Sunday, March 14, 2010

Where is a safe place for cash?

First off let me state that I am not a financial advisor. These are simply my opinions and thoughts.

The banks have a lot of problems that they are not sharing with the public. Big Problems! I wish I owned my home so I could have a hidden safe somewhere, but I don't. Of course a safe can be stolen or robbed also so it would have to be well hidden and NO ONE should know you have one. I would not even let someone install it and I would not let the company I buy it from know where I live. As far as banks go, if your savings account and your checking account are fdic insured then your money is supposedly protected. The problem is that some studies show that the fdic does not have enough money to cover all the losses if the huge banks fail. Also if the fdic has to deal with a huge bank that fails you have to wonder how long until you can get your money back since the fdic has millions of accounts to deal with. A smaller bank the fdic can handle much easier. Usually they just move your money into a healthier local bank. Personally I would reccomend that you use your big bank for monthly bills and find a smaller bank with a five star rating to put your excess money into. For example USAA bank has one of the highest ratings in nevada -- 4 stars at But I would still keep an eye on their ratings throughout the next year. Especially stay away form banks that were big into home and commercial real estate loans over the last few years. Those banks are headed for more trouble. I wonder to myself if putting money into a reliable brokerage firm like Scottrade may be a good idea as they have no exposure to real estate loans. Just a thought. Good luck to all.

Saturday, March 13, 2010

Mark to Market, a Painful pill for Banks.

In a letter to the CEOs of Bank of America, Wells Fargo, JP Morgan Chase and Citigroup, House Financial Services Committee Chairman Barney Frank asks that the banks admit losses on all the valueless second mortgages that they hold. By doing so the banks would basically be showing how close to insolvency they actually are. But I have to wonder if Franks request are a hint toward things to come. I suspect he knows they will not do this willingly.

This makes me wonder if he gearing up for a reinstatement of mark to market. Mark to market rules would force the banks to value real estate holdings at current market value as was the case about a year ago (At that time they removed the mark to market requirement in the FASB accounting rules to stop the banks from showing how much trouble they were really in).

Currently, as I can best understand it, the banks are able to mark to the value of the current loans against the properties. So if you owe the bank 300k but the current market value is 150k, then currently the bank can show they have an asset worth $300k whereas if mark to market were reinstated then they would have to revalue that asset at $150k.

This rule change about a year ago as well as other factors are what I believe helped fuel the rally from March '09 until now.

Mr. Franks wording in his letter is pointing toward an attitude that the banks need to get back to a reality based accounting standard. If the banks choose to follow the recommendations in the letter, or if they are forced to do so via reinstatement of mark to market rules, either way bank stocks are likely to head for trouble. Keep your ears peeled. If reinstatement ever happens then the banks may lead the market into a new round of pain.


Mr. Brian Moynihan
Bank of America

Mr. Vikram Pandit

Mr. James Dimon
JP Morgan Chase

Mr. John Stumpf
Wells Fargo

Dear Messrs. Moynihan, Pandit, Dimon and Stumpf:

The mortgage foreclosure crisis that began over two years ago, and which continues to be a prime contributor to our nation's current economic downturn, burdens millions of hard-working American families. Congress and the Obama Administration have worked hard to address foreclosures by enabling and encouraging loan modification s, but the private sector's response has fallen far short of the need. Many homeowners are eager to save their homes despite being "underwater," but find that lenders and servicers are unable or unwilling to make necessary modi fications. These homeowners are increasingly deciding to walk away and thus foreclosures continue to mount, deepening the crisis.

To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages. There is no more important priority for me in our efforts to restore stability to our mortgage market.

Many investors in first-lien mortgages have indicated that they are willing to accept the fact of significant losses on those investments in order to move on and use their money for other purposes, rather than having it locked in underwater mortgages with a high and growing likelihood of foreclosure. With the interests of homeowners and investors aligned in this way, it should follow that large numbers of principal-reduction modifications could be made relatively quickly. That is not happening. According to investors, Administration officials, and other experts I have consulted, holders of second-lien mortgages are now a principal obstacle to many modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate
attention from your institutions.

Large numbers of these second liens have no real economic value - the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep
borrowers in their homes.

The four organizations you lead are major participants in the second-lien market. Failure to modify these debts has become a major and unnecessary obstacle to thousands of Americans being able to stay in their homes. I urge you in the strongest possible terms to take immediate steps to write down these second mortgages and allow principal reduction modifications of the underlying first liens to take place. If there are legal obstacles to your doing so, we will work with you to remove them.

I will be calling you within the week to discuss what your institutions plan to do to remove the second liens you own or control as impediments to principal reduction modifications.

Bear ready to attack?

Check out this chart showing when cash held by mutual funds is around 3.5% that is often when the market falls.

1) Major rallies occurred in 1974, 1982, and 1990 when the cash levels were greater than 11%.

2) The market sold off in 1973, 1976, and 2000 when cash levels were below 4.5%.

3) The old historical low was 3.9% in 05/1972. The market top was 12/1972 followed by a 46% decline. The next historical low was 4.0% on 03/2000 followed by a 43% decline. New historic lows of 3.5% were set in June and July 2007.

4) Cash levels reached 6.5% in November 2000 but the market declined to a bottom in October 2002.

5) Cash levels reached 5.9% in February 2009 then rolled over sharply.

6) The January 2010 level was 3.6% compared to 3.6% in December 2009 and 5.7% in January 2009. Cash levels are in a very low range. The chart suggests the market is near a top as cash levels are near to the historic low of 3.5%. The next decline should be similar to 2000-2002 and 2007-2009 (50-60%).

7) Cash levels will have to move much higher before the secular bear market ends.

8) Stock funds posted an inflow of $16.34 billion in January, compared with an outflow of $3.53 billion in December. Among stock funds, world equity funds (US funds that invest primarily overseas) posted an inflow of $10.10 billion in January, vs. an inflow of $5.41 billion in December. Funds that invest primarily in the US had an inflow of $6.24 billion in January, vs. an outflow of $8.94 billion in December.

Saturday, January 2, 2010

Bears, don't give up yet!

Odds are, the rally from the March low will become known as the biggest flash in the pan, or sucker rally, since the Great Depression.

Socializing of America

The international forcaster article ends with these words ...

We have been informed by our contracts in Washington that debt failure, the bankrupt or near bankrupt conditions at lenders and the lack of loans available for the past couple of years suit the administration just fine. Mr. Obama believes that the more small and medium-sized companies that go under the better it is for his economic program. That means large corporations and government will supply the jobs and subsequent control of the people. Debt doesn’t matter when the goal is a one-world society, nor does unemployment. These Illuminists are going to rip this country piece by piece. In addition, as we said six years ago, when we said Fannie and Freddie were bankrupt, the government wants to end up owning 40% of US housing in order to completely control 40% of Americans’ lives. Once in full possession they further dictate how Americans will live.