THE BASIS POINT

Recent Economic Data OK but Long-Term Worries Prevail. Is Resulting Volatility Good Or Bad?

Economic Worries
Yesterday’s stock market drop dominated the financial news. And a slowing economy helps rates and mortgage loan agents, right? (It’s a two-edged sword.) So the markets did not pay much attention to Non-Farm Productivity increasing over 6% during the fourth quarter of 2009. Efficiency in the last nine months of 2009 soared at the fastest pace since 1966 as companies cut worker hours even after sales stabilized. Factory Orders for November were up 1%, better than expected. And 4Q09 GDP was 5.7% at the first reading last week. But the focus, and one of the reasons given for stocks taking a beating, was on Jobless Claims which hit a 7-week high.

There is certainly a lot to be nervous about. There is the concern that around-the-world budget deficits will need to be financed by issuing more debt. California, with the 8th largest economy in the world, is continuing to have budget problems. On top of all that, oil prices declined over 5% while gold prices also fell, down over 4%. The dollar was weaker to the yen, but firmer to the euro as the risk aversion trade returned, and this helped Treasuries and mortgage security prices, dropping rates to December levels.

20k Jobs Lost, 9.7% Unemployment
Forecasts for today’s Non-Farm Payroll number centered on a gain of 15,000, although the ADP number from Wednesday showed that the private sector lost 22,000 jobs, so the difference will be in the government arena. As it turned out, Non-Farm Payrolls fell 20,000 in January, and the December numbers were revised downward from -85k to -150k (Nov’s went from +4 to +64k). Conversely the Unemployment Rate dropped to 9.7%, once again highlighting the fact that a sharp increase in the number of people giving up looking for work helped to depress the jobless rate. Immediately after this news, stocks were higher and the 10-yr hit 3.64% and mortgage prices (and the 5-yr Treasury) were worse by about .125.

But then this trend reversed: stocks went into red and bonds recovered.

Is Volatility Good Or Bad?
Does this kind of volatility in bonds or stocks help or hurt the markets? Although volatility has little lasting impact on markets, in the long run volatility makes ordinary investors less inclined to trust markets. And aversion to risk makes capital more expensive, as we are seeing now, and in turn the economy can become less dynamic. On the flip side, traders love volatility, although they tend to overestimate their knowledge of finance and the accuracy of their predictions. And overconfidence can encourage excess trading, and in a down market this can lead to “chasing losses” – if you’ve lost some, it is tempting to make big bets in an attempt to get your money back.

Next Big Bank Problem: Loan Buybacks
Ever had to buy back a loan? You’re not alone, nor will you be in the future.

Fed Buys $12b in MBS
Steady as she goes. For the week ending yesterday, the Federal Reserve’s MBS program was a net buyer of $12 billion agency MBS ($17.6 billion gross), which was the same as the previous week. The bulk of the purchases were 4.5% securities, which are mostly comprised of 4.75-5.125% 30-yr conventional mortgages. Program-to-date now stands at $1.173 trillion.

BofA Settles With SEC on Merrill Suit
New York Attorney General Andrew Cuomo, who encouraged the agencies to reach down the credit curve several years ago to help precipitate the credit crisis, and also usher in the HVCC regulations, charged Bank of America Corp, former Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price with fraud for allegedly misleading shareholders about the acquisition of Merrill Lynch. On the other hand, BofA just settled with the SEC by agreeing to pay a $150 million civil fine and bolster disclosure and governance practices. Cuomo is using a New York law used to combat securities fraud to accuse Bank of America, Lewis and Price of intentionally failing to disclose massive losses at Merrill prior to a December 5, 2008 shareholder vote on the merger.

Fidelity National Financial Earnings
Fidelity National Financial, headquartered in Florida, has reported a net profit of $69 million for the fourth quarter 2009 and a net profit of $222 million for the full year, both turnarounds from 2008 losses. Direct orders opened in the fourth quarter 2009 were up, although actual title claims paid in the fourth quarter 2009 were up also. The former LandAmerica units, Lawyers Title and Commonwealth Title, were profitable.

GMAC Earnings Loss
GMAC posted a loss in the fourth quarter of $3.9 billion, with a net loss of $4.95 billion after writing down mortgage holdings. For all of 2009, GMAC swung to a net loss of $10.3 billion from a $1.87 billion profit. Many wish that they were as optimistic as the CEO who said, “GMAC has undergone significant transformation in 2009 and as a result, is better positioned to pursue business and market opportunities going forward.” Translation: “I think that there is nowhere to go but up.” We, the taxpayer, currently own 56% of the company. The mortgage unit lost $4 billion from continuing operations before taxes after the company wrote down $2.6 billion in assets that are scheduled to be sold, and the parent company said it contributed about $2.8 billion of capital to ResCap, more than a previous estimate of $2.7 billion. As I mentioned in an earlier commentary, GMAC will cut about 554 jobs, including 313 positions at ResCap’s offices in Charlotte, North Carolina and Costa Mesa, California.

Daily Humor: A Super Bowl Joke
A Cajun who died went to hell.

The devil assigned him the usual punishment: he put him in the mass pit where the heat was melting others.

The devil came back sometime later surprised to find the Cajun just sitting around, not even misting, much less sweating. “How come you’re not so much as sweating here where everyone else is screaming for relief from the heat?”

The Cajun laughed and said, “Man, I was raised in the bayous of Sout Looziana. Dis ain’t nothin’ but May in Lafayette to me!”

The devil decided to really put the Cajun through it. He put him in a sealed off cave in the pit with open blazes and four extra furnaces blasting.

When he came back, days later, the Cajun was sitting pretty, had barely begun to bead up with sweat.

The devil was outraged. “How is this possible!? You should be melted to a shrieking puddle in these conditions!”

The Cajun laughed even harder than before. “Hey, man! I done tole you. I was raised in Sout Looziana. You tink dis is heat?! Dis ain’t nothin’ but August in Jennings!”
So the devil thought, “Alright, a little reverse ought to do the trick.” He put the Cajun into a corner of hell where no heat ever reached. It was freezing; and, to add to the Cajun’s misery, he added massive icebergs and blasting frozen air. When he returned, the Cajun was shivering with ice hanging from every part of him; but he was grinning like it was Christmas.

Exasperated, the devil asked, “HOW!? How is it possible?! You’re impervious to heat, and here you sit in conditions you can’t be used to…freezing cold; and yet you’re happier than ever. WHY?!”

The Cajun kept grinning and said, “Dis mean de Saints done won da Super Bowl?!!”