The Wall Street Examiner Get the facts. Thu, 21 Aug 2014 01:39:37 +0000 en-US hourly 1 World Stock Markets Trading Discussion – Titivated transition Thu, 21 Aug 2014 01:39:37 +0000 This is a syndicated repost courtesy of The Daily Stool. To view original, click here.

Early openers mostly on the up: Kiwis +0.4%, Aussies +0.6%, Nikkei +0.9% and Sth Korea -0.8%.

Energy +1.8% the main mover in Aussie sectors down to Consumer Staples -0.7%.






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Cycle Screens Say Higher, But Not Much Thu, 21 Aug 2014 01:25:54 +0000 Cycle screening measures were only slightly stronger on Tuesday. Here’s the rundown on what it means.

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Market Poised for Breakout Wed, 20 Aug 2014 21:00:16 +0000 The market is pushing into resistance with most signs pointing toward a breakout. This report shows the resistance levels and price projections for this move.

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The New Way the Government Is Poisoning the American Dream Wed, 20 Aug 2014 18:20:29 +0000 This is a syndicated repost courtesy of Money Morning. To view original, click here.

It’s yet another prime example of “The strong get more while the weak ones slave.”

Private equity shops and institutional players are buying and packaging (securitizing) nonperforming mortgages from the Federal Housing Administration (FHA) and selling those mortgages to mutual funds and themselves.

On the surface, the U.S. Department of Housing and Urban Development (HUD) wants to minimize the cost to taxpayers. After all, we have to cover the insurance guarantees the FHA made on loans it backed but are now nonperforming or in foreclosure.

That’s really nice of HUD and the FHA, thinking about us taxpayers. Maybe they should have thought about us when they agreed to guarantee payment on loans to less-than-prime borrowers who only have to put down 3% to get their loans.

But, whatever, they’re from the government…

The FHA Is Here to “Help”

FHAIt’s also nice that most of those loans, the FHA-insured ones, get packaged into securities and sold to institutional investors. Because, you know, those institutional investors, the same ones who package FHA loans into securities and sell them to each other and keep piles for themselves, need us to cover their backsides.

It’s just the socialization of losses to protect poor wee banks and financial institutions.

The FHA is looking to cut its losses on mortgages it guarantees, right at the time the housing market is supposedly strengthening. And so it’s gotten HUD’s blessing to sell billions of dollars of loans at $0.70 or $0.60 on the dollar (or less) to some of the same players that bought them in their original packaged form.

Why now? Why is the FHA selling nonperforming mortgages and mortgages on homes in foreclosure to institutional buyers just as the market has bounced and is supposedly strengthening?

Well, here’s why all of this is happening right now.

It doesn’t want to have to bear more losses on those loans. You get it? The market has bottomed, and now the FHA wants out as it’s rebounding.

It doesn’t matter that it’s taking losses by selling loans at $0.60 on the dollar. It matters that there are buyers for them, buyers that are standing up to help taxpayers minimize their losses just as the market has rebounded.

So, these do-gooders are back to help us taxpayers out. Of course, these are the same do-gooders that bought up more than $100 billion of foreclosed homes to securitize and rent out. They bid up home prices so quickly that regular folks can’t buy those homes at favorable prices… but now have to step up and pay the highest prices since the housing market implosion.

And the government is helping them help itself.

If you’re wondering why these institutions would want to package these nonperforming loans they buy from the FHA, and why other investors would want to buy the new securities, you may have missed the fact that the U.S. Federal Reserve has a zero interest rate policy.

Because there’s a massive yield hunt going on around the world, investors will take the risk of getting maybe a 4% return on these new securities, because it’s a better yield than they can get elsewhere.

Are they stupid? No way.

The government is selling them these loans as the housing market has rebounded.

Here’s what you maybe aren’t getting. The government doesn’t want to foreclose on these people. They’re selling the loans to vulture squads that will foreclose in a New York second if they can reap a profit on the sale of the home after the loan principal is paid off.

Not that the folks at the FHA are that cruel, of course. They stipulate that the loan buyers can’t foreclose for six months. After that, it’s not their fault or their problem.

Now that home prices have risen, it might be a good time to kick out delinquent borrowers and sell the homes that back the securities.

Does it matter that banks aren’t making mortgages hand over fist and there may not be a lot of buyers at pumped-up prices? No. The institutions aren’t really going to sell those homes to you and me, you knucklehead.

They’re going to sell those homes to themselves at favorable prices out of foreclosure. And then they’ll rent them to you and me at the high prices we now have to pay.

And what will they do with those rental homes they own? They’ll do exactly what they’re doing now. They’ll package them into securities and sell them to each other.

It’s all about the institutionalization of the American Dream, with taxpayer backing of course.

More from Shah Gilani: The Alibaba IPO date could be as soon as mid-September, but everyone wants to know… should you buy Alibaba stock?Here’s everything you need to know about the investing potential for this Chinese e-commerce megadeal…

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Lee Adler Talks About The Fed’s Rigor Mortis Market With Lindsay Williams Wed, 20 Aug 2014 17:16:32 +0000 Lindsay Williams of South Africa’s Fine Business Radio and CNBC Africa chatted with me today about the Fed, the end of QE, and inflation.

Listen here or the player below.

For more podcasts and videos visit Radio Free Wall Street or on a 6 week delayed basis at the Wall Street Examiner YouTube Channel.

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The Blight Of Debt-Fueled M&A: How Central Banks Destroy Corporate Value Wed, 20 Aug 2014 15:58:18 +0000 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

Monetary central planning gives rise to economic waste, distortion and deformation because it causes capital to be mis-priced. Nowhere is this more evident than in the massive and destructive level of mergers and acquisitions (M&A) that has become a standard component  of bubble finance. Stated simply, ZIRP and financial repression push long-term interest rates to deeply sub-economic levels, causing the value of future cash flows from M&A deals to be grossly and systematically over-estimated.

Accordingly, by nearly all accounts upwards of 75-80% of deals fail—that is, they destroy shareholder value rather than enhance it on a long-term basis. Needless to say, such an outcome would not occur on the free market because companies which engaged in serial, loss-making M&A would be severely punished by stock market investors.

But as Doug French points out in his incisive essay on M&A, the bubble finance policies imposed by central banks short-circuit the natural financial discipline of the free market. In particular, M&A analysis is driven by three factors—–interim free cash flow forecasts, estimates of “terminal value” after the first 5-10 years and the discount rate by which the interim cash flows and terminal values are brought forward to the present. Obviously, a discount rate pegged to a standard spread over the 10-year treasury yield, which currently stands at a level which does not even cover inflation and taxes (2.4%), will generate a drastically bloated NPV (net present value) of the typical deal.

And that is just the beginning of the distortion. As I pointed out in The Great Deformation, the Fed’s financial repression and wealth effects policies (i.e. “puts” under risk asset prices) have transformed Wall Street into a speculative casino driven by fast money traders which troll for “market moving” events than can generate spectacular short-term gains.

And there is no better place to accomplish these “rips” than in the M&A arena where interconnected networks of traders, bankers and hedge fund managers thrive on hunches, educated guesses, reliable sources, sage opinion, reasonable probabilities, “gut feelings” and a generous flow of inside information, legal and not, to stalk takeover targets.

The resulting pressures deform both sides of the market. On the one hand, target company boards have scant ability to resist 25-50% takeover “premiums”. At the same time, the availability of cheap debt financing and inordinately low discount rates invariably encourages acquiring companies to top-up their bids, thereby generating huge windfalls for the hedge funds and takeover arbitrage investors which drive the M&A deal process.

Needless to say, M&A speculators could not afford to play the game if they had to pay an honest economic price for their “downside insurance”. That is, takeover speculators typically protect their “long position” in the target company’s stock by means of a short-position or put on the broad market. In that manner, they insulate themselves from a sudden unexpected drop in the stock market that could nix the deal and cause them to experience heavy losses.

In today’s central bank dominated capital markets this “speculators insurance” is doubly cheap. First, takeover speculators increasingly opt for thin coverage because they are confident that the Fed has a safety net under the market and that other investors will “buy the dips”. And secondly, for the coverage that they do acquire such as puts on the S&P 500, premiums are at rock-bottom levels owing to the fact that the Fed has crushed volatility and driven short-sellers out of the casino.

As a consequence, the power and scale of of takeover speculation in today’s markets vastly exceeds what would occur in a two-way market of honest money and economically priced finance. In their misguided efforts to stimulate investment and demand via ultra-low interest rates, therefore, the central banks have actually accomplished the opposite. Namely, by subsidizing mindless deal-making—so-called Merger Monday—-they cause an after-the-fact scramble for artificial “synergies” to justify financially-driven deals. In the end, jobs are eliminated, stores and plants are closed, assets are written-off and capital is destroyed as a result of financial engineering, not capitalist enterprise.

Moreover, the corrupted capital markets make it exceedingly easy for corporate acquirers to chronically over-pay. This is owing to “merger accounting”, which permits companies to set up vast cookie jars of reserves which can be deployed in the years after a deal to whitewash the results, and the Wall Street fraud known as “ex-items” earnings. The latter permits companies to hide their M&A failures as “non-recurring” write-offs that are not supposed to impact current stock prices and PEs—when in fact they amount to an overt destruction of corporate capital and true shareholder value.

And this dodge is not trivial. On an average basis over the Fed’s financial cycle, ex-items earnings overstate true profits by upwards of 30%, and a very significant share of these “one-time” write-offs are attributable to failed M&A deals.

Finally, the Fed’s serial bubbles add a pro-cyclical element to the M&A game. As shown below, US M&A volume quadrupled  from $400 billion in 2002 to $1.6 trillion at the 2007 peak. After plunging during the financial crisis and market meltdown, the M&A cycle has now regenerated itself. Owing to the Fed’s massive flood of cheap money, M&A volume this year will regain its 2007 peak.

There can be little doubt as to the eventual outcome. Once the current bubble splatters and the stock market undergoes a deep correction, the corporate confessional stage of the cycle will re-emerge. Deal volume will temporarily contract, as in 2009-2010, and massive restructuring programs will be announced to clean-up the mistakes of the current cycle. Among the write-off will be new rounds of lay-offs and job cuts—the systematic consequence of central bank policies which make capital too cheap and labor too dear.

Read the rest of this post at David Stockman’s Contra Corner » Stockman’s CornerView original post.

]]> 0 Wall Street Journal Posts Opening For Fed Reporter Wed, 20 Aug 2014 15:57:41 +0000 Allow a moment for both Tweets to load.

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Meet Your Investment Manager Wed, 20 Aug 2014 13:43:00 +0000 This is a syndicated repost courtesy of Au Contrarian. To view original, click here.

There is little else left in the asset-pricing world than central bankers. The redoubtable Ben Hunt, chief risk officer at Salient investment managers ($20 billion under management), wrote on David Stockman’s Contra Corner: “I’ve spent the past few weeks meeting Salient clients and partners across the country…. When I had conversations [with clients and partners] six months ago, I would get a fair amount of resistance to the notion that narratives dominate markets and that we’re in an Emperor’s New Clothes world. Today, everyone believes that market price levels are largely driven by monetary policy and that we are being played by politicians and central bankers using their words for effect rather than direct communication. No one requires convincing that markets are unsupported by real world economic activity. Everyone believes that this will all end badly, and the only real question is when.”

This might be referred to as “End-of the-Cycle Mispricing, but, what a cycle! End-of-the-Cycle Mispricing discussed the derangement of prices, in all assets. Money managers as a whole have not considered protection for their funds when everyone runs for the door at once. The “catastrophic bond” paper linked to the discussion was specific, but, there are plenty of avenues to construct such protection.

What follows is a transcription of just how ignorant, moreover, willingly ignorant, and, it may be, enthusiastically ignorant, was the Bernanke Fed when it decided that holding interest rates at zero percent would be its policy. Before plunging through the looking glass, here is the conclusion: If ever there was a time to protect one’s assets from further FOMC derangement, this is it. If you do not (and cannot) design a Personal Protection Plan, buy cash, gold nuggets, and silver eagles.

Reading the transcript from the December 15-16, 2008, FOMC meeting, it is clear the Federal Open Market Committee was embarking on its zero-interest rate policy (ZIRP – which is still all we’ve got) as an experiment.

By way of background, the FOMC had cut the Fed funds rate cut from 5.25% on June 29, 2006 to 1.00% on October 29, 2014. Most of reduction had been over the previous few months as the pillars fell: Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, and Morgan Stanley. The last two converted to commercial banks and received government protection as well as deposit-taking authorization.

The December meeting addressed whether the funds rate should be cut to zero (ZIRP), or, to some halfway house. As has been true throughout Bernanke’s chairmanship, the 284-page debate could only have been held in the Eccles Building. The funds rate had been trading below the declared rate for a couple of months. One can only imagine the ecstasy at the Fed on December 12, 2008, when the funds rate traded at 0.00%: the “zero-bound.” This had been Professor Bernanke’s ad pitch since the early 1990s.

Two members of the Committee stand out as particularly itchy to get on with it, Chairman Bernanke and (then) San Francisco Federal Reserve President Janet Yellen. Bernanke broke with precedent by speaking first. Normally, the Chairman opens with a few remarks but waits until all FOMC members (plus non-voting regional presidents) have voiced their opinions before holding forth.

In synopsis, there was no debate, not because fed funds were trading at zero already. The FOMC was discussing Fed policy. In Bernanke’s words: “[W]e are at a historic juncture…. [o]f necessity, moving towards new approaches…. [T]his is a work in progress.” One might wonder if the Fed chairman had created the “necessity” so that he could breathlessly declare this “historic juncture,” and he could experiment with his textbook diagrams: His “work in progress.”

Through his great experiment, Bernanke seems not to have blanched at heaving new innovations from the Eccles Building without knowing what might follow. At the October 28-29, FOMC meeting, about three weeks after the Fed first paid banks interest on their reserves, Federal Reserve Governor Elizabeth Duke reported: “I asked [the banks] specifically this question about interest rates on reserves, and every single one of them said: ‘We haven’t had time to even focus on it. We don’t even know what’s going on with that.’” Bernanke responded: “Learning theory in practice. Thank you very much.”

You may remember the many borrowing windows opened by the Fed in 2008. The transcript shows there was little coherence to these conduits. At the December meeting, Bernanke said: “We have adopted a series of programs, all of which involve some type of lending or asset purchase…. [of] which even I do not know all of the acronyms anymore.” Anymore? A viewer of Bernanke during Senate testimony would question whether he knew what they did to begin with.

St. Louis Federal Reserve President James Bullard lamented later in the same meeting: “I would like to see us work harder, maybe much harder, on the metrics for success of these facilities [the various borrowing windows - FJS] and perhaps rework or discontinue facilities that may not be meeting expectations…. Frankly, I am not sure in all cases what the purpose of the programs is. We have a lot of them out there. We have ideas. We should quantify that. We should be assessing, and then we should turn around and say, ‘This one is working. This one is not working.’ I would like to see a lot more in that direction. I understand that we haven’t done it so far….” The Bernanke Fed tendency might be summed: “Assess the facilities? Why bother? Open another one.”

Everyone had their say at the December meeting, During the Greenspan and Bernanke pontificates, members who disagreed with the FOMC vote were talking to a wall. In the meeting under discussion, the topic was whether to confiscate the People’s interest rates (and interest earnings) or not.

The chairman opened: “I’d like to ask your indulgence. There’s an awful lot here, and I’d like to go first this time and try to clear out some underbrush and to lay down some issues in the hope that it will perhaps focus our discussion a bit more.” The message is unmistakable: the FOMC would vote to ZIRP the American people.

There were several members who contested ZIRP. The FOMC member chosen for exposition here is St. Louis Federal Reserve President James Bullard. This choice is two-fold. His concerns were worries a college professor might express, one who talked about – in fact, Bernanke hid behind – models, the “literature,” and theory. Bullard has also been selected since he holds the bone fides Bernanke cherishes. Bullard’s papers have been published in the American Economic Review, Journal of Monetary Economics, Macroeconomic Dynamics, and Journal of Money, Credit, and Banking.

The St. Louis Fed president explained his demurral: “I do not find the Reifschneider-Williams paper, which I know carries some weight around here, very compelling, so let me give the brief reasons behind that. For one thing, you are taking a model and you are extrapolating far outside the experience on which the model is based. That might be a first pass, but that is probably not a good way to make policy, and I wouldn’t base policy on something like that.”

What (you may not have the slightest interest in knowing), is the Reifschneider-Williams paper? David Reifschneider and John C. Williams wrote a paper in 2000, “Three Lessons for Monetary Policy in a Low-Inflation Era.” The paper describes “limits to policy accommodation attributable to the lower bound on rates.” The person who described the paper in that phrase will be identified later, though anyone who’s been around the past few years probably has a hunch.

The second of Bullard’s concerns: “There are also important nonlinearities. This whole debate is about nonlinearities as you get to the zero bound, and in my view, they are not taken into account appropriately in this analysis. You have households and businesses that are going to understand very well that there is a zero bound. It has been widely discussed for the past year. They are going to take this into account when they are making their decisions, so you have to incorporate that into the analysis. That is a tall order-there are papers around that try to do that, and many other assumptions have to go into that.”

The fellow who has been widely published on macroeconomic matters went on: “The third thing I think is important is that, in other contexts, gradualism or policy inertia is actually celebrated as an important part of a successful, optimal monetary policy. Mike Woodford, in particular, has papers on optimal monetary policy inertia, and many others have worked on it. In those papers, it is all about making your actions gradual and making sure that they convey some benefit to the equilibrium that you will get.

“All of a sudden, in this particular analysis, when you are facing a zero bound, that [taking a gradual, deliberate approach towards a zero percent interest rate - FJS] goes out the window, and I don’t think that it is taken into account appropriately in the analysis.

“Also, it is thrown out the window exactly at a time when you might think that the inertia and the gradualism are most important, which would be in time of crisis when you want to steer the ship in a steady way.” Yes, you might think.

Bullard had plenty more to say at the December 2008 meeting. Others who zapped ZIRP were Dallas Federal Reserve President Richard Fisher, Philadelphia President Charles Plosser, and Richmond President Jeffrey Lacker. One of Plosser’s many admonitions: “We still do not understand why having interest rates on reserves isn’t working to keep the funds rate at its target, and there may well be unintended consequences of moving our target to zero, beyond those well articulated in the Board’s staff notes.” Plosser’s audience had no interest in whether FOMC steps actually worked or not. Bernanke had already said, regarding Governor Duke’s lack of knowledge by the banks: “Learning theory in practice. Thank you very much.”

I could probably list another hundred – certainly at least fifty – other objections stated at that meeting against establishing a zero-interest rate policy. Today, at least a thousand problems created by ZIRP are throttling us.

There is not the slightest chance Chairman Yellen will lift rates. The market will do that. Yellen, then San Francisco Federal Reserve President, did not acknowledge any reason to deliberate over ZIRP: “I see few advantages to gradualism, and certainly whenever we approach the zero bound, I think the funds rate target should be quickly reduced toward zero. [Outside of the Eccles Building, it was 0.00% - FJS] As to the level of the lower bound, my default position is that we should move the target funds rate all the way to zero because that would provide the most macroeconomic stimulus.”  From current speeches, it is obvious she still believes that final sentence.

The answer to the pop quiz: Who said the Reifschneider-Williams paper describes “limits to policy accommodation attributable to the lower bound on rates?” Nobody. That is footnote number 24 to Ben S. Bernanke’s speech on August 31, 2012, at Jackson Hole, Wyoming, “Monetary Policy since the Onset of the Crisis.” He committed murder in his footnotes to speeches. The claim to which he attached the footnote is as improbable as he is, and Bernanke is abusing the paper (as Bullard warned the FOMC) by extrapolating its conclusions to a situation (ZIRP) which is “far outside the experience on which the model is based” to bilge his way past the crowd at Jackson Hole. That is never hard to do. Some investment manager.

Given the FOMC’s ad lib policymaking, it is difficult to believe they have any idea what to do when – yes, when – the run on the markets start, other than to close markets. This is the time to construct an avenue of personal protection.

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), which was translated and republished in Chinese (2014). He is researching a book about Ben Bernanke. He writes a blog at



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The Housing Bubble’s Silver Lining Wed, 20 Aug 2014 13:38:00 +0000 This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here.

As rents climb, developers large and small take out their calculators and dreams of wealth blossom: but no, this is not bubble.

The disastrous blowback from inflating housing bubbles is painfully obvious: as housing becomes unaffordable, households impoverish themselves to “get in now before it’s too late;” malinvestment (i.e. McMansions in the middle of nowhere) flourishes as housing becomes a speculative financial vehicle rather than shelter; retirement funds are sold designed-to-default mortgage-backed securities, and when the bubble finally pops, those lured into buying at the top are left underwater, owing more on their mortgage than their house is worth.

But there is one silver lining to housing bubbles: some of the money squandered in the speculative frenzy ends up rehabilitating old buildings or erecting new housing in useful locales.

But the euphoria and greed of the bubble mindset do serve one valuable purpose: rundown properties that would not attract any investment in more rational times are viewed as undiscovered gold mines in bubbles.Let’s not overstate this silver lining: a rational, productive set of financial policies would have directed capital into useful construction without the dubious aid of a speculative bubble. Every dollar wasted on a marginal-return housing investment (for example, a shoddy house with Chinese drywall that renders it cheaper to tear the house down than attempt to fix everything that’s wrong) is a dollar that could have gone into rehabbing a well-constructed building from a previous era or building shelter that will last 100 years with little maintenance.
As rents climb, developers large and small take out their calculators and dreams of wealth blossom. This gold-rush mentality quickly spreads to forgotten areas such as small-town Main Streets and abandoned urban zones–for example the Mid-Market area in downtown San Francisco, a seedy stretch of Market Street that is being redeveloped at a furious pace. Decrepit storefronts are being torn down and thousands of new high-rise apartments and condos are being built in their stead.

The tens of thousands of well-paid techies who have flooded into the city in recent years have driven rents off the scale, and so developers of cubbyhole studios are rubbing their hands in anticipation of collecting $3,000 a month for each cubbyhole from Tech Bros earning $10,000 a month.

All bubbles eventually pop–not just in housing, but in tech employment, and every other bubble in which the participants are absolutely confident that the bubble is not a bubble and the good times will roll essentially forever.

Thus we can anticipate thousands of Tech Bros will lose their jobs when the current frenzy runs its course, just as we can anticipate developers with empty cubbyhole flats will be forced to lower the rents. Many will go broke and the buildings will be auctioned off for a fraction of their construction cost, and the new owners will be able to make a go of it at rents that are a fraction of the asking price in the Tech Bro glory days.

But the city and the future residents got new buildings that will provide shelter for decades, and that’s a good thing. As the massive speculative bubbles propping up the U.S. economy all pop, the value of those new and rehabbed buildings will plummet, along with rent and the price of condos. And that will be a good thing, too.

When will this unfold? Nobody knows. Bubbles are not entirely predictable phenomena; we can identify them easily enough–when every participant is sure it can’t be a bubble, that guarantees it is a bubble–but we cannot predict when the fever will break. We can only predict that all speculative bubbles will pop, and that the deflation will be commensurate to the trendline of the bubble’s ascent.

If we’re left with some renovated buildings and new shelter in practical locales, we can count our blessings.


Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)

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Gold Threatens Support But Continues to Hold Wed, 20 Aug 2014 12:32:44 +0000 Most of gold’s technical indicators continue to weaken as support is threatened.

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