Not Just a Bias

I admit it: I'm human. I often fall victim to the same behavioral foibles others do.

When it comes to the economy, for example, I regularly find myself trying to confirm my view that the so-called recovery is an illusion. That means I end up ignoring or dismissing countless pronouncements from Wall Street executives, economists and strategists, policymakers and politicians, TV talking heads, and many others about America's improving fortunes.

Instead, I slog through hundreds of blogs, portals, and news sites, hoping to stumble upon scraps of information that justify my bearish take on the economy, the financial system, and the markets.

Actually, that's not quite true. I really don't need to spend a lot of time looking for evidence that supports a pessimistic outlook. In fact, it's hard to miss the stream of reports from various sources confirming that things are less than they seem. Most days, all I have to do is pop open my web browser and take a quick look around and, before long, I discover stories and commentaries like these:

Oh, So The "Recovery" Is About Delinquency?" (The Market Ticker)

I've said for a long time that one of the reasons our consumer spending numbers have been "reasonably good" the last six months or so - and have been improving - is that people haven't been paying their mortgages.

Now comes Bank of America about to tell Congress the same thing:

Bank of America's top mortgage executive, testifying today before Congress, will release sobering details of home-loan delinquencies, including that "hundreds of thousands of customers" haven't made a payment in more than a year.

And, to put a number on it...

Almost 500,000 struggling loan customers have not supplied information or taken other basic steps to qualify for mortgage help. About half of them have not made a payment for more than a year, or owe more than 50 percent of the value of their homes.

That's because those 500,000 lied about their income, assets or both when they applied for the loan originally, and that deception would be discovered.

But this also means that some 250,000 of those customers have not made a payment in a year.

If we presume that these people have average mortgage payments of $1,000 a month (and this number is probably low), this amounts to $250 million monthly that is being spent in the economy but would otherwise go to mortgage payments.

Anecdotes bear these sorts of numbers out - so-called "struggling" homeowners who, despite being delinquent on their mortgage and in fact not having paid in over a year, are spending upwards of $1,500 monthly in places like Best Buy, hairdressers and tony clothing stores.

The essential conundrum is this: Eventually, one way or another, these families will have to start making payments toward housing again.  They may make those payments via their mortgage or they may be evicted and become renters but the money currently being blown on frivolities that is "propping up the economy" and leading to "strong consumer sales" is showing up there only because people are literally getting a free ride on their shelter costs.

"‘Wall of Debt’ of $2 Trillion a Struggle to Refinance, S&P Says" (Bloomberg)  

Companies in the U.S. will struggle to refinance a $2 trillion “wall of debt” maturing over the next five years as banks grapple with lending restrictions of their own, according to Standard & Poor’s.

“Most of this debt was issued during the period of 2004 to 2007 when the bank and high-yield bond markets were very robust,” John Bilardello, S&P’s global head of corporate sector ratings, said on a teleconference call from New York. “There’s a serious question over whether the securitization market will come back and whether banks will be able to lend to the extent they did several years ago.”

U.S. banks, still reeling from $1.15 trillion of writedowns and losses, are being forced to shrink their balance sheets and increase the capital they must set aside to offset the risk of losses in an attempt to avoid a repeat of the global financial crisis. The Basel Committee on Banking Supervision proposed changes in December that would require lenders to increase the amount of equity and retained earnings they hold by 2012.

“Although corporate borrowers enter 2010 in a more stable environment, a smooth, swift rebound is unlikely,” Bilardello said. “U.S. borrowers can expect a year of mixed advances and setbacks as continued unemployment offsets some bright spots on the macroeconomic front.”

"The Insiders Are Selling" (MarketWatch)

Commentary: Corporate insiders switch to a bearish tone

Two months ago, when I last devoted a column to the behavior of corporate insiders, the news was positive.

I wish I could be as upbeat today.

My column two months ago came just as data were emerging on how insiders behaved during the sharp correction that began in mid-January. I reported that insiders as a group had, in the wake of that decline, cut back on the pace of their selling and picked up their buying -- which represented a collective bet that the downturn was nothing more severe than a mere correction. ( Read my Feb. 17 column.)

Today, in contrast, with the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 11,088, +69.00, +0.63%) nearly a thousand points higher, the situation is just the reverse: Insiders have picked up the pace of their selling and cut back on their buying.

Corporate insiders, of course, are a firm's officers, directors and largest shareholders. We are able to closely follow insider behavior because the law requires them to more or less immediately report to the SEC whenever they buy or sell their companies' shares.

One company that gathers and analyzes the SEC data is Argus Research, whose findings are published in the Vickers Weekly Insider Report. Each week, Vickers calculates a ratio of the number of shares that insiders have sold over the previous week to the number that they have purchased.

Last week, according to the latest issue of Vickers' service, insiders on balance sold 4.96 shares of their companies' stock for every one that they bought.

That's more than double the ratio for the week in early February when the stock market hit its low for the correction, when it stood at 1.96 to 1. In fact, the recent ratio is quite close to the 5.15-to-1 ratio that prevailed in the week in which the stock market hit its January high -- just before the correction commenced.

To be sure, there is a lot of volatility to the weekly ratios, especially when the overall volume of insider transactions is relatively light -- as indeed they have been lately. This is one of the reasons that Vickers also calculates an eight-week average of their sell-to-buy ratio. It currently stands at 4.18-to-1.

Except for a brief period last October, this eight-week ratio now is higher than it has been since late July 2007. That came just as the Dow was closing above the 14,000 level for the first time and the sub-prime mortgage mess was beginning to unravel.

"Continued Bullish Sentiment: The CBOE Equity Put-Call Ratio" (TraderFeed)

We are seeing unusual levels of bullish sentiment in the CBOE equity put-call ratio, with the lowest level of put buying relative to call purchases since the market rally began. Indeed, the excellent SentimenTrader site reports that we haven't seen such bullish options sentiment since 2000, which marked a very important stock market peak.

Meanwhile, we saw 301 new 52-week highs among NYSE common stocks, as reported by Decision Point, but that is down from levels reached last week. When bullish sentiment cannot translate into incremental market strength, that turns me cautious.

"Sale of ResCap a Flop" (New York Post)

Taxpayer bailout talk

Government-owned GMAC Financial Services is having trouble selling its Residential Capital mortgage business -- and that could mean another taxpayer bailout.

"The original notion that someone would buy this quickly is not happening," a source close to the situation told The Post.

GMAC declined to comment.

Part of the problem is a guarantee ResCap made to Fannie Mae and Freddie Mac, which bought most of the loans the lender originated.

Beginning in 2007, ResCap promised that that it would repurchase loans if there was evidence of borrower fraud or if there was an early payment default.

ResCap since has sold hundreds of billions of loans to Fannie and Freddie. And now, bidders are having a hard time determining whether ResCap's $1 billion in reserves is enough to cover the guarantee or if it will need much more -- as much as $3 billion to $4 billion, the source said.

Suitors would have to put up roughly $2 billion in cash to buy ResCap.

The Post first reported on March 12 that GMAC had hired Goldman and Citigroup to sell ResCap.

GMAC's sale is still in its early days, and GMAC has not yet set a bidding deadline, the source said.

"Without having material evidence, my read is the sale is not going as well as they had hoped, and there is a good chance the government now will sell at any price," said David Lykken, founder of consultant Mortgage Banking Solutions.

"‘I Believe in the Goldilocks Recovery’" (FT Alphaville)

Are fund managers becoming complacent? If the latest BofA Merrill Lynch survey of the profession is anything to go by there is certainly reason to think so.

According to the April report the number of investors taking “above normal risk” More…

Are fund managers becoming complacent? If the latest BofA Merrill Lynch survey of the profession is anything to go by there is certainly reason to think so.

According to the April report the number of investors taking “above normal risk” in their portfolios is now at its highest level since 2006, while the number of respondents predicting above trend growth and below trend inflation has reached its highest reading since February 2008.

In other words equities are in something of a sweet spot — the economy is growing but not at a rate that will force the Fed the hike rates aggressively.

Michael Hartnett, Chief Global Equities strategist at BofA explains.

April’s survey shows a growing number of investors envisaging a Goldilocks scenario of above trend growth and benign inflation. The findings are consistent with the view that the US consumer, far from remaining in intensive care, is on the path back to good health.

But that’s not all. Fund managers are also bullish on corporate profits.

April’s survey shows new-found confidence that companies can generate larger profits and, significantly, can increase margins. A net 71 percent of the panel now believes that corporate earnings will rise 10 percent or more over the next 12 months, up sharply from a net 53 percent in March. A net 42 percent of respondents believe that corporates can grow their operating margins in the next 12 months, up from a net 27 percent in March.

And dividends.

Investors’ expectations of higher payouts appear to be rising. A net 25 percent of the panel say that payout ratios (including dividends and share buybacks) are too low, up from a net 20 percent in March and the highest reading since August 2007. Respondents’ desire to see corporates increase capital spending is at its highest since June 2006, with 43 percent of the panel identifying it as their priority. At the same time their sense of urgency towards balance sheet repair is diminishing. Just 23 percent of the panel view debt reduction as a priority, the lowest since January 2008.

"Give Me Some of That 'Worthless' Ambac" (Jim Cramer's Blog/Real Money)

I hate Ambac Financial (ABK - commentary - Trade Now). I believe the current stub of equity is worthless. The claims are too big and the cash too small. But so what.

Ouch.

That's painful to write. Especially, when you consider the Columnist Conversation tune of Tim Collins, and the excellent work by Andrew Wessel at JP Morgan backing up that analysis.

But it doesn't matter. You could argue that none of these insurers are technically solvent: Radian (RDN - commentary - Trade Now), PMI (PMI - commentary - Trade Now), MGIC Investment (MTG - commentary - Trade Now), MBIA (MBI - commentary - Trade Now). It hasn't meant a thing.

MGIC has rallied 400% during its extended period of "worthlessness." I want some of that worthlessness. Radian's up 600% during its "worthless" period. I would have liked a piece of that worthlessness. How about grabbing a hunk of the 800% rally in the "worthless" PMI? Wouldn't that have been delicious?

Do you hold your nose and buy ABK because of those rallies? I believe, oddly, yes. Now, there is simply no percentage in admitting you would ever recommend a worthless security. But this is a game of performance, not a game of valuation. There are plenty of genuinely worthless stocks that have gone up huge. There are tons of cases where gigantically worthless stocks -- almost every dotcom circa 1999-2000 -- gave you great returns.

The purists out there have spurned these points. I could care less about purity. I could care less that someone might be able to say Cramer likes worthlessness. But the !@#$% animal spirits have it going, and a worthless stock can be worth something if it moves up that much and starts offering equity or bonds against it.

Again, I hate these situations. But they are real. They are happening. They have happened. And this is one of them that I feel is destined to happen again.

Sorry.

Comments

[sharonsj]

You can't put all the blame on the borrowers. I just read that the FBI had been looking into this a few years ago and reported that 80% of the LENDERS were committing fraud. Nobody has gone to jail so far.

[steve from virginia]

http://economic-undertow.blogspot.com/2010/04/broken.html

[NowWhat]

I hear they are foreclosing on the wrong houses over night. You could lose your house over night you wouldnt know it until they come and take all your stuff. Scary.

[roger]

It is wise to remember that Capitalism is more than a system
of production and consumption with profits and benefits for
all, it is also a very powerful medium of change.
The Golden Gate bridge directors are considering going all
electronic,eliminating all humant tall collectors, ( but not
the directors who make huge salary's for maybe 6 hrs of work
per month. We are slowly but surely getting closer to the day
dreamed by all CEO's and share holders (speculators ) of
production methods void of any labor cost,that's when the
economy will rebound :) PS: there will not be a return to the
old archaic methods of making a living.

[Jen]

Almost 500,000 struggling loan customers have not supplied information or taken other basic steps to qualify for mortgage help. About half of them have not made a payment for more than a year, OR OWE MORE THAN 50 PERCENT OF THE VALUE OF THEIR HOMES.

"But this also means that some 250,000 of those customers have not made a payment in a year."

Am I reading it wrong? It means some subset of the 250,000 have not made a payment in year.
If all of them owe more than 50% of the value, then 0 have not made a payment in a year and the statement is still true.
I'm kind of boggled as to why they would lump the two groups together.
I'm guessing people that owe more than 50% of the value are prime candidates to join the group that has in fact stopped paying.

So should I read this as 250k deadbeat people are not holding up thier end of the bargain and are screwing banks, or is it that banks made big fat risky loans to 250k people that still owe over half of it.

[Luke]

have you tried to get a modification or principal reduction? It is a nightmare. You talk with minimum wage employees who say nothing, promise everything. I seriously doubt if most are strategically defaulting. It's a far greater percentage who are unemployed or seriously underemployed and have zippo money to pay their mortgage because food and utilities, gasoline are sky high and there's hardly any money left at the end of the month. Because the President's plan is voluntary, it essentially is meaningless--all bark, no bite. The whole thing is one gigantic media happy times malarkey. Game over.