The Road To Default

Posted By on May 14, 2010

The Road to Default

Follow the capital flows, people. As money flees from the European bond market, it runs to the safety of US debt, stocks, and gold. The race to the fiat bottom, however, ensures that it’s only a matter of time before the US devalues again and capital begins to flee the safe haven illusion of the US bond market.

Greece needs to borrow from everyone else to cover it budget deficit. Excuse me, but are we not doing the same thing when we go hat in hand and sell our debt to China and Japan? What is happening is that capital is starting to notice we are in the final stages ready for major default?

Source: martinarmstrong.org

What A Travesty….Newest Wall St. Probe Focuses On Muni Bets…..

Posted By on May 14, 2010

These security firms are dirty skunk smelling sewer rats in 30 feet of nuclear waste…..they’re so bad that they glow in the dark.

The latest in a string of Wall Street inquiries is focused on municipal bonds. The SEC has reportedly opened a preliminary investigation into possible conflicts of interest among firms that sold municipal bonds and then set themselves up to profit if the bonds failed. The probe also seeks to determine whether firms used their own money to bet against the bonds and, if so, whether that fact was properly disclosed to investors. Several states are investigating the issue as well, including California, the country’s largest bond issuer. California’s inquiry is focused on Bank of America (BAC), Barclays (BCS), Citigroup (C), Goldman Sachs (GS), JPMorgan (JPM) and Morgan Stanley (MS).

Jim Sinclair Says The Bailout Of U.S. States Is Coming, 33 Are In Trouble.

Posted By on May 14, 2010

Illinois Deep In Debt, Doesn’t Pay Bills

Posted By on May 14, 2010

Illinois deep in debt, doesn’t pay bills
Crisis pushes businesses, organizations to edge of bankruptcy

 
By CHRISTOPHER WILLS

SPRINGFIELD, Ill. – For 35 years, frail senior citizens in southern Illinois could turn to the Shawnee Development Council for help cleaning the house, buying groceries or any of the chores that make the difference between living at home or moving to an institution.

No more. The council shut down the program Thursday because of a budget crisis created by the state of Illinois’ failure to pay its bills.

Paralyzed by the worst deficit in its history, the state has fallen months behind in paying what it owes to businesses and organizations, pushing some of them to the edge of bankruptcy.

Illinois isn’t bothering with the formality of issuing IOUs, as California did last year. It simply doesn’t pay.

Plenty of states face major deficits as the recession continues. They’re cutting services or raising taxes or expanding gambling to close the gap. But Illinois is taking the extra step of ignoring bills.

Oil Slickonomics – Part 3

Posted By on May 13, 2010

May 13, 2010
 
 
“We have breaking news on the oil spill in the Gulf.  
 
Anderson Cooper, 10 PM, May 13, 2010, CNN
 
CNN breaking news tonight reports that the estimate of 5000 barrels a day spilling from the BP well in the Gulf of Mexico may be very low.  A Purdue University professor has used sophisticated scientific analysis to estimate the flow visible in the now-famous video, and has revised the estimate to 70,000 barrels a day, with a margin of error of plus or minus 20 percent.  That is the equivalent of an Exxon Valdez spill every four days.  Another way to put it is that about 20 million gallons a week or some 60 million gallons have polluted the Gulf since this started.
 
The new estimate helps explain the large size of the slick, as estimated by NOAA.  It also leads us to move to our second case among the three scenarios we have discussed in part 1 and part 2 of this series. See www.cumber.com for the other parts of the series.  We were already at “bad.”  Now we may be at “worse” if tonight’s effort by BP is unsuccessful.  We should know within 48 hours.   
 
According to Anderson Cooper, other experts who have responded to the new estimate have now called on the federal government to intervene massively and to stop leaving this issue to the oil company.  They allege BP is purposefully covering up or excluding information and keeping professionals from participating in a coordinated national effort to deal with this catastrophe. 
 
We have no way to know what is going on inside BP.  We do know that the reports continue to be alarming. 
 
Tonight there is another attempt by BP to use another method to stop the flow.  BP says that we shouldn’t deal with measuring and that we should focus on stopping the spewing of oil.  They are partially correct. 
 
Of course the stoppage must come first.  But measuring is a way to determine the responses needed to minimize the damage and clean up the mess.  And this is a very big mess.  BP’s liabilities are growing exponentially, as are those of its suppliers and partners who are involved.
 
In addition there is now risk to shipping lanes, because ships and barges cannot safely navigate through oil spills and slicks.  The fire hazard has also greatly intensified.  There are insurance requirements to prevent the transiting of ships.  In sum, it is not wise to sail through a dangerous stretch of oil-contaminated ocean.
 
We have seen some firms make investment recommendations favorable to BP and the others involved.  They claim the existing loss of market cap makes them cheap.  We think that an unknown and growing liability is enough to dissuade us from attempting to bottom fish.  You could catch a falling knife.  We are not positioned in the ETFs that have heavy weights of these companies.  
 
The other issue has to do with the 30,000 existing drilling rigs in the Gulf.  They too must be cognizant of the risk of operating with an oil slick underneath them that is spread widely on the surface.  Fire hazard again emerges as one of the considerations.  We are told by petroleum engineers that these rigs may have to be evacuated if the slick reaches the sort of proportions to be dangerous to them.  This is true for both drilling rigs and production platforms. 
 
This situation in the Gulf has gone from bad to worse.  It still may be contained.  BP’s efforts to capture the gushing oil with the funnel-type device they are attempting to use tonight may still work.  We certainly hope so.
 
Meanwhile the combined federal and oil company effort has now widened to over 500 vessels and 13,000 people.  1.5 million miles of boom and containment-type barriers have been installed, and more are coming.  Coastal cities in Florida are making emergency plans.  We have evidence of oil spill damage in three states: Mississippi, Louisiana, and Alabama.  
 
Like Yogi Berra said: “It ain’t over till it’s over.”   
 
David R. Kotok, Chairman and Chief Investment Officer
 
*********
Copyright 2010, Cumberland Advisors. All rights reserved.

Australian Prime Minister Speaks Out

Posted By on May 13, 2010

Muslims who want to live under Islamic Sharia law were told on Wednesday to get out of Australia , as the government targeted radicals in a bid to head off potential terror attacks.I am tired of this nation worrying about whether we are offending some individual or their culture. Since the terrorist attacks on Bali , we have experienced a surge in patriotism by the majority of Australians. ‘  

‘This culture has been developed over two centuries of struggles, trials and victories by millions of men and women who have sought freedom’ 

‘We speak mainly ENGLISH, not Spanish, Lebanese, Arabic, Chinese, Japanese, Russian, or any other language. Therefore, if you wish to become part of our society . Learn the language!’ 

‘Most Australians believe in God. This is not some Christian, right wing, political push, but a fact, because Christian men and women, on Christian principles, founded this nation, and this is clearly documented. It is certainly appropriate to display it on the walls of our schools. If God offends you, then I suggest you consider another part of the world as your new home, because God is part of our culture.’ 

‘We will accept your beliefs, and will not question why. All we ask is that you accept ours, and live in harmony and peaceful enjoyment with us.’ 

‘This is OUR COUNTRY, OUR LAND, and OUR LIFESTYLE, and we will allow you every opportunity to enjoy all this. But once you are done complaining, whining, and griping about Our Flag, Our Pledge, Our Christian beliefs, or Our Way of Life, I highly encourage you take advantage of one other great Australian freedom, ‘THE RIGHT TO LEAVE’.’

‘If you aren’t happy here then LEAVE. We didn’t force you to come here. You asked to be here. So accept the country YOU accepted.’ 

Are Tax Credits for Homebuyers Still Available? Yes

Posted By on May 12, 2010

May 12th, 2010                     by Tim Manni

Have you heard of any other government programs or tax credits for home buyers?

While the federal homebuyer tax credit for both first-time and repeat buyers have expired, several states are offering their own incentives to promote and maintain homeownership.

 

California Offers $10,000 to Homebuyers

One example is California’s homebuyer tax credit of up to $10,000 for both first-time and repeat buyers. The reaction of homebuyers in California has been astounding. According to the San Jose Mercury News, the money allocated for the credit in 2009 was used up in only four weeks. Based on the current demand in California, experts are predicting the money allocated for 2010 will be used up in only two to three weeks.

Don’t Forget About the NCSHA

The National Council of State Housing Agencies (NCSHA) is a national, nonprofit organization created by the nation’s state Housing Finance Agencies (HFAs) to assist them in increasing housing opportunities for lower income and underserved people through the financing, development and preservation of affordable housing.

Housing Finance Agencies can help you determine whether you qualify for any of a variety of programs, including the Low Income Housing Tax Credit, Mortgage Revenue Bonds (MRBs), and the HOME Investment Partnerships (HOME) Program.

Click here to view each state’s HFAs and their program information.

Help for Homeowners (and Homebuyers)

Do you live in one of the states with the worst housing markets in the country? The federal government is providing extra funding to ten states that have been hit especially hard by the housing downturn. While five states have yet to announce how they plan to allocate the added funds, so far, principal reductions, subsidized monthly payments for unemployed borrowers and down-payment assistance seems to be the recurring strategies for the states that have announced their spending plans.

http://blog.hsh.com/index.php/2010/05/are-tax-credits-for-homebuyers-still-available-yes/

Lets Look At The 1929 Crash…..Heads Up, Just A Reminder Of The Unthinkable!

Posted By on May 11, 2010

1929 Crash

www.ingerletter.com

The Average American Has Very Little In Retirement Savings!

Posted By on May 11, 2010

Source:  U.S. Census

The average person will have a hard time once retired.  These stats are numbing to say the least.

The average retirement accounts for many Americans is near $50,000, but half of Americans have $2,000 or less in their account. Many middle class Americans are simply not prepared for retirement.  Even with Social Security, this will only be a small amount.  So with a large number of baby boomer depending on a smaller income in years to come, what does this do to our consumption based economy?  Also, you have to sell your stocks to get the funds out of them so what is going to happen with millions of baby boomer selling stocks into a market where younger Americans have very little to save, not to mention save for retirement?

http://www.mybudget360.com/

Federal Food-stamps ……Sets New Record At Almost 40 Million People! That’s About One In Every Eight

Posted By on May 11, 2010

(Reuters) – Nearly 40 million Americans received food stamps — the latest in an ever-higher string of record enrollment that dates from December 2008 and the U.S. recession, according to a government update.

Food stamps are the primary federal anti-hunger program, helping poor people buy food. Enrollment is highest during times of economic distress. The jobless rate was 9.9 percent, the government said on Friday.

The Agriculture Department said 39.68 million people, or 1 in 8 Americans, were enrolled for food stamps during February, an increase of 260,000 from January. USDA updated its figures on Wednesday.

“This is the highest share of the U.S. population on SNAP/food stamps,” said the anti-hunger group Food Research and Action Center, using the new name for food stamps, Supplemental Nutrition Assistance Program (SNAP). “Research suggests that one in three eligible people are not receiving … benefits.”

Enrollment has set a record each month since reaching 31.78 million in December 2008. USDA estimates enrollment will average 40.5 million people this fiscal year, which ends Sept 30, at a cost of up to $59 billion. For fiscal 2011, average enrollment is forecast for 43.3 million people.

http://www.reuters.com/article/idUSTRE6465E220100507

Art Cashin From The Floor Of The New York Stock Exchange……..Dissecting The Somewhat (?) Suspect Payroll Data

Posted By on May 11, 2010

When we read this from Art Cashin, it becomes painfully clear why the government can’t be trusted on its statistics which are self serving to say the least!

Dissecting The Somewhat Suspect Payroll Data – As we suggested in yesterday’s Comments, Friday’s non-farm payroll numbers got swallowed up by the on-going worries about Greece.  But, the “jump” of 290,000 new jobs was a big topic on the weekend talk shows.  There was a lot of “we’ve turned the corner” portrayals.

Longtime readers know I’ve thought some of the improvement in the data was “suspect” (to be kind).  For the last eight weeks, Initial Unemployment Claims have averaged 450,000 per week.  So, over the last four weeks, 1.8 million people were laid off.  How does that fit in with the claim that 290,000 new jobs were created?  The obvious answer is that it doesn’t.

So, let’s drill down into the payroll numbers to see what’s going on.  The CES Birth/Death adjustment added 188,000 of those jobs.  Birth/Death does not refer to people but to businesses.  The BLS guesses how many new companies opened versus how many closed their doors.  The BLS then uses that guess to guess again how many jobs those business created or lost.

Another 66,000 of the new jobs came from census hiring.  Those are temporary jobs and those folks will be laid off later in the year.  Speaking of temporary, another 26,000 of the new jobs were non-census temporary.  Let’s recap.  A guess produced 188,000 of the jobs, 66,000 were census and 26,000 were temporary.  Thus, it seems 280,000 of the 290,000 “new jobs” were either temporary or the result of guesswork.  Some turn.  Some corner.

Bank Owned Homes (REO) Set New All Time Record

Posted By on May 10, 2010

REO Homes

www.ingerletter.com

Volcano Air Travel Disrupted Over Europe Again

Posted By on May 10, 2010

Gordon_Gekko    05/10/2010
 
 

Volcano

Satellite photo of Iceland’s Eyjafjallajökull volcano May 7th, 2010 (via NASA Earth Observatory) 

I know right now everyone is focused on the drama playing out in Europe over Greece et. al., but there is another little sideshow being produced over there by Mother Nature which has the potential to take centerestage and prove to be equally, if not more, devastating.

It is being reported that the Icelandic volcano Eyjafjallajokull is again causing flight disruptions across Europe, although not to the extent of the previous disruption in April, which was one of the largest in Europe post WWII and caused Eurocontrol, the agency in charge of European air traffic, to shutdown airports across Europe for six days. It grounded more than 100,000 flights and cost the airlines approx. $1.7 billion in lost sales. 

The Current Disruption

The bulk of the cloud measures 2100 miles long and 1400 miles wide. The main ash cloud is spread over the North Atlantic with an offshoot spreading from Portugal through Spain, southern France and northern Italy, then up to Germany, the Czech Republic and Austria. A high pressure system in the mid-Atlantic is expected to continue to drive northerly winds into Europe for the next few days thus increasing the chances of further disruption. 

Eurocontrol is reporting today that around 1500 flights were cancelled on Sunday. Flights were affected in Italy, France, Spain, Portugal, Germany, Switzerland, Ireland, Austria and Croatia. Regional airports in Spain France and Italy were closed for much of Sunday. Although no airports are closed today, about 500 fewer than normal flights are expected.

Volcano 2

This little nugget in The Times of UK:

Scientists have produced the first internal map of Eyjafjallajokull’s network of magma chambers, which extend 12 miles below the ground.
The map shows how the volcano’s tubes plunge deep down through the earth’s crust to the start of the mantle, which is made of semi-molten rock. It reveals the huge scale of the eruption and the potential for a far greater one. This is because the magma chamber of Eyjafjallajokull is dwarfed by the much larger one under Katla, a volcano 15 miles to the east. Two of Katla’s eruptions, in 1612 and 1821, are thought to have been triggered by those of its neighbour.
The workings of the volcanoes have been provisionally drawn up by Professor Erik Sturkell, a geologist at the Nordic Volcanological Centre, University of Iceland. Sturkell suggests the Eyjafjallajokull eruption has been building since 1994, when new lava began rising, forming two reservoirs three miles beneath the volcano. They now feed into a much larger magma chamber a mile under the crater.
A surge of earthquakes under Katla mean it has experienced a similar influx of lava, Sturkell said. “This suggests the volcano is close to failure [eruption].”
Of course, it doesn’t help that Iceland sits directly on top of a the Mid-Atlantic ridge – a tectonic plate boundary located along the floor of the Atlantic Ocean separating the Eurasian and North American Continental Plates and a hot spot for volcanic activity.  With around 35 volcanoes surrounding Iceland, the thing is a  powder keg at this point.

http://www.zerohedge.com/article/air-travel-disrupted-over-europe-again-major-global-disaster-making-%E2%80%93-part-i

 

 

The Iceland Met Office has said that there are no indications that the eruption is about to end.

Is the Federal Reserve Behind The European Bailout?

Posted By on May 10, 2010

By Larry Doyle|May 10, 2010, 12:57 PM|Author’s Website  

Is the American taxpayer ultimately bailing out the European Union? Far fetched? Don’t be so sure.

While the focus of the European bailout is on the European Central Bank, the European Union, and the IMF, little attention is being given to swap lines which were reopened between the Federal Reserve and the European Central Bank.

The ECB has steadfastly fought the idea of breeching the principles which formed the European common currency, the Euro, in order to fashion a bailout for the EU. Did the ECB crater to political pressure by the EU? Or did the risks of the bailout shift from the ECB to another large central bank? Such as? The Federal Reserve!!

Adding fuel to this fire is the fact that the Fed reopened swap lines with the ECB and other central banks just yesterday. The Wall Street Journal reports, Fed’s Swap Decision Could Ratchet Up Political Pressure,

The U.S. Federal Reserve’s decision to reopen swap lines with the European Central Bank and central banks in Japan, Switzerland, England and Canada puts it in a delicate political position.

The U.S. Congress is in the midst of rewriting a financial regulatory overhaul that could rein in the Fed amid sharp criticism of its actions before and during the financial crisis. The overseas lending program it reopened Sunday in response to pleas from Europe has been among the programs lawmakers have criticized, with some suggesting it is bailing out foreign banks and other saying the Fed is too secretive about details.

Is the American taxpayer ultimately bailing out the EU? While the German populace is livid at the idea of providing bailout funds for the wastefulness and fiscal follies in other EU countries, has the wool just been pulled over the American public’s eyes?

Will the America public ever learn what is going on here?

http://wallstreetpit.com/26998-is-the-federal-reserve-behind-the-european-bailout

Morgan Stanley’s Stephen Roach See’s Increasingly More Frequent And More Dire Crises Coming Up

Posted By on May 10, 2010

Tyler Durden    05/10/2010
 
Morgan Stanley’s Stephen Roach spoke with Bloomberg’s Tom Keene earlier, pointing out the most troubling statistic about recent market activity, which has to do with both the frequency and amplitude of catastrophes: “The crises are coming with greater frequency. Over the last 25 years we have had an average of one crisis every 3 years. The gap this time is 18 months. The scale is bigger. This is a much more serious problem in the eurozone than the Asian financial crisis.” So intercrisis half-life continues to decline as the severity jumps exponentially. In other words, in nine months we will need a combined Fed-ECB-BOE-PBoC-BOJ effort for about $10 trillion just to calm the markets. 4.5 months after that, $100 trillion more… And so forth.

 

Oil Slickonomics Update

Posted By on May 10, 2010

May 10, 2010

In “Oil Slickonomics”, part 1, http://www.cumber.com/commentary.aspx?file=050210.asp , we set forth three scenarios for the BP disaster.  They are “bad,” “worse,” and “ugliest.”  Events are now moving from bad to worse.  
 
BP’s attempt to install a large funnel-type device is running into problems.  They have shifted the device several hundred yards away from the well as they try to deal with complex technical issues.  Meanwhile the damaged well continues to spew at least 200,000 gallons of oil a day. 
 
Within days we will have reached the second level of damages in the Gulf of Mexico.  Under our “worse” scenario the total will be in the many tens of billions before this is all over.  There are now early reports of “tar balls” washing up on beaches.  Damage is now witnessed in Alabama, Louisiana, and Mississippi.  NOAA has expanded the no-fishing zone to about “4.5 percent of Gulf of Mexico federal waters.” The original closure boundaries, which took effect Sunday, May 2, encompassed “less than three percent.”
 
Readers please note that this event is still mostly confined to United States “federal waters,” which are under NOAA jurisdiction.  International claims are a more complex financial liability for BP and its partners.
 
So far, BP has offered US-based fishermen a one-month-pay settlement package.  This is being routinely rejected, according to the professional fishermen we have been able to reach.  If this spillage continues, as we project under our second and “worse” scenario, and IF it can be limited to that scenario and doesn’t worsen to “ugliest,” the ultimate loss of income to fisherman will continue over many, many months or even years. 
 
According to NOAA, “There are 3.2 million recreational fishermen in the Gulf of Mexico region who took 24 million fishing trips in 2008. Commercial fishermen in the Gulf harvested more than 1 billion pounds of finfish and shellfish in 2008.”  BP’s offer of one month’s pay is a pittance when compared with the ultimate damages that will be suffered by the fishing industry.
 
Some readers have asked about the federal fund that is designed to pay for cleanups of oil spills.  It is funded by an eight-cent-per-barrel tax and is wholly inadequate for this type of catastrophic event.  In the wake of the BP explosion, three Senators have offered a bill to broaden the scope of the fund and raise the tax. 
 
One May 1, the New York Times reported that, “A count made by the Department of Homeland Security last August found that since 1991, there had been 51 instances in which liability exceeded caps.  In most years it was a handful; in 1999 there were 11, because of a typhoon in American Samoa that wrecked eight fishing vessels that spilled oil.  Numerically, cargo vessels and fishing vessels are the biggest culprits, but oil tankers and barges cause the most dollar damage.  The fund’s single largest expense so far came after a tanker in the Delaware River, the Athos I, spilled tens of thousands of gallons of crude oil in 2004. Money can be sought by the states for expenses like restoration of a damaged wetland or compensation for loss of use of a resource.”
 
We wondered about the details surrounding the federal fund and asked Jim Lucier of Capitol Alpha Partners for his views.  Jim is one very smart analyst, whose firm does superb research on federal political activities and Washington-based intelligence.  He is current with the BP spill issue.  Jim gave us permission to share his piece on this federal fund.  You can find “How the OPA Trust Fund Works” on our website, at http://www.cumber.com/content/Special/HowOPA050410.pdf.
 
We thank Jim for giving us permission to share it.  Please note that Jim is a member of the GIC and will be speaking on the Washington scene at our briefing in Paris on June 18. 
 
David R. Kotok, Chairman and Chief Investment Officer
 
*********
Copyright 2010, Cumberland Advisors. All rights reserved.

Looks Like The Biggest “Save” Ever…..EU Crafts $962 Billion Show Of Force

Posted By on May 9, 2010

This is huge……..European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis. 
 
Inflation dead ahead………Gold and Silver looks to be the ultimate store of wealth.  The world debt will be staggering!
 
 
 By James G. Neuger and Meera Louis
 

May 10 (Bloomberg) — European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.     Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators.

The ECB will also embark on very significant operations,   European Union Economic and Monetary Commissioner Olli Rehn told reporters in Brussels after the 14-hour meeting. The ECB has taken a decision to intervene in the secondary markets of government securities.

Under pressure from the U.S. and Asia to stabilize markets, the European governments gambled that the show of financial force would prevent a sovereign-debt crisis and muffle speculation that the 11-year-old euro might break apart.

Europe’s failure to contain Greece’s fiscal crisis triggered a 4.1 percent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. It prompted President Barack Obama to call German Chancellor Angela Merkel and French President Nicolas Sarkozy yesterday to urge resolute steps in Europe to prevent the crisis from cascading around the world.

Under the loan package, euro-area governments pledged to make 440 billion euros available, with 60 billion euros more from the EU’s budget and as much as 250 billion euros from the International Monetary Fund, said Spanish Economy Minister Elena Salgado.

“We are placing considerable sums in the interests of stability in Europe,  Salgado told reporters after chairing the meeting.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ap50DW8IqhBo&pos=1

The Latest Oil Slick Map

Posted By on May 8, 2010

Oil Slick Map

Let’s Not Forget What Warren Buffett Said…..Financial Derivatives Are Weapons Of Mass Destruction! Next Up, Interest Rate Derivatives

Posted By on May 8, 2010

Over-The-Counter Derivatives

Beware Of The Mortgage Modification Plan….Foregiven Debt Is Taxed As Income In Most Cases

Posted By on May 8, 2010

Though not every homeowner who’s underwater on a mortgage need worry, many are finding that a foreclosure or other form of housing loss can lead to a big tax obligation.

[W.FORECLOSURE]

As the U.S. economy continues struggling with the fallout of the debt-induced housing crisis, millions of homeowners like Ms. McDaniel are discovering that their decision to walk away from a mortgage could result in tax bills running into the thousands or tens of thousands of dollars.

The upshot: anyone weighing whether or not to seek a mortgage modification—or debating whether to abandon a house that is worth less than the mortgage—should consider the tax treatment carefully before making a move. The same holds for any form of consumer debt that a bank ultimately cancels, including credit-card balances or an auto lease.

Federal and state tax laws have long viewed canceled debt as income because consumers who borrow money to buy a house—or who pull money out of their house to buy cars and such—and then don’t pay it back “wind up ahead of where they were,” says an IRS spokesman.

Thus far this year, Michele Knight, a CPA with a high-end clientele in Keystone, Colo., has had five clients owe taxes tied to houses and another five tied to credit cards and auto leases. “They’re calling me in tears and saying, ‘What do you mean I owe taxes?'” she says. “I never would have expected it.”

Dianne Corsbie, a White Plains, N.Y., financial planner, says about 5% of her 200-client practice owes taxes because of a foreclosure, most tied to investment properties. In Napa, Calif., Duane Carey, owner of a Ranch Tax Service, says every fifth person he sees “comes in angry, holding one of these 1099s.”

Overall, the IRS estimates that individual taxpayers will have filed nearly 3.6 million tax returns for 2009 that include income from canceled debt. That’s down a bit from 2008, but up 17% from 2007. The numbers include taxes due on primary homes, vacation and rental property, credit cards, auto leases and other canceled debts. The IRS projects the numbers to rise in coming years.

Part of that rise will likely come as the government expands its mortgage-modification program, including a call in March by the Obama administration for banks to reduce principal as a way to help people remain in their homes. That reduction could lead to tax obligations.

At first the government’s mortgage-modification program focused on primary mortgages, which are tied to the purchase or construction of a primary residence, and which are eligible for exemption under a 2007 Congressional act aimed at helping homeowners avoid the tax implications of a foreclosure.

That act—the 2007 Mortgage Forgiveness Debt Relief Act—exempts taxpayers from as much as $2 million in forgiven debt. But the debt had to be acquired before Jan. 1, 2009—and had to have been used solely to buy, build or remodel/repair a primary residence.

The government’s new, expanded modification programs include short sales, in which a bank agrees to accept as full payment less than the value of the mortgage balance; deed-in-lieu transactions, when a homeowner gives the house to the bank instead of repaying the mortgage; and second mortgages such as home-equity lines of credit.

In many of those instances, say Treasury officials, homeowners used mortgage money to fund everything from tuition and medical bills to vacations and cars and even the down payment on a second home or investment property. That debt, however, isn’t eligible for exemption.

Sometimes the tax bills are so high that people can’t afford to pay. In such a situation, the IRS will allow taxpayers to apply for an installment-payment plan.

Some homeowners can avoid the taxes completely if they can prove insolvency, in which the total value of debt exceeds total assets. But even that could leave some owing taxes.

IRS rules stipulate that a taxpayer can escape taxes up to the extent of insolvency, meaning that if one’s liabilities are $500,000 and assets are $300,000, the $200,000 difference is the extent of the insolvency. But if the person has $250,000 in debt canceled, then $50,000 is taxable income.

http://online.wsj.com/article/SB10001424052748703686304575228783947789118.html?mod=WSJ_hps_MIDDLESecondNews

Why The Center Cannot Hold……John Mauldin’s “Outside The Box”

Posted By on May 7, 2010

Risks associated with the fiscal deficits. And by the way, we should note that 25 of 27 European countries are running deficits in excess of 3% of GDP. Ireland has a deficit of 14.3%. Portugal is at almost 10%. Greece is almost 14%.

Here is a table from Variant Perception in London, from data from The Economist. Notice that France is over 8%. Germany is almost 6%. Wow. We’ll look at the implications of this later.

image001

The first risk…. is of course, higher interest rates brought about by what they term increased risk premia. In essence, investors want to get paid more for their increased risk. Interest on Greek debt for 5-year bonds is now 15%. There is no way for them to grow their way out of the problem if interest rates are at 15%, up almost fourfold in less than a year. Rates are rising for other European peripheral countries as well.

The second risk “… associated with high levels of public debt comes from potentially lower long-term growth. A higher level of public debt implies that a larger share of society’s resources is permanently being spent servicing the debt. This means that a government intent on maintaining a given level of public services and transfers must raise taxes as debt increases. Taxes distort resource allocation, and can lead to lower levels of growth. Given the level of taxes in some countries, one has to wonder if further increases will actually raise revenue.

“The distortionary impact of taxes is normally further compounded by the crowding-out of productive private capital. In a closed economy, a higher level of public debt will eventually absorb a larger share of national wealth, pushing up real interest rates and causing an offsetting fall in the stock of private capital.

This not only lowers the level of output but, since new capital is invariably more productive than old capital, a reduced rate of capital accumulation can also lead to a persistent slowdown in the rate of economic growth. In an open economy, international financial markets can moderate these effects so long as investors remain confident in a country’s ability to repay. But, even when private capital is not crowded out, larger borrowing from abroad means that domestic income is reduced by interest paid to foreigners, increasing the gap between GDP and GNP.”

From….www.FrontLineThoughts.com

The Credit Default Swaps “Roulette Wheel”…..Jim Sinclair Shares His Opinion

Posted By on May 7, 2010

The solution is the problem. “Main Street is in the hands of a Roulette Wheel.” 
 
The name of the “Roulette Wheel” is Credit Default Swaps. It does not matter what the G-7 or the G-20 does. It does not matter what the IMF, ECB and Fed under a beard do. Mrs. Merkel’s foolish political strategy fits right into the equation.
 
CDS are going to take down every major currency, making trillions for the players. It will in time turn on the USA as it is already operating against the financially weaker Illinois and New York debt.
 
The dollar, as it gains ground due to the mirror image of the euro, becomes weaker and weaker due to overvaluation with no fundamental legs. The dollar’s time will come.
 
The OTC derivative credit default swap is about to clean the clock of the world. Der Spiegel is right but the debt is there. It will not go away but only grow bigger. The situation is in the cross hairs of the richest people on the planet hell bent on getting richer. That is the message of the Dow dropping 1000 points regardless of how it happened.
 
Nothing the G-7 or G-20 does will stop the predetermined avalanche in the world of fiat currency. Armstrong is right in that when it comes time for the great coming apart it will be akin to the Big Bang.
 
You are either ready now, or there will be no chance of readiness. Right now ready means gold and gold equivalents. The last currencies to be attacked will be the Cando and the Swiss Franc.
 
It is all over. The fat lady has sung. 
 
Respectfully,
         Jim Sinclair
 

The Mother of All Bubbles

Huge National Debts Could Push Euro Zone into Bankruptcy
Greece is only the beginning. The world’s leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.


By SPIEGEL staff.
 
Savvas Robolis is one of Greece’s most distinguished economics professors. He advises cabinet ministers and union bosses. He is also a successful author and a frequent guest on the country’s highest-rated talk shows. But for several days now, it has been clear to Robolis, 64, the elder statesman of Greece’s left-wing academia, that he no longer has any influence.
 
His opposite number, Poul Thomsen, the Danish chief negotiator for the International Monetary Fund (IMF), is currently something of a chief debt inspector in the virtually bankrupt Mediterranean country. He recently took three-quarters of an hour to meet with Robolis and Giannis Panagopoulos, the president of the powerful trade union confederation GSEE. At 9 a.m. on Tuesday of last week, the men met behind closed doors in a conference room in the basement of the Grande Bretagne, a luxury hotel in Athens. The mood, says Robolis, was “icy.”
 
Robolis told the IMF negotiator that radical wage cuts would be toxic for Greece’s already comatose economy. He said that the Greeks, given their weak competitive position, primarily needed innovation and investment, and that a one-sided fixation on cleaning up the national budget would destroy the last vestiges of economic strength in Greece. The IMF, according to Robolis, could not make the same mistake as it did in Argentina in the early 1990s. “Don’t put Greece on ice!” the professor warned.
 
But the tall Dane was not very impressed. He has negotiated aid packages with Iceland, Ukraine and Romania in the past, and when he and his 20-member delegation landed in Athens on April 18, they had come to impose a rigorous austerity program on the Greeks, not to devise long-term growth programs.
 
Thomsen’s mandate is to save the euro zone. And any Greek resistance is futile.
 
Time to Foot the Bill
 
Robolis versus Thomsen. For the moment, this is the last skirmish between the old ideas and ideals of prosperity paid for on credit and a generous state, against the new realization that the time has come to foot the bill. The only question is: Who’s paying?
 
The euro zone is pinning its hopes on Thomsen and his team. His goal is to achieve what Europe’s politicians are not confident they can do on their own, namely to bring discipline to a country that, through manipulation and financial inefficiency, has plunged the European single currency into its worst-ever crisis.
 
If the emergency surgery isn’t successful, there will be much more at stake than the fate of the euro. Indeed, Europe could begin to erode politically as a result. The historic project of a united continent, promoted by an entire generation of politicians, could suffer irreparable damage, and European integration would suffer a serious setback — perhaps even permanently.
 
And the global financial world would be faced with a new Lehman Brothers, the American investment bank that collapsed in September 2008, taking the global economy to the brink of the abyss. It was only through massive government bailout packages that a collapse of the entire financial system was averted at the time.
 
More…

European Debt Turmoil

Posted By on May 7, 2010

The Globe and Mail in Toronto put together a good visual (below) on how financially exposed the larger and stronger economies of Western Europe are to the region’s teetering nations. Think of all the turmoil caused by Greece – the external debt load of Spain and Ireland together is more than eight times greater.

Europe Turmoil

Chart Of The Four Bad Bears….Updated

Posted By on May 6, 2010

Chart Of The Four Bad Bears….Updated

Four Bad Bears

Oh Oh….Roaches In The Computer Trading Systems…..But I Think We Got’em

Posted By on May 6, 2010

Roaches On The Floor

http://www.greenfaucet.com/

Oops…..Hit The Wrong Button At The Market Trading Desk, Run Baby Run

Posted By on May 6, 2010

Run Baby Run

http://www.greenfaucet.com/

The ABC’s Of Trading…..B For Billion Is Different Than M For Million

Posted By on May 6, 2010

If  True………..

According to ForexLive, a big error at a major trading firm caused today’s -1,000 point market crash, before staging a huge come back.

ForexLive:

“Major US bank had an order to sell $15 mln of S&P e-mini contracts.    Accidentally sold $15 bln…”

Update:

CNBC is now reporting that a trader entered a “b” for billion instead of an “m” for million in a trade possibly involving Procter & Gamble (PG). The Dow plunged nearly 1,000 points before paring those losses.

“Sources tell CNBC the firm in question that handled the erroneous trade is Citigroup (C). The bank said it has no evidence of a bad trade but is investigating the situation.”

http://wallstreetpit.com/articles/market-latest?source=refreshed

Arnott: Odds Of Double-Dip Recession Better Than 50%

Posted By on May 5, 2010

Research Affiliates chairman, along with BlackRock’s Dennis Stattman, paint a gloomy picture of U.S. economy; prepare clients ‘to weather the storm’.   The U.S. economy could well be headed for another downturn  and advisers should be helping clients find opportunities overseas and in alternative-asset classes, two well-known investment managers said Tuesday.  Our basic problem as a nation is that we’re essentially consuming beyond our means, Mr. Stattman said. He added that U.S. investors are living in an artificial world of zero-interest rates.  Both investment managers were stark in their criticism of the world’s largest economy. Both pointed to America’s crippling debt, its dwindling labor force, and the sizable imbalance between consumption and production.
 
 By Hilary Johnson

May 5, 2010 2:45 pm ET

The U.S. economy could well be headed for another downturn  and advisers should be helping clients find opportunities overseas and in alternative-asset classes, two well-known investment managers said Tuesday.

Speaking at the InvestmentNews Retirement Income Summit in Chicago, Robert Arnott, chairman of Research Affiliates, and Dennis Stattman, managing director and senior portfolio manager of the BlackRock Global Allocation Fund, sounded a clear warning about America’s economic prospects.

“There’s a better than 50% chance that we will see a second dip in the economy, Mr. Arnott cautioned. The market is not pricing that in.

Both investment managers were stark in their criticism of the world’s largest economy. Both pointed to America’s crippling debt, its dwindling labor force, and the sizable imbalance between consumption and production.

“Our basic problem as a nation is that we’re essentially consuming beyond our means, Mr. Stattman said. We’re not producing enough with respect to what we spend. Until we get production moving up in line with consumption, we are building a bigger and bigger problem.

He added that U.S. investors are living in an artificial world of zero-interest rates. It’s pulling down the short end and long end of the yield curve, and keeping interest rates lower than they would otherwise be. It’s probably pushing stock prices higher than they otherwise would be. This leaves markets vulnerable to a correction.

“The opportunity to buy commodities and the opportunity to buy emerging-markets stock and bonds could be a generational opportunity, he said.

Both men see an austere future for retirees, especially those who haven’t saved enough, and who limited themselves to more traditional investments.

Mr. Arnott said advisers need to convince clients to ratchet down return expectations to reasonable levels and boost savings and investments.

That way, he said, they can be prepared to weather the storm.

http://www.investmentnews.com/article/20100505/FREE/100509949/-1/INDaily01

Greeks Protest EU Austerity Plan

Posted By on May 5, 2010

So what happens when you take away entitlements that the Greeks have had for years?……….We here in the United States should take notice, because our time is coming and it will forced upon us by those that own our debt, at the moment China sits high on that list.      
 

By Maria Petrakis and Natalie Weeks

May 5 (Bloomberg) — Greek demonstrations against government austerity measures turned deadly when three people were killed after protesters set fire to a bank in central Athens in what Prime Minister George Papandreou called a “murderous act.

“Greeks have a right to demonstrate, not a right to violence, especially violence which leads to murder, Papandreou told parliament today. He said all Greek political parties were united in opposing violence.

The violence came during a general strike called after Papandreou announced a second set of wage cuts for public workers, a freeze on pensions and a second sales-tax increase to secure a bailout from the European Union and the International Monetary Fund. The measures, which aim to tame a budget deficit of almost 14 percent of economic output, were denounced as savage by union leaders.

For the complet story:http://www.bloomberg.com/apps/news?pid=20601087&sid=avSGW7ZQxfNU&pos=8

Freddie Mac Seeking Another $10.6 Billion

Posted By on May 5, 2010

The government owned businesses are the only ones we’ve ever heard of that will never break even or make money, but still manage to stay around, even though they have a monopoly on things.

 

By Lorraine Woellert

May 5 (Bloomberg) — Freddie Mac, the mortgage-finance company in government conservatorship, said it will need $10.6 billion more from the U.S. Treasury after posting its third- straight quarterly loss.

The first-quarter net loss narrowed to $6.7 billion from $9.9 billion a year earlier, the McLean, Virginia-based company said today in a Securities and Exchange Commission filing. Freddie Mac, which buys mortgages and guarantees home-loan securities, has tapped $50.7 billion in Treasury aid since November 2008.

Freddie Mac and larger rival Fannie Mae have been surviving on government aid since regulators seized the companies in September 2008 amid rising delinquencies and foreclosures. In December, the Treasury removed a $200 billion limit on support for each company, extending unlimited backing through 2012.

The Congressional Budget Office in January estimated that direct U.S. aid to the government-sponsored entities could total $389 billion by 2019. Washington-based Fannie Mae said in February it would seek $15.3 billion in additional aid after a 10th-straight quarterly loss, bringing its total Treasury borrowings to $76.2 billion.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aIxv5mE0Xcbo

International Intrigue In The Gulf Of Mexico?

Posted By on May 4, 2010

Interesting musings from the Inger Letter’s Gene Inger……………this is one bizarre report regarding international intrigue and the Gulf of Mexico oil disaster.  The White House ordered a news blackout on the story!
 
There is a circulating story about what really happened in the Gulf of Mexico; which we would give no credence to at all if not for what the US Government did in the wake of the disaster, which was dispatch military SWAT teams to most outlying oil platforms. That has nothing to do with containment or resolution in the case of oil spills or leakage; and everything to do with protection of U.S. assets.
 
I do not want to however encourage acceptance of a Russian story out of the Kremlin this morning despite the specificity (including registration numbers) of a North Korean freighter claimed to have deviated from a filed ‘float plan,’ from Havana to Venezuela; in which the report ‘claims’ they launched a mini-sub about 75 miles from the platform and proceeded to ‘torpedo’ the American oil platform. What would they gain from this Administration, which already turned a blind-eye on North Korea’s flat-out sinking of a South Korean warship in international waters a couple weeks back? Hard to say of course unless they ‘want’ to provoke a new hot war with the United States. So I’d like to not believe the Russian story; but it’s out there, and for that reason we’ll share it as the reports say that ‘if so’, the White House ordered a news blackout on the story (for sure, if that did happen, something like that doesn’t get buried even by Washington).

Oil Disaster

The ‘worst case scenario’ of the uncapped BP oil ‘gusher’ (that’s why it is; flowing) is generally considered to be polluting the ‘Delta’, and damaging the Southeast’s overall economy, due to shipping transit issues. Actually the risk of the oil not being capped, but making its way into the Gulfstream, is an even worse picture for Florida, as (not at all exaggerating this) I heard last night that the State of Florida will issue new formal ‘State of Emergency’ orders later this week if the slick gets caught up by NW winds in the ‘loop current’, which could send it toward the delicate Keys and then up the East Coast of Florida, where nobody has really been considering the implication of that!

If you really want a ‘worst case’ consider ‘what if’ the Russian story isn’t a fabrication. Eventually that comes out. North Korea is an ally of Iran, whether anyone says so or not. Lots of the nuclear knowhow and even the missiles basically came from them its been reported. First a provocation of South Korea (the ship sinking) and now of the US would be not only an Act of War, but might be intended (again letting imagination run wild a bit) to destroy much of America’s ability to expand domestic oil production; so that if in a future conflict Iran were to block the Straits of Hormuz (we wouldn’t let them, presuming the Navy was successful, though they could sink one tanker there and tie it up for awhile), the Teheran fanatics might think that would leave the West in an economic quandary worse than we’ve seen, with $200 oil and another big disaster for which they’d quietly try to engineer without starting a nuclear war. In any event, its far-fetched, but again, the Administration’s initial response was a military one, not just a spill-containment effort. And Iran already made deals with Venezuela to put troops in there; just a reminder. So obviously one can see how this could escalate, and that is even if BP and other companies are successful in capping the well with a bunker sort of cement enclosure, as a temporary fix. And deep-water drillings dealt a setback no matter what it appears, which also keeps the oil price relatively high aside moves like today, that were primarily related to currency shifts.

Furthermore, you don’t have a demand-pull recovery in the world with very high oil and with austerity in Europe by the way; a little detail that few are grasping while they act as if the world is recovering with no interruptions. We think that while you can try to isolate the Goldman story or the ‘sovereign debt’ issue, or ‘terrorism’; what you really have is like a train wreck; or as that is usually described you get a combination of ingredients that contributes to the mix or even a ‘perfect storm’.

It might be timely to remind citizens once more of our soft underbelly or the reported deployment of Iranian shock-troops to Venezuela to wrack-havoc in event hostilities break out. In any event there’s obviously growing awareness (we hope) that Southern Command (now in Miami after almost being decimated by Pres. Carter after he gave-up our fine U.S. facilities in the Panama Canal zone, which China has occupied and nobody ever talks about) was correct in demanding that the Pentagon increase their resources; or do we assume that Americans are aware a new U.S. Navy Caribbean task force has been established, which is the first time such a Fleet’s been formed since WW II; at a time when Nazi submarines harassed shipping and oil facilities on the Gulf Coast. Post-yuppie pundits trying to make light of the risks are skating all on thin ice. Perhaps overreacting isn’t appropriate (and we’re not; just the facts and the realities of risk); but as Intel’s best leader titled his book: ‘only the paranoid survive’. If that applies here, we’ll say it’s combinations of ‘don’t tread on me’, and ‘be prepared’. I wonder if Washington is prepared to cope with reality; financially and geopolitically. I think they are starting to ‘get it’, but ever so slowly (unless they’re actually preparing).

(By the way; one thing that has me irritated is the perpetuating of the absurd ‘order’ of the White House to authorities -as if government has any right to do so- not to use all words that would indicate profiling; to wit: they can’t say Islamic or Moslem terrorist. If you read everything out there today, you see references to ‘extremist groups’, or for the case of WCBS in New York the term ‘radical extremist organizations’ in Pakistan or elsewhere. If this were WW II would they refer to the Nazi’s as militant huns? Or to the Japanese warriors as ‘Shinto throwbacks’? My point is underplaying is dangerous too; and gives citizens the idea we’re not in a ‘war’. Want a world war out of all of this in the future? Just keep minimizing situations by not calling our enemy who they are.)

www.ingerletter.com

The Real Story Is Americans Have The Lowest Level Of Housing Equity In Nearly 60 Years:

Posted By on May 3, 2010

As of today, over 7 million current mortgage holders are 30+ days late or in some stage of foreclosure.  This is at peak levels.  And part of the reason why after 27 months of this recession and trillions in bailouts to Wall Street and banks, not much has changed on the housing front.  Wall Street and the banks are richer, but in terms of improving the housing market nothing has really changed.  And most middle class Americans have their net worth in housing values so is it any wonder why the middle class is questioning this recovery and more importantly, where all those trillions of dollars went?

This is why Americans have the lowest level of housing equity in nearly 60 years:

The $3 Trillion Commercial Real Estate Problem

Posted By on May 3, 2010

Commercial real estate pushes $7.4 billion in FDIC Losses in one day – Hard to hear the CRE collapse with investment banks finally being called out in the court of public opinion. $3 trillion CRE market will keep Fridays busy for the FDIC.

 

Posted: Mon, 03 May 2010

The $3 trillion commercial real estate market is still in a state of economic turmoil.  Many people might have missed the big news on Friday given the massive spotlight on Goldman Sachs.  On Friday, the FDIC closed down 7 banks at a stunning cost of $7.4 billion to the FDIC.  As we have mentioned, the FDIC deposit insurance fund (DIF) is already depleted yet the FDIC has front-loaded premiums to make sure they have a buffer to combat the continuing bank collapses.  The Friday bank failures will cost the FDIC the most since the collapse of IndyMac almost two years ago.  IndyMac collapsed because of toxic residential loans including option ARMs.  Many of the banks collapsing now are deep in the commercial real estate game and that is the next thing to go bust.

Commercial real estate prices have fallen a stunning 42 percent from their peak only a few years ago:

Source:  MIT

Unlike residential real estate that usually has a liquid market, many commercial real estate deals take years to put together.  Many deals are developed in booming times (i.e., 2005) and only come online when things are completely bust (i.e., 2008).  Many of the regional banks were unable to compete with Wall Street and the big GSE lenders for the residential market so they decided to dive in head first into the commercial real estate game.  That proved to be an ill-timed bet.

The FDIC looks after 8,000 institutions with $13 trillion in combined assets:

Source:  FDIC

Take a look at the construction and development line but also the commercial and industrial loan line.  These are only a few places where those CRE deals show up.  Banks are taking major hits on these deals because during the boom times, many businesses were assuming razor thin margins in the best of times and expecting credit to be easily available for a long time.  Both those situations are no longer applicable today in the market.  Credit is tight for commercial loans and the economy isn’t exactly in good shape outside of Wall Street.

And with CRE defaults, we are seeing some spectacular failures.  This last week we heard that none other than the Ritz-Carlton in Tahoe has had a default notice filed against it:

“(WSJ) The developers of the Ritz-Carlton Highlands hotel at Lake Tahoe apparently have leaned a little too far over their skis. Bank of America Corp., the lead lender in the hotel’s $157 million mortgage, has filed a default notice against the property.

Developer and owner East West Partners, based in Avon, Colo.,  is “talking daily” with its lenders to resolve the situation, East West senior partner Blake Riva said. At issue: $10 million of the loan has matured without being paid, and the lenders want East West to pitch in another $8 million of capital.

Otherwise, East West and Ritz-Carlton, a unit of Marriott International Inc., say the hotel is doing well. Like many mountain-resort businesses, the Ritz is temporarily closed and slated to reopen by mid-May, after the “mud season” passes and vacationers return to the area on the California-Nevada border.”

Short of not paying a few million, all is well.  This is the kind of shell game going on in Wall Street that is allowing Bank of America to turn out billions of dollars in quarterly profits even though cash flow is drying up for many of their real estate deals.  There is an enormous problem with CRE loans coming due yet many banks like they did with residential loans, are choosing to ignore missed payments and would rather pretend all is fine.  In their current state of mind, they would rather pretend CRE values are up to $6 trillion nationwide instead of putting their value closer to what it truly is at $3 trillion.  In other words, the entire market is close to being underwater on aggregate.

The giant defaults in CRE bring on two unique problems.  For the CRE market, you have virtually no buyers (at least at current prices).  Next, you have banks that are using mark to market to keep prices elevated even though many of these current CRE note holders are unable to even keep their loans current.  So big banks on Wall Street would rather ignore the issue and keep using taxpayer money to spin out make believe profits.  Yet regional banks don’t have the political pull and access to the U.S. Treasury and Federal Reserve and are finding out that they are largely insolvent.  This is an issue of solvency, not liquidity.

Commercial real estate is also under more short-term refinancing windows (i.e., 5 or 7 years) so many loans are coming due in full.  Unlike residential real estate with longer 30 year horizons, these loans must be paid in full or refinanced every few years.  Now in more normal times, this isn’t such a problem because ideally the bank did its own due diligence before lending out billions and made sure the cash flow of the business could cover the loan.  But in the last decade, the same easy financing that occurred in residential real estate occurred with commercial properties.  So now, you have a major endgame.  These properties do not qualify for financing and borrowers are unable to pay the bill.  So the banks that can pretend continue to pretend and the other more regional banks are taken over by the FDIC.  Clearly this two-tiered system cannot continue indefinitely.

These problems are not confined only to California:

“(Washington) Among the projects on the seriously troubled list is the nearly 400,000-square-foot Metro Center III office building at University Town Center in Hyattsville, according to bond data. The building’s outstanding $20.5 million loan is 11 months delinquent and the building owners have told lenders that they can no longer pay full debt service due to expiring leases and vacancy issues. The property, which counts Kaiser Permanente as a tenant, is about 60 percent occupied.

The Hyatt Regency in Bethesda is a recent newcomer to the delinquency list at 30 days delinquent on its $140 million loan that matures in January 2012. The hotel’s debt service coverage ratio is 1.18.

“I think the area will suffer more on a property-by-property basis,” Mancuso said. “Refinancing, that is the No. 1 challenge.”

And the list goes on.  The CRE shoe has dropped but we have our hands full dealing with crooked investment banks.  When it rains it pours and we’ll have to learn to chew and walk at the same time because many issues are coming together at once after the Wall Street gambling spree.

For more, go to:http://www.mybudget360.com/

Europe In Trouble…..The Greek Fix Contagion

Posted By on May 3, 2010

Eoro Bailout

Hurricane Forecasters See One Of The Worst Seasons In History Looming In 2010 Atlantic Season As Meteorological Conditions Mirror 2005

Posted By on May 3, 2010

 

By Brian K. Sullivan

May 4 (Bloomberg) — The 2010 Atlantic hurricane season may rival some of the worst in history as meteorological conditions mirror 2005, the record-breaking year that spawned New Orleans- wrecking Katrina, forecasters say.

The El Nino warming in the Pacific is fading and rain is keeping dust down in Africa, cutting off two phenomena that help retard Atlantic hurricane formation.

Perhaps most significantly, sea temperatures from the Cape Verde Islands to the Caribbean, where the storms usually develop, are above normal and reaching records in some areas.

“We have only seen that in three previous seasons, 2005, 1958 and 1969, and all three of those years had five major hurricanes,” said Jeff Masters, co-founder of Weather Underground Inc. “I am definitely thinking that this is going to be a severe hurricane season.”

With less than a month to go before the official June 1 start of the season, predictions are for 14 to 18 named storms. In an average year, there are 11 named storms with winds of at least 39 mph (62 kph), six of them reaching the 74-mph threshold for hurricanes and two growing into major storms with winds of 111 mph or more, the National Hurricane Center says.

Last year’s nine named storms were the fewest since 1997. Three became hurricanes and none made landfall in the U.S. As the number of hurricanes rises, so do the chances of one striking the oil-rich Gulf of Mexico or Florida’s agricultural areas.

The Gulf is home to about 27 percent of U.S. oil and 15 percent of U.S. natural gas production, the U.S. Department of Energy says. It also has seven of the 10 busiest U.S. ports, according to the Army Corps of Engineers. Florida is the second- largest producer of oranges after Brazil.

Energy disruptions could occur if 2010 produces a repeat of 2008, when hurricanes Gustav and Ike slammed into the Gulf Coast about a week apart, said Andy Lipow, president of Lipow Oil Associates, a Houston-based consulting company.

“The good news going into hurricane season is that we have significant amounts of inventories of gasoline and distillate fuels,” he said.

In 1998, storms caused 15 million barrels of oil outages and 48 billion cubic feet of natural gas outages in the Gulf, according to AccuWeather Inc. records. In 2005, it was 110 million barrels and 683 bcf, and in 2008, 62 million barrels of oil and 408 bcf of gas were shut in.

The usual misery and destruction from a Gulf hurricane hit may be magnified if the spill of crude from a burned-out rig near Louisiana hasn’t been stopped before storms arrive with winds and waves that could push oil inland.

Joe Bastardi, chief hurricane forecaster at AccuWeather in State College, Pennsylvania, said he doesn’t think the Atlantic can produce 28 storms this year, as it did in 2005, the most active year on record.

“I have 2005 in the mix” of years to compare to 2010, Bastardi said. “But if I had to choose, I would choose 1998 over 2005.”

In 1998, 14 named storms formed, 11 of which turned into hurricanes, according to Weather Underground’s website. There were 15 hurricanes in 2005.

AccuWeather currently calls for 16 to 18 storms to form. Bastardi predicts the current El Nino will change into a La Nina, cooling the Pacific in time to influence the hurricane season, which runs through Nov. 30.

While El Nino fades, hot spots in the Atlantic set a monthly record in March, breaking a mark set in 1969, and tied the high set in June 2005, Masters said. Hurricanes draw on warm water to form and gain strength.

Colorado State University researchers William Gray and Phil Klotzbach chose 1958, 1966, 1969, 1998 and 2005 as the years that shared the most similarities with 2010.

The U.S. coast from North Carolina to Maine has a raised risk of being hit by a hurricane this year, said Todd Crawford, chief meteorologist for Andover, Massachusetts-based WSI Inc.

The Northeast usually has about a 25 percent chance of a hurricane strike, Crawford said. This year, it has a 48 percent chance, close to the 50 percent chance the Gulf of Mexico and Florida have every year, he said.

“We’re not too bullish on the Mid-Atlantic and Northeast,” said Jim Rouiller, a senior energy meteorologist at Planalytics Inc. in Berwyn, Pennsylvania. “We’re liking the track threatening Florida and the eastern Gulf, followed by the entire Gulf and the third emphasis would be on the Carolinas.”

The U.S. Climate Prediction Center will issue its forecast on May 20.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFsWLwU9XyZY

Commercial Paper In Free Fall

Posted By on May 2, 2010

Commercial Paper Outstanding

Here Are Some Comparisons Of The Exxon Valdez Tanker Spill Back In 1989 Vs. The Horizon Deepwater Blowout Currently

Posted By on May 2, 2010

Here are the comparisons of the Exxon Valdez tanker spill vs. the Deepwater Horizon well blowout…………..If the 25,000 barrel-a-day estimate is accurate (it may turn out to be conservative) and the leak lasts for 90 days, that would total 2.25 million barrels, or 94.5 million gallons vs. 11 million gallons for the Exxon Valdez tanker disaster.  The BP PLC oil spill in the U.S. Gulf of Mexico is potentially “catastrophic” and could turn out to be worse than the Exxon Mobil Corp. Valdez spill in Alaska, Interior Secretary Ken Salazar said Sunday. “The worst-case scenario is we could have 100,000 barrels [a day] or more of oil flowing out,” Mr. Salazar said on CNN’s “State of the Union.”  The spill occurred after the Deepwater Horizon drilling rig blew out on April 22, killing 11 people and leaking crude oil into the Gulf of Mexico. The slick is threatening the coastal region’s fishing, tourism and shipping industries.   BP and the U.S. government have over the past week stuck to their raised estimate of 5,000 barrels a day spilling out of the deepwater well. But Homeland Security chief Janet Napolitano on Sunday told ABC News’s “This Week” that the current spill rate could currently be much higher.  “Right now that could be in the tens of thousands of gallons per day, of barrels per day,” she said, without elaborating which figure was more accurate. One barrel of oil is 42 gallons.  The Valdez spill, caused by a wrecked tanker heading for Long Beach,California, spilled 11 million gallons of crude over three months in 1989, devastating part of Alaska economically and environmentally. If the 25,000 barrel-a-day estimate is accurate and the leak lasts for 90 days, that would total 2.25 million barrels, or 94.5 million gallons. The Exxon Valdez spill, caused by a wrecked tanker, spilled 11 million gallons of crude over three months in 1989, devastating part of Alaska economically and environmentally.

Last Weeks Bank Closings

Posted By on May 2, 2010

The information on this week’s bank closings is staggering. The FDIC announced seven closings as of April 30, 2010, at 9:00 pm EST.

The seven banks’ combined assets amount to $25.83 billion. They had combined deposits of $19.61 billion.

The FDIC is projecting losses of $7.33 billion in connection with the seven closings. That is its “optimistic” estimate based on its having entered into loss share agreements on $19.76 billion of the failed banks’ assets.

That $7.33 billion amounts to about 37% of deposits. Based on that estimate, the real market value of the seven banks’ assets was about $12.28 billion and had been over-stated, on average, by 110%.

http://jsmineset.com/

ABC’s Of The Goldman Sachs Synthetic Derivative CDO’s…..

Posted By on May 2, 2010

From John Mauldin’s  Thoughts from the Frontline Weekly Newsletter

Normally, you think of a Collateralized Debt Obligation (CDO) as a pool of mortgages. This pool is broken into anywhere from 6 to 15 tranches. The highest-rated tranches get their money back first, and the rating agencies made them AAA. While the lowest level would be called the equity portion and be first in line to lose, in theory it paid a very high yield. It was usually not rated. But the level just above that is BBB (just barely investment-grade), and that was typically about 4% of the total deal, but paid a much higher yield than the “safe” AAA portion. 

Now, here is where it gets interesting. Investment banks would take the BBB portions of these Residential Mortgage-Backed Securities, which were not as easy to sell, and combine them in a CDO, which the rating agencies then rated using models based on data provided by the investment banks themselves. Since this combining of BBB tranches supposedly created diversification that the rating firms’ models indicated would drastically limit delinquencies and defaults, the AAA tranche of the CDO was jacked up to 75% of the total capital structure, with 12% rated AA. Only 4% was typically considered BBB. So pools of mortgages that probably should have been rated below BBB were miraculously turned into a CDO with 87% of its capital structure rated AAA and AA and only 4% rated BBB, with a chunk as equity. (I wrote about this in January of 2007, based on material from Gary Shilling and others, plus my own research, although I think I wrote about it in an earlier letter as well.)

Who would buy this stuff? Mostly institutions that were reaching for yield in what was, in 2007, a very low-yield world. Yield hogs. And institutions that trusted the rating agencies.

But the CDO in the Goldman case was not this type of CDO. It was hard to find enough BBB pieces to put together a CDO of the type described above, and the demand was high. Remember, everyone knew that housing could only go up. So, what’s an investment bank to do? They create a synthetic CDO. Follow this closely. The various investment banks – it was way more than just Goldman; rumors are it was up to 16 of them – would construct an artificial CDO fund based on the performance of BBB tranches in other deals.

Let me see if I can simplify this. It is as if I had a very negative view about a particular industry for which there was no future or index or liquid security. We could go to an investment bank and ask them to create a “hypothetical” index that would mirror the performance of this industry. I would be willing to short that index. But unless the bank wanted to be long that index, they would have to find a buyer who would take the long position. Presumably the buyer would have a different view than me.

Now, by definition there has to be a short for the long, and vice versa. This is a synthetic index. It exists only as a spreadsheet and performs in conjunction with the components it’s modeled upon.

Numerous hedge funds did not think the rating agencies knew what they were talking about when it came to the mortgage ratings. They also believed we were in a housing bubble. So they went to a number of investment banks and asked them to construct synthetic (derivative) CDOs that they could short. And there were buyers on the other side who wanted the yield, who trusted the agencies, and who believed that housing could only go up.

As to the Goldman deal, the buyers had to know there was someone short on the other side. By definition there was a short. Besides, they had a guarantee from ACA on the AAA portion (which of course went bad, as I wrote about later that year) – there was a guaranteed AAA yield a few points higher than with normal AAA debt. What could be better? Except of course that it was too good to be true. Learn a lesson, gentle reader. Don’t reach for yield.

The hedge funds that shorted the synthetic CDOs took real risk. They had to pay the interest on the underlying tranches to the investors who were long. And if the housing market continued to rise, and the bubble did not burst, they could easily lose a lot, if not all, of their money. No one knows when a bubble will burst. The markets can be irrational longer than you can remain solvent.

Let’s be very clear. This was purely gambling. No money was invested in mortgages or any productive enterprise. This was one group betting against another, and a LOT of these deals were done all over New York and London.

The SEC alleges that there was material lack of disclosure. I must admit that I would want to know that the person who was taking the short position had a hand in the creation of the pool of BBB paper I was buying. And if Fabrice Tourre told someone that Paulson was $200 million long when they were actually net short, that could be problematic. Now, if he just said that Paulson bought the equity portion of the synthetic CDO (there has to be one), that will be a different matter.

The prosecutor for the SEC is by all accounts a very solid and serious person who would not move this case forward if he did not think they would win. This is not one the SEC will want to lose. On the other hand, I hope that Goldman takes this to the Second Circuit Court of Appeals (the final decision maker in a long and arduous process), as there are some very interesting aspects to this case that I would like to see resolved, as an individual in the industry. On someone else’s legal bill.

I wonder why Goldman’s witnesses seemed ill-prepared. Did their lawyers tell them to keep it simple and not get into a spirited defense? My instinct says that a lot more will come out about this case. If it was just this one deal, then Goldman should pay the fine and walk away. Done all the time. I suspect there is more here. Or maybe it was just that they didn’t want to explain why they were doing a synthetic CDO. We’ll see when someone writes the book.

How Should Our Institutions Invest?

However, the larger and far more critical question is, why were institutions buying synthetic CDOs in the first place? This is an investment that had no productive capital at work and no remotely socially redeeming value. It did not go to fund mortgages or buy capital equipment or build malls or office buildings. It seems to me there is a certain social responsibility when you have institutional capital and manage pensions. It’s one thing to buy a gambling stock; it’s quite another to be the gambler, especially if it is not your capital at risk, and by being a yield hog you increase your bonuses. The hedge funds were risking their capital. The institutions were risking other people’s money. And let’s be clear, the counterparties in the Goldman deal, at least, were very knowledgeable players. They knew exactly what they were buying.

More From John Mauldin….Copyright 2010 John Mauldin. All Rights Reserved

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

Oil Slickonomics, A Disaster For The Ages

Posted By on May 2, 2010

Oil Slickonomics
May 2, 2010
“At its current leak rate of 5,000 barrels of oil per day, the spill could surpass the size of the 1969 Santa Barbara spill by next week. If the leak cannot be contained, it could exceed the size of the 1989 Exxon Valdez oil spill off Alaska by mid June.”    Paul Harrison, Environmental Defense Fund
 
Three scenarios lie ahead.  They rank as bad, worse, and ugliest (the latter being catastrophic and unprecedented).  There is no “good” here.
 
The Bad. 
 
Containment chambers are put in place and they catch the outflow from the three ruptures that are currently pouring 200,000 gallons of oil into the Gulf every day.  If this works, it will take until June to complete.  The chambers are 30-foot-high steel configurations that must be placed on the ocean floor at a depth of one mile.  This has never been done before.  If early containment is successful, the damages from this accident will be in the tens of billions.  The cleanup will take years.  The economic impact will be in the five states that have frontal coastline on the Gulf of Mexico: Texas, Louisiana, Mississippi, Alabama, and Florida.
 
The Worse. 
 
The containment attempts fail and oil spews for months, until a new well can successfully be drilled to a depth of 13000 feet below the 5000-foot-deep ocean floor, and then concrete and mud are injected into the existing ruptured well until it is successfully closed and sealed.  Work on this approach is already commencing.  Timeframe for success is at least three months.  Note the new well will have to come within about 20 feet of the existing point where the original well enters the reservoir at a distance of 3.5 miles from the surface drilling rig.  Damages by this time may be measured in the hundreds of billions.  Cleanup will take many, many years.  Tourism, fishing, all related industries may be fundamentally changed for as much as a generation.  Spread to Mexico and other Gulf geography is possible. 
 
The Ugliest. 
 
This spew stoppage takes longer to reach a full closure; the subsequent cleanup may take a decade.  The Gulf becomes a damaged sea for a generation.  The oil slick leaks beyond the western Florida coast, enters the Gulfstream and reaches the eastern coast of the United States and beyond.  Use your imagination for the rest of the damage.  Monetary cost is now measured in the many hundreds of billions of dollars.
 
Some thoughts about markets and impacts. 
 
Usually, the first estimates in any crises are too low.  That is true here.  1000 barrels a day is now 5000, and some estimates of spillage are trending higher.  No one knows exactly.  The containment and boom mechanism is subject to weather cooperation as we can see this weekend.  Soon we are entering the hurricane season.  The thoughts of a storm stirring up the Gulf, hampering any cleanup or remediation drilling effort and creating a huge 10,000 square mile black stew is frightening to every professional in the business.
 
This will be a financial calamity for many firms, not just BP and its partners and service providers.  Their liabilities are immense and must not be underestimated.  The first estimate of $12.5 billion is only a starter.
 
Thousands of small and independent businesses as well as larger public companies in tourism are hurt here.  This is not just about the source of half the nation’s shrimp.  That is already a casualty.  It’s also about the bank loans for the $200,000 shrimp boat and the house the boat owner and/or his employees live in and the fact that this shock piles on a fragile financial system that is trying to recover from a three-year financial crisis.  Case study, my fishing guide in the Everglades splits his time between Florida and Louisiana.  His May bookings in LA have cancelled.  His colleagues lost theirs and their lodge will be empty.  They are busy trying to find work in the clean up.  For him, his wife and eleven year old daughter, his $600 a day guide fees just went “poof”.  When I asked him if he thought he had a legal claim on BP, he said he hadn’t thought about it yet but it gave him pause.  As we suggested above, the $12.5 billion loss estimate is only a starter.
 
Federal deficit spending will certainly rise by tens, and maybe hundreds, of billions as emergency appropriations are directed at larger and larger efforts to clean up this mess.  At the same time, federal and state revenues tied to Gulf-region businesses will fall.  My colleague John Mousseau will be discussing the impact on state and local government debt in a separate research commentary.  
 
We expect that the Federal Reserve will extend the timeframe that we have come to know as the “extended period” in the making of its monetary policy.  We do not expect the Fed to raise interest rates at all for the rest of this year, and maybe well into next year.  We expect to see the deterioration of the economic statistics for the US to reveal the onset of this oil-slick crisis in May, and the negative impact will intensify during the summer months.  A “double-dip” recession probably has been made more likely by this tragedy. 
 
We are at the highest level of cash in our US stock accounts that we have seen in over a year and a half.  We expect a market correction will present entry points at lower stock prices.  We have exited the financial sectors, including the insurance ETF.  We now worry about the banks that are exposed.  We do not own the major oil stocks now.  Some of them face enormous liability payments.
 
In addition, the offshore-drilling energy sector will face much-increased and more costly regulation.  Deepwater and all offshore drilling in the US has been set back for a generation, just as Three Mile Island set back nuclear power development for decades.  No politician can win an election now with a permissive view on drilling.  Sarah Palin’s “Drill, baby, drill” now condemns her to political marginalization.  Off shore drilling has lurched to the top of the political agenda in this November’s election cycle.  
 
Readers may be interested in following events on the NOAA website:  http://response.restoration.noaa.gov . 
 
David R. Kotok, Chairman and Chief Investment Officer
 
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