wait for next week’s main refinancing operation.” Really? Why hasn’t that happened before, and if it has, why are these amounts so high?

He adds that there is “no perception that some banks are suddenly facing big problems.” Yeah, and there was no perception banks here in the US were facing big problems three years ago, either.

Here’s a classic dog-ate-my-homework attempt at an explanation, from a guy at Commerzbank: “My explanation is that someone forgot to bid at the main weekly refinancing operation,” said economist Michael Schubert.

Forgot to bid? Good one. And now has to borrow at the facility’s “punitive” rate of 1.75%? Imagine the conversation with his boss.

There’s an odor on this thing, and demands better explanation. Hopefully we’ll see one soon.

Addendum: FT’s Alphaville has an item that sheds some light on the situation, but still unclear what’s behind the borrowing. Seems as if it was a mistake, it needs to be repeated until about next Wednesday or so, when all will be revealed.

Here’s a press release from JPMorgan so soaked in sanctimony, we feel damp just reading it. Here’s the headline: JPMorgan Chase Announces New Programs for Military and Veterans.

Bottomline, JPM made some foreclosure “mistakes” with military customers for which it “deeply apologizes” and pledges to make amends. How heroic.

It’s a great thing to be helping veterans and military families. They deserve it all the time, and PR stunts “initiatives” like this shouldn’t happen just because a big bank gets called out for bum foreclosures.

Once again it looks as if the Dow Industrials’ winning streak (now at eight straight sessions) may be in jeopardy, but it would be foolish to underestimate the bulls’ ability to turn things around, especially late in the session.

“These days, opening indications and actual closing prices are two very different animals,” Barry Ritholtz noted earlier at the Big Picture. He has a precise summation of how the bull vs bear battle has gone during the past several months:

In the face of massive liquidity of QE2, there remains a firm bid beneath this market. So far, losses have been modest to minuscule, with selling pressure well contained. M&A, share buybacks, anything but disappointing earnings are an excuse to put on the rally caps. Even dips are an excuse to buy. (We are running 53% cash on specific name selling, not overall market calls).

The bears are bloody but unbowed — they know a correction is imminent. But the bulls have heard this line for nigh on two years, and yet still the market still powers higher. The Dow, S&P and Nasdaq are all at multi-year highs. There is a difference between being early — a matter of days or weeks — and wrong. So far, the bears have been wrong.

Eventually, the grizzlies must be fed. They have their champions, including various Fed Hawks, who are terrified of an inflationary spiral. Lacker, Plosser and Fisher may be mortal enemies of price instability, but they are friends of Yogi and Boo-Boo and Baloo, well known amongst ursines for their opposition to easy money. And easy money is a bull’s best friend.

Even the most ardent bull knows that this too, will pass. The bears will have their day, before their next bout of hibernation.

The 64 trillion question: When? Continue reading…