FedUpUSA

Archive for July 14th, 2010

Is it possible to write a 2,300 page piece of legislation that accomplishes next to nothing and is pretty much completely and utterly worthless?  The answer is yes.  Barack Obama has been trumpeting the Dodd-Frank financial reform bill as the “biggest rewrite of Wall Street rules since the Great Depression”, but the truth is that after the Wall Street lobbyists got done carving it up, the bill that was left was so watered down and so toothless that it essentially accomplishes nothing except creating even more government bureaucracy and even more mind-numbing paperwork.  The bill is so riddled with loopholes for the big banks that it is basically the legislative equivalent of Swiss cheese.  The Democrats in the Senate were ecstatic when they announced that they had secured the 60 votes needed to pass this legislation, but when they are asked about what the financial reform bill will do, most of them are left stammering for some kind of cohesive response.  The sad truth is that most of them probably don’t understand the bill and none of them will probably ever read the entire thing.

So will the financial reform bill do any good at all?

Well, yes.

A very, very small amount.

Essentially, it is kind of like going over to the Pacific Ocean and scooping out a couple of cups of water.

That is about how much good this bill is going to do.

But U.S. Senate Majority Leader Harry Reid is making this sound like this is some kind of history-changing legislation….

“We’re cleaning up Wall Street.”

Oh really?

Charles Geisst, professor of finance at Manhattan College recently had the following to say about this absolutely toothless bill….

Like health-care reform, this bill is being drawn up to grab headlines but its details betray it as nothing more than a slap on the wrist for Wall Street. It is true that Wall Street can commit grand theft and apparently get off with nothing more than community service.

The truth is that most of us never expected the U.S. government to truly take on Wall Street.  The relationship between the two is just way too cozy for that to happen.

So does the financial reform bill actually accomplish anything?

Yes.

Let’s take a look at the “sweeping changes” contained in the bill….

*Federal regulators will receive more authority to monitor everything from mortgages to complex derivatives.  (Oh goody!  Just what we needed – more federal regulation!  As if federal agencies have ever been very good at regulating the financial industry…) 

*Financial firms will be required to reduce the debt they take on and to hold more capital in reserve.  (This will make financial firms marginally more stable, but the truth is that the big banks are so good at accounting tricks that this will not really make much of a difference.  When a big firm is going to fail a few extra bucks in reserve is NOT going to make a difference.) 

*The U.S. government will be given extensive power to seize collapsing financial firms.  Federal regulators would keep collapsing firms operating long enough to prevent a massive panic and would slowly sell off its pieces.  (This does not eliminate “too big to fail” – instead it enshrines “too big to fail” into law permanently.  The bill institutes ”orderly procedures” for exactly how to proceed when the U.S. government steps in and takes over failing financial firms.  Just what we need – more socialism!)

*The financial reform bill creates a new Bureau of Consumer Financial Protection at the Federal Reserve that is supposed to help prevent abusive lending by mortgage and credit card companies.  (Wait a second – this bill gives the Federal Reserve more power?  Who came up with that grand idea?  Yeah, let’s give the fox more power to guard the hen house.  The truth is that the Federal Reserve is one of the core problems with our economic system as we have written about previously.)  

*Some rather toothless regulations will be placed on the derivatives markets, hedge funds and credit rating agencies.  (A big emphasis on “toothless”.)

So what does this legislation not do?

-It does not eliminate “too big to fail”.  The truth is that the biggest banks and financial institutions have been systematically gobbling up a bigger and bigger share of the market and this legislation does nothing to change that.  Anthony Sanders, a professor of finance in the School of Management at George Mason University, says that this bill essentially does nothing about the “too big to fail” problem….

“As far as I can see the ‘too big to fail’ problem is still in place.”

In fact, this legislation may cause even more consolidation in the financial industry, because small firms are going to have an especially difficult time complying with all of the new rules, regulations and paperwork created by this bill.

-The financial reform bill does nothing about the horrific bubble in the derivatives market.  Originally it was believed that some tough regulations were going to be imposed on derivatives trading, but the Wall Street lobbyists were all over those provisions like rabid dogs. 

So now there is loophole after loophole in the bill and the “derivatives problem” still ominously hangs over Wall Street.  Not that there is any way to fix it. 

Nobody actually knows the true total value of all the derivatives in the world, but estimates place it at somewhere between 600 trillion dollars and 1.5 quadrillion dollars.

When the derivatives bubble pops, and it will, there won’t be enough money in the entire world to fix it.

-The financial reform bill does nothing about mortgage giants Fannie Mae and Freddie Mac.  They remain financial black holes that the U.S. government will be forced to pour hundreds of billions (if not trillions) of dollars into.

-A proposal to conduct yearly comprehensive audits of the Federal Reserve was left out of the financial reform bill.  Instead, a very, very, very limited one-time audit of a few of the transactions that the Federal Reserve conducted during the height of the financial crisis was included. 

What we really need is a true audit of the Fed.  The Federal Reserve has never been the subject of a true, comprehensive audit since it was created in 1913.  Considering the fact that the Federal Reserve issues our currency, controls our banking system, sets our interest rates and is basically the core of the U.S. economy, you would think that the American people should have the right to see what is going on over there.

But Ben Bernanke and the rest of the folks over at the Fed fought against the comprehensive audit proposal with everything that they had.  They seemed extremely alarmed that the American people might actually get to take a look inside their books.

The truth is that unless something is done about the Federal Reserve, no true “financial reform” is really going to take place.

But the U.S. Congress could have done at least some good with this bill.

Instead, they have given us a 2,300 page mess that is pretty much completely and utterly worthless.

The Economic Collapse

The Index of pending home sales fell a record 30% in May to a record-low reading of 77.6 — two hugely pessimistic predictors of future prices nationwide. Yet the combination of two record negatives went barely reported when the stats were announced last week.

So here’s the news for you now, a week late, but new to the marketplace of ideas. Pending-home sales have crashed and now stand below the worst numbers we have seen since the housing crash started in 2006. The rubber bands and duct tape are breaking apart in the property market. Presume the fix of a fall is in.

Take a look at the three charts below. Judge for yourself how important the facts are which the National Association of Realtors (NAR) announced last Thursday (July 1). I personally find them startling, alarming, critical to review.

The oversight by major news outlets — snubbing record negatives — is egregious by virtue of its ignorance of the expiration of the free-down-payment program. The pending-home-sales stat gave us our first view of buyer demand for housing without the hugely popular prop from the federal government.

I am not saying here that the news was buried. I am saying that reporters failed to do the most basic leg work. Even those who lucked out and stumbled upon the record stats, they failed to comprehend the importance of the new data. I would have missed it too if I hadn’t charted the numbers myself, but I did, so I didn’t miss it.

***

Speculation has run rampant as commentators have wondered about the direction of prices as government support starts to fall away.

The future direction of real estate prices is a major obsession of almost all economy watchers as the monthly bill for shelter overshadows others, as the value of homes is a predominant factor of family wealth, and because the banking sector has huge investments based upon residential property.

“If you’re looking for a silver lining in housing, you aren’t going to find it here,” Mike Larson of Weiss Research said. “Demand has fallen off a cliff in the wake of the tax credit expiration, with pending sales falling by the biggest margin ever to the lowest level ever.”

Mr. Larson’s comment drew attention to the two new record lows. His name is on every story that mentioned one or both record stats. Had he remained silent, these highly relevant record lows would have gone unreported completely.

Of the 15 major media outlets i reviewed, four actually did learn about both of the record negatives, but they didn’t understand the meaning of it.

The statement by NAR announcing pending-home sales makes no reference to either the record fall or the record new low. If their intention was to hide bad news, they got away with murder. Let’s show you the fools who fell for it.

***

Among the outlets who failed to uncover either of the two record negative stats are Barrons, Dow Jones, The Financial Times, Fox Business, The Los Angeles Times, and Marketwatch.

I reviewed stories on pending-home sales by 15 leading news outlets – in addition to the flunking students mentioned immediately above, I also read Atlaticwire.com, BBC News, Bloomberg, Boston.com, CNBC, Investors’ Business Daily, New York Times, Reuters, US News — and the only difference between the outlets was the extent to which they screwed up this critical epicenter-type data set (Please see the graphic nearby depicting the various degrees of incompetence.).

The future direction of housing prices are arguably the most critical factor in the most critical nation in the most critical financial crisis since the Great Depression. The signs are not hunky-dory in this market. The May pending-sale figures may in retrospect serve as a Rosetta Stone: A perfect guide to the true fortunes of residential real estate. Just in case you have forgotten, we are in one hell of a market, and Mom did not tell us this is what would happen when we grow up.

*** HousingStory.net estimates current inventory for sale of 3.9 million is 1.2 million units higher than it should be, and not too far away from the record high 4.5 million. Inventory stands at 8.3 months of sales, but it should be at 5.8 months.

 Fourteen percent of mortgages are behind on payments — about 7.7 million borrowers or, more starkly, one in seven. A record 4.63 percent of borrowers are in foreclosure. Approximately 13 million homeowners have no equity or negative equity. They would make nothing from the sale of their house if they could sell it. Or they would lose a little or a lot. Thus do we have the phenomena of strategic default — now as common as no-money-down mortgages during the boom.

 ***

 We are in a pause of a tectonic shift of plates. Prices have been flat since August 2009, but are down 30% from their peak. The fall of 30% was almost completely discounted as impossible prior to its occurrence.

 My speculation is that the fate of bubble-mortgage debt remains as our key obstacle blocking recovery (Unbelievers should rent the Godzilla movie “Eating the Lost Decades of Japan” for further enlightenment.). Total mortgage balances remain almost unchanged from the peak of the bubble –$11.68 trillion today versus $11.95 trillion at the peak (see chart below).

The data released last week on pending home sales and the dismal record of reporting on that data proves that breaking news business journalism fails even in surface scratching. The cows just want to feed on the grass in front of them and go on to the next field. 

The smart investor is going to look at these charts on pending-home sales and have a real advantage over the common media consumer. Readers of my work know I have found pessimistic facts easy to find. The pending-sales figures are a dramatic concurrence — a record fall and a record low. 

So I will give you my opinion: All hell has broken loose all over again in real estate. Don’t buy a home. Sell one. 

*** 

*** 

The press release by NAR on pending-home sales. The Fifteen Stories by Major Media Reviewed on Pending Home Sales. 

Thank you for carrying the story to Automatic Earth, Business Insider, Implode, Jesse’s Cafe Americain, MortgageNewsClips.com, Patrick.net. Housing Story

In pictures and words.

The original price action is here (top right corner of your screen); I have pulled the original Ticker and have decided the future Youtube’s will be linked only through here, and that comments on Youtube itself will be disabled.

There are a number of reasons for this, not the least of which are the “it’s all the Joos fault!” garbage I have to clean up on Youtube’s comment area.  It’s sad that people can’t see the forest for the trees and have to look for a boogeyman behind every corner.

A few people also seemed to be unable to recognize the context.  Yes, the original clip appears to show blatantly improper (even unlawful) activity, and as I explain in the video above, Section 9 of the Securities Act of 1934 covers this sort of thing.

But the larger point was missed in the short five minutes (that’s what I get for doing short takes, eh?) which is that it is confidence in the marketplace – that it is not just a bunch of computers fighting with one another, but rather is a valid price-discovery mechanism – that is critical to having a healthy securities market in the first place.

This confidence has been severely damaged to the point that even mainstream commentators like Cramer mention it, along with other well-respected tweeters such as this note sent to me this morning:

@tickerguy #marketticker Give it up Karl – those guys would get away with murder. Laws are not enforced, which is why it’s a free-for-all.

That’s a great sentiment to have about our capital markets, right?  That comment, incidentally, was in reference to this morning’s article about all the “accidental” Repo-105-like transactions that are suddenly being admitted to (as the SEC looks at them), rather than having the SEC call people out.  Funny how it is that those “accidents” never are to the detriment of a firm’s balance sheet posture, right?

The point is the same, however:

Confidence is all the markets have to sell to ordinary businesses – and people.

Without it the markets are departed by the “ordinary Joe”:

“We just didn’t want to put up with it any more,” says Karen Potyk. She and her husband sold the last of their stock holdings on May 20, moving the money to bonds, certificates of deposit and bond-like annuities.

Small investors’ faith in stocks, which surged in the 1990s, has collapsed since the technology-stock debacle and the Enron and WorldCom scandals of 2000-2002. The 2007-2009 financial crisis only made things worse. Now, the pullback among ordinary investors means they are a declining force in a market that is increasingly dominated by professionals.

Professionals?  Well, yeah, I suppose so.  We call a guy with a set of lock-picks a professional too, but when he’s tooling around your house at 3:00 AM his title isn’t usually “locksmith.”

These professionals wield high-speed computers and have figured out how to, in many cases, circumvent the precise letter of the law and regulations – but not the spirit.  They operate in the shadow of what’s permitted (and, I believe, well beyond it much of the time) even though the clear intent of regulations such as “Reg-FD” is to guarantee everyone an equal and fair bite at the apple.

Investors talk of a growing disillusionment with big institutions, including corporations, government, banks and political parties—as well as fears about the nation’s heavy debt. Some people’s confidence in stocks was seriously shaken by the volatility that returned in May. They worry that the May 6 flash crash, when the Dow Jones Industrial Average fell 700 points in eight minutes before rebounding, is a sign that ordinary people are increasingly at the mercy of anonymous companies that trade with powerful computers.

That’s because they are.

If Wall Street wants to stop this, then it needs to actually stop it and quit yapping and making excuses.

Orders, for example, could be forced to be valid for two full seconds.  That is, if you expose an order in the market you have to take a genuine risk of being filled not only by those with other high-speed computers, but also by real people trading with their brain directing their keyboard and/or mouse in real time.  With a common round-trip time of ~100 milliseconds for messages nowdays on The Internet, a two-second exposure would allow human reaction time (~1.5 seconds) plus transport of the instruction to have a fighting chance against the machines.  The “fat-finger” mistake would still be able to be canceled – if it is, indeed, a fat-finger mistake.

We could, for instance, require that if you have an imbalanced pattern of orders then you need to be able to demonstrate that you were truly intending to be willing to take execution of either side.  This might be refuted rather easily if, for example, you have 100 contracts offered on the /ES at 1090, 2,000 bid at 1088, the tiny offer gets hit (and you pull the bid) and then a very short while later you show up with an opposite-side identical play.

And we could impose geometrically more-expensive fees as your percentage of cancel-to-execute rises.  First cancel, cheap.  Second, cheap.  Third with no execute, not so cheap.  Fourth, more expensive.  Tenth?  Damn expensive.  This too stops the game – now cancels aren’t effectively “free” beyond one or two per order that actually matches and executes.

Of course doing these things (among others) would destroy the “near-sure thing” of picking ordinary investor’s pockets via various HFT-linked schemes.  It would mean that you couldn’t safely put 10,000 or 100,000 shares of orders into the system as “line standers” then cancel them as price approached.  You couldn’t stick a 2,000 contract /ES order out there and cancel it a tiny fraction of a second later – if someone wanted to hit you they could do exactly that, dramatically raising the risk involved in playing this sort of game.  If the risk of losing at these games rises to a high enough level, people will stop doing it – simply because it’s too dangerous.

There is nothing wrong with speculation – I do it daily. 

But there is something very wrong with a market that is rigged against the smaller investor by computers that can place 20 orders up and down the bid and offer ladder to “hold their place in line” and then cancel those they no longer want as price moves while you, sitting behind a screen, can’t possibly replicate this sort of strategy - you get to stand at the end of the line of all the other shares at the same price. 

It is a documented fact that the cancel-to-execute ratio has shot the moon over the last few years.  These are not small investors issuing change orders, they are high-speed computer-driven algorithms that are “standing in line” and then quickly withdrawing their orders when they don’t like the conditions, thereby reserving a trade in front of you, an (apparently legal) way to front-run order flow.  It is impossible for you, the small investor or trader, to compete in such a system as you do not have the colocated machine sitting 5′ from a gigabit-level (or better) switch at the exchange itself – your terminal is connected to a brokerage, which must obtain the quotes from the exchange, disseminate them to you, then transmit back to the exchange your price order.  You, as an individual investor, are easily 100 times slower than the “arms race” folks – you can’t win in such a game which is no small part of why some of these firms are able to put up “no lose” trading records.  Their “gains”, if you’re wondering, come from you – a fraction of a penny at a time, millions of times a day.

It’s time to stop it folks.

The Market-TIcker