Targeted Relief: How to Rescue Housing in 2010

In January of this year, I wrote an article stating that if the government was going to be on the hook for a trillion dollars on behalf of the economy, then the biggest bang for the buck would be to self-refinance underwater mortgages.

Moral hazard notwithstanding, if the government offered 30-year fixed mortgages, at 4% and assumable to any homeowner, the follow would occur: a) banks would be paid off at 100 cents on the dollar, b) homeowners would have a cheaper monthly note and more disposable income, c) home prices would stabilize, and d) the difference between the old mortgage and the new one would be applied to the borrower's income taxes over 30 years.

Now that Fannie Mae and Freddie Mac [(FNM), (FRE)] have unlimited funds for the next three years, this targeted relief would do more good to heal the economy (end quantitative easing), to restore accounting rules (market-to-market), and banking practices (no more modifications) to the system.

This would also have a positive effect on the mortgage market and mortgage rates.

 

Case of the Missing Tax Receipts

This will be my last article for 2009. I wish everyone a prosperous and safe New Year. I really am a happy and positive person, unfortunately, writing about the markets and the economy exposes my bear side. Black Swans are for people who choose to keep their eyes shut.

I'm bearish about 2010 because the latest report from the US Census on state and Local Government taxes show the forth consecutive quarter of receipts being down. Transactional taxes are the DNA of economic activity. Bulls argue that unemployment is a lagging indicator. Taxes are a leading indicator.

"2009 Quarter 3

Third quarter 2009 (2009:3) tax revenue for state and

local governments, as compared with third quarter

2008 (2008:3), was down 6.7 percent, marking the

fourth consecutive quarter of negative growth. Tax revenue

for the quarter totaled $266.5 billion compared

with $285.6 billion reported for third quarter 2008.

Of the four largest tax categories only property tax

increased; general sales tax, individual income tax, and

corporate income tax all continued to decline in the

third quarter of 2009."

Here are the total numbers for the US:

Percentage Change from 2008:3 to 2009:3 for Selected State Government Tax Revenues1

State         General sales tax     Individual income tax     Corporate net income tax     Severance tax Documentary and stock transfer tax

United States . . . . . . . . . . –9.2         –11.6                 –23.2                 –63.3             –26.3

When real positive economic data appears, I will be the first to note it. Until then, I will continue to call balls, balls; and strikes, strikes.

Top Eleven Predictions for 2010

I suppose it's fitting and proper for this year to be laid to rest on a Friday. Over the weekend investors can cleanse themselves of the last 12 months and prepare for the final chapter of the first decade of the 21st century with hope of a less discombobulating investment environment. On Monday, we can all pretend, again, that it's alright, nothing's changed.

Unfortunately, I believe the damaged done to the financial system and the balance sheets of individuals and municipalities won't allow much tranquility near term. The year 2009 was a relative experience. Compared to 2008, almost any activity was a net positive which underlines how low expectations were for the preceding 12 months.

Beneath the façade of business as usual or the new normal, that's being and been programmed into the Wall Street meme for 2010, silent cries of anxiety continue to roam the dance floor of profits, knowing a true dance partner will never come to recapture all the wealth squandered in this lost decade of financial tango.

So, without regurgitating the gruesome details of two stock market bubbles, one real estate bubble, one regular recession, one Great Recession, four quarters of negative GDP growth (Depression), a collapse of the banking and credit systems, a quantitative easing monetary policy, zero job growth, and trillions of dollars of new federal debt and guarantees on debt, I give you my top eleven predictions:

1. The bond market will suffer its worst lost since 1994.
   
2. Gold will surpass $1,800.00 per oz.
   
3. The Democratic Party will lose the House and barely retain the Senate.
   
4. The FDIC will face temporarily run out of funds to shut down bad banks.
   
5. At least two states will default on their general obligation bond interest payments, roiling the municipal bond markets.
   
6. Either, Tim Geithner, Lawrence Summers, of Ben Bernanke, will leave the administration before 2011.
   
7. State and Federal taxes will rise in 2010.
   
8. Inflation will rise above 5% at least one quarter in 2010.
   
9. The yearly high for stocks will occur in the first half of the year.
   
10. At least one western democracy will fail and be replaced with another democratically elected government.
    
11. Residential real estate prices will drift lower YOY.
    

How to Rescue Housing in 2010

In January of this year, I wrote an article stating that if the government was going on the hook for a trillion dollars on behalf of the economy, then the biggest bang for the buck would be to self-refinance underwater mortgages.

Moral hazard notwithstanding, if the government offered 30-year fixed mortgages, at 4% and assumable to any homeowner, the follow would occur: a) banks would be paid off at 100 cents on the dollar, b) homeowners would have a cheaper monthly note and more disposable income, c) home prices would stabilize, and d) the difference between the old mortgage and the new one would be applied to the borrower's income taxes over 30 years.

Now that Fannie and Freddie has unlimited funds for the next three years, this targeted relief would do more good to heal the economy (end quantitative easing), to restore accounting rules (market-to-market), and banking practices (no more modifications) to the system.

This would also have a positive effect on the mortgage market and mortgage rates.

Where Is Gold Headed?

Gold continued to fall on Friday as the rising U.S. dollar reduced its hedge appeal. December gold fell to $1,115.30 per ounce, down $10.40 on the session. Prices fell as low as $1,110.80 earlier in the day. The metal lost $46.50 on the week, falling in four of five sessions. Gold is more than $100 off the record $1,218 reached last week. Yesterday, gold was flat.

Nothing has changed.

The strategy to buy and hold gold now is predicated on the following rational:

Gold should be held for at least three to five years.
We are at the beginning of a new cycle for gold accumulation.
Economic indicators still favors commodities and hard assets.
The long-term trend is still up for the price of gold.
The secular bull market in equities that began in 1982 exhausted itself in 2007. The current bull market in gold started in 2002. The economic data pouring out in November and December has a tremendous amount of “white noise” in it. The fourth quarter of 2008 had such a dramatic collapse that year-over-year comparisons and seasonal adjustments distorts the true economic picture. This will continue another two or three months.

April 15th, the deadline to pay taxes, is 120 days away. This will be the day of reckoning for municipal budgets when shortfalls in tax receipts around the country become apparent. The federal government will be shocked in the drop in taxes collected, also.

People invest for one of two reasons: greed or fear. Over the next two years, investors will buy gold primarily out of fear. There are insufficient funds to service the obscene amounts of outstanding debt that was issued this decade. As more and more defaults occur from real estate, corporations, and governments, trust in domestic and international financial systems alike will diminish. The price of gold will rise.

Historically, it is documented that after periods of hyper-credit, the swift and troublesome reversal of credit causes an economic depression. Unemployment swells, lifestyles and life choices are interrupted, altered, or sometimes ruined. Public anger begins to rise; politics becomes more bitter and partisan, and true solutions are prevented from reaching the surface and being enacted.

When economic systems are broken, to protect their jobs, politicians rely too heavily on monetary and fiscal policies, which have limited impact on the aftermath of busted bubbles. Political discontent ensues, the propensity for violence by all sides’ increases, and a pattern for chaos emerges. This current edition of growing anarchy isn’t my paranoia; I’m borrowing it from several senior Goldman Sachs bankers who applied for gun permits (soon after receiving first dibs on the H1N1 vaccine before city hospitals) in November before their lavish Christmas bonuses were paid. Their CEO, Lloyd Blankfein, also upgraded the security system on his two New York homes.

These types of events occur pushing up the price of gold absent real inflation.

Then inflation begins.

We are leaving the first decade of the 21st century. The second decade will be quite different from the previous one. Ten years ago, the federal government was running huge budget surpluses and paying down the debt. Then Federal Reserve Board Chairman, Alan Greenspan, speculated aloud about the distant problem of the debt market running out of treasury obligations if the US borrowing needs continued to fall. Congress became concerned and decided to study the problem. So, the future can be changed.

As the price of gold continues to rise, fear is replaced by greed as the primary reason to hold gold bullion. This is a recurring theme throughout history which is never discussed in the mainstream media. I don’t work in the mainstream media; I provide economic commentary to preserve wealth and to manage risk for clients. What investment strategies did work this decade is ill-equipped for tomorrow.

Make no mistake about it: near term, wealth is under assault and risk is growing- from all sides.

Buy Gold at or Below Net Asset Value with This Closed-End Fund

It appears that the correction in gold will be extended a second day today. If this correction continues, I have found a closed-end gold bullion-backed ETF, with a visible net asset value, that you can purchase at, perhaps, a discount in the near future. The Central Gold Trust , which trades on the NYSE Euronext, closed Friday at a 5.7% premium to NAV.

The following description is from Quantumonline.com:

“Central Gold-Trust, launched in Canada in April, 2003, is a passive, single purpose, self-governing closed-end trust, 98% invested in long-term holdings of gold bullion, substantially in physical international bars, and does not actively speculate with regard to short-term changes in gold prices.

Central Gold-Trust’s gold bullion is held unencumbered in allocated, segregated and insured safekeeping in Canada, in the treasury vaults of the Canadian Imperial Bank of Commerce. The gold bullion is physically audited by Ernst & Young in the presence of Gold-Trust Officers and Trustees as well as bank officials.

Central Gold-Trust Units now trade on both the AMEX with symbol GTU and the Toronto Stock Exchange (TSX) with symbols GTU.UN in Canadian dollars and GTU.U in United States dollars.”

The closing market price on Friday was $47.12 while the NAV was $44.58. That is a $2.54 premium to NAV. The trading range on Friday, December 4th was $48.74 to $46.47. During extreme moves closed-end funds can and do trade at discounts to NAV.

If the premium evaporates during this correction on any given trading day, buying gold bullion at a discount or even at NAV is considered a decent entry price for intermediate and long term investors.

COBRA's the Grinch that Will Steal This Christmas

Well, Black Friday’s sales figures are in and they are rather dark. Although, the usual spin doctors were out in full force implying people in between jobs are out shopping for things they don’t really need, this shorten holiday shopping season will most certainly be a dud.

According to the NY Times:

Some 195 million consumers visited stores and Web sites over the weekend, up from 172 million last year, according to the National Retail Federation, the trade group that reported sales results on Sunday afternoon. Average spending over the weekend, however, fell to $343.31 a person, from $372.57 a year ago. Total spending was $41.2 billion — about the same as last year.

We all know about unemployment at 10.2% and rising. And, we also are aware that the true unemployment rate (U-6) is 17.5%. Wages were flat again this year. Everyone knows of, or heard about, unused credit card accounts closed and existing lines of credit being reduced by prickly issuers.

The NY Times uncovered the breadth and depth of the Great Recession on Main Street with their food stamp usage in the US, article. Thirty-Six million Americans, or 1 in 8, and nearly 1 in 4 children, use food stamps. Twenty thousand people a day are signing up for assistance.

From the Times:

In sheer numbers, growth has come about equally from places where food stamp use was common and places where it was rare. Since 2007, the 600 counties with the highest percentage of people on the rolls added 1.3 million new recipients. So did the 600 counties where use was lowest.

Furthermore, that early in the year surge of people filing unemployment claims, 700,000 weekly, as companies pared-down expenses, received a 9-month subsidy from the stimulus package to pay 2/3 of their COBRA health insurance premium. Those first beneficiaries are starting to pay this month an extra $500, $1,000, or more for their family’s healthcare until a new job is found or until COBRA runs out. Suppose 200,000 workers from each week in the first quarter are now employed, that leaves (500,000 workers x 12 weeks) 6,000,000 shoppers who will think twice before spending.

Either way, Wal-Mart (WMT) and Amazon (AMZN) both have a brutal competitor in the likes of United Health Group (UNH) with little elasticity in its product.

If unemployed consumers are sitting at home deciding whether to go shopping, as their COBRA healthcare premium rise as much or more as their monthly unemployment benefit, chances are they‘ll likely stay home this holiday season and entertain Mr. Grinch.

10 Reasons to Believe That We're in a Depression

As the economy drifts listlessly going into this holiday season, thoughts of sugar-plumbed call options and zombie companies (Fannie Mae (FNM), Freddie Mac (FRE), and Citibank (C)) are dancing in the heads of day traders, fund managers and CNBC.

Hooray, hooray, everything is OK! Well, not quite. While Wall Street is feasting on the greatest secular bear market bounce in history, Main Street is experiencing persistent and formidable economic famine, the likes of which, have not been seen the Great Depression – which recorded the second greatest secular bear market bounce in history.

10. Look at the macroeconomic data.

Tuesday’s retail sales number, up 1.37 %; excluding autos, were up .2%. The year-over-year number was -1.74%! The world ended September 15, 2008, with the demise of Lehman. Financially, October 2008 was the dark side of the moon, yet, October 2009 still lags? The GPD is in a funk.

9. Look at the market’s technical data

On CNBC’s Fast Money last week, a dazed and beaten Louise Yamada pointed out there are “green shoots” of stock distribution appearing in the market; rising volume on falling days and falling volume on rally days. Additionally, the market’s chart pattern still roughly traces 1932-1941 period. We are near the 1938 bounce during the Great Depression. Money was and can be made in a depression.

8. Look at the market’s fundamentals

On November 6, the Wall Street Journal reported that, with 88% of companies reporting earnings, year-over-year was down 15%. However, earnings estimates by analysts were beaten by 80% of the reporting stocks. Sales are down but layoffs and cost cutting are allowing the market to believe in this Immaculate Conception rally. At some point, currency exchange manipulation by international corporations and lower wages, or fewer workers employed, invariably leads to the destination of painful contraction and negative growth.

7. Consumers

Consumers are toast and retailers are beginning to blink for the holidays. The housing index is rolling over; flat in November at 17, revised downward in October from 18 and September recorded its high of 19 since falling down into single digits. Wednesday morning, housing starts showed a drop of 10.6%, on a seasonally adjusted annual rate, to 529,000 units. In 2006, housing starts were closer to 2,000,000 units. Unemployment is 10.2% ( for U-3; for U-6, the unemployment figure is 17.5%), the housing ATM machine is gone, wages are weak (except on Wall Street) and the market rally has helped institutions more than retail. Credit card lines of credit are truncating, loans are for those who don’t need them and many consumers are too gun-shy to use credit if they could.

6. Municipal Governments

John Maudlin latest piece did a brilliant job dissecting the bleak future of state income shortfalls. A jobless recovery with missing sales taxes will create at minimum 10 more California fiscal basket cases in 2010. The first round of stimulus money actually bailed out states – that’s why new job creation was so muted. Municipal defaults will emerge next year to terrorize investors.

5. Federal Government

Washington doesn’t have the stomach to break up banks that are too big to fail and to seriously reregulate the financial industry. The reverse merger of Washington DC by Wall Street in 2008 makes this so. Much of the financial products that the feds have guaranteed, to the tune of $24 trillion, are so complex that they are only understood by their creators - the borrowers. This ensures that we can sweep our current problems under the rug today to inflict more pain tomorrow. Even if we do not bring back mark-to-market anytime soon, at some point the battered dollar will force interest rates to rise and drive the economy down. Also, certain people in high places need to be replaced. Sadly, they will keep their jobs.

4. The global economy

Countries are diversifying away from the dollar and into gold and other hard assets. So should we (SGOL, SIVR, GDX, GDXJ, IAU, and GLD). They recognize that our fiscal and monetary policies are out of whack and no one in the US, either businessmen or politicians, is putting country before profits or reelection. This is the mindset that formed the greatest generation. South America, circa 1980s, here we come. Also, many countries are recovering faster than the US because their actions in the crisis aimed at repairing their economies, not individual companies.

3. Baby Boomers and retirement

Baby boomers who’ve lost jobs in this period realize their chances of finding one last job before retirement, at their last income level, are extremely low. The “severance package” class of unemployed, and the employed but leery worker, will not return to their previous spending habits. Years ago, they were told to save long-term in the stock market through index funds and to dollar-cost average, to buy more real estate than you could afford because both stocks and real estate rise over time, to fund their retirement accounts and buy company stock, to trust municipal bonds, and they would be alright. Unfortunately, as they near retirement, too few baby boomers are alright.

2. Income and wages

Either global competition, or inevitable draconian changes in fiscal policy to address our growing federal debt, or both, will reduce US wages for many years to come. To increase productivity, wages have been flat for the past 10 years. It was masked by the irrational stock and real estate markets. Without America discovering the “next new thing” our previous standard of living will accelerate downward. State and federal governments will desperately tax income sooner rather than later. These factors enhance the chances of the next leg of our depression.

1. The 21st Century

Every champion, eventually, must retire from the ring. The US is no different. And that is the primary reason most professionals have gotten some portion of the last three years wrong. Any data set from the 20th century is obsolete without significant adjustments. Linear extrapolation of historical patterns of growth, revenue, and consumption, without correctly modifying credit, demand and demographics, plus the impact of technology, domestic tariffs and regulations, and Realpolitik, is like placing a compass inside a magnetic field. Good luck.

No one can take away the fact that America owned the 20th century. However, in the 21st century, cheap land, cheap labor and a younger demographic profile, suggests that in 20 years, the reins of power will be in the adolescent hands of a rapidly growing Asia. So, we invest in their currency (CYB, ICN, and BZF), finance their growth (DRF), and sell them the raw materials (DBN) that they will need to build tomorrow.

For now, besides military weaponry, our number one export is entertainment (DIS).