Monday, March 13, 2017

Oil Hovers Near Three-Month Lows As Investors Await Data

By Aaron Sheldrick
Reuters
March 14, 2017

Crude oil prices hovered near three-month lows on Tuesday in early Asian trading as investors await key reports and data that may shed light on a supply overhang in the global market.

U.S. West Texas Intermediate crude (WTI) CLc1 edged down 3 cents to $48.37 a barrel. The contract ended down 9 cents in the previous session after touching $47.90, the lowest since the end of November.

Brent crude futures LCOc1 were down 1 cent at $51.34 a barrel, having settled down 2 cents on Monday after dipping to as low as $50.85.

Prices fell sharply last week as investors worried that swelling U.S. crude supplies would hinder OPEC's efforts to restrict output and reduce a global glut.

Prices had risen after the Organization of the Petroleum Exporting Countries (OPEC) and other major oil producers, including Russia, agreed at the end of November to rein in production by almost 1.8 million barrels per day (bpd) in the first half of 2017.

"It's shaping up to be another fun week in the crude complex, with OPEC releasing its monthly oil market report on Tuesday, swiftly followed by the IEA's monthly oil market report the day after," Matt Smith, analyst at ClipperData, said in a note.

The International Energy Agency releases its closely watched monthly oil market report on Wednesday.

Data from the industry group the American Petroleum Institute on U.S. crude and product stockpiles is also due out later on Tuesday.

Analysts said the slump may not have much further to go now that prices have fallen more than 8 percent since last Monday, the biggest week-on-week drop in four months.


Article Link To Reuters:

Kushner's Set To Get $400 Million From Anbang On Manhattan Tower

By Vishaka George
Reuters
March 14, 2017

A company owned by the family of Jared Kushner, U.S. President Donald Trump's son-in-law, stands to receive over $400 million from China's Anbang Insurance Group, that is investing in a Manhattan building owned by the Kushner's, Bloomberg reported.

Details of the agreement are being circulated to attract additional investors, Bloomberg reported on Monday. (bloom.bg/2nm6PwG)

The building, a 41-floor tower located at 666 Fifth Avenue, was purchased by Kushner Companies in 2006 for $1.8 billion, which at the time was the highest sales price for a single building in Manhattan.

The planned $4 billion transaction includes terms that some real estate experts consider unusually favorable for the Kushners, the Bloomberg report said.

"Kushner Companies is in active discussions around 666 5th Avenue, and nothing has been finalized," spokesman James Yolles told Reuters via email.

Anbang could not immediately be reached for comment.

Reuters reported in January that the Chinese group was in talks to invest in a project to redevelop the New York City building.

Anbang, established in 2004 as an auto insurer, has emerged as one of China's most aggressive buyers of overseas assets in the past two years, spending more than $30 billion buying luxury hotels, insurers and other property assets.


Article Link To Reuters:

Ackman's Pershing Square Sells Valeant Stake, Takes $3 Billion Loss

By Svea Herbst-Bayliss 
Reuters
March 14, 2017

Billionaire investor William Ackman walked away from Valeant Pharmaceuticals International Inc on Monday with a loss of more than $3 billion as he sold his entire stake in the struggling drug company after trying to rescue it for some 18 months.

The abrupt and unexpected move by the powerful activist investor sent Valeant shares tumbling almost 10 percent in after-hours trading. They have lost 95 percent of their value since mid-2015.

For Ackman, it marked a dramatic climbdown from his vocal support of the company, but should help soothe his own investors who had begun to show signs of concern about mounting losses in his portfolio.

"We elected to sell our investment and realize a large tax loss which will enable us to dedicate more time to our other portfolio companies and new investment opportunities," Ackman said in a statement.

Ackman's Pershing Square Capital Management became one of Valeant's biggest investors in 2015 when it sunk some $3.2 billion into the company. At its peak the Valeant stake was worth roughly $4 billion.

Pershing Square said on Monday the Valeant position, at its current market value, represented 1.5 percent to 3 percent of its various funds.

Already one of the hedge fund industry's most vocal investors, Ackman turned himself into Valeant's biggest cheerleader and fixer, even as the stock price plunged amid U.S. regulators' probe of Valeant's pricing policies and problems at its specialty pharmacy unit, Philidor.

After securing a board seat, Ackman replaced the chief executive, overhauled the board of directors and made some asset sales.

But the biggest move - trying to sell Salix, the company's gastro-intestinal division, to Japanese company Takeda - eluded Ackman after advanced negotiations failed to lead to a sale.

He sold Pershing's 18.1 million shares of Valeant on Monday, plus about 8.8 million under his own name, together representing almost 8 percent of Valeant overall, according to Reuters data.

Big Drop

Ackman's fund bought into Valeant when the stock was trading near $190 a share and he watched it surge to $260 a share during the summer of 2015. But regulatory scrutiny and other concerns caused the stock price to sharply tumble after August 2015.

The stock has fallen 16 percent since January even as many other stocks have been buoyed by hopes of stronger economic growth and increased merger activity.

The shares closed at $12.11 on the New York Stock Exchange on Monday, and dipped to $10.93 in after-hours trading.

That long decline has tarnished Ackman's reputation as an investor and wreaked havoc on his portfolio.

After gaining 37 percent in 2014, his Pershing Square International Fund lost 16.6 percent in 2015 and 10.2 percent in 2016, largely because of the Valeant losses.

Monday's move mirrored a similar exit in the summer of 2013 when Ackman sold his entire stake in retailer J.C. Penney and stepped off the board after having failed to fix the company.

"Ackman never, never gives up, at least not until a year or two after everyone else has given up," said Erik Gordon, a professor of law and business at the University of Michigan.

Pershing Square was Valeant's second-largest owner after hedge fund Paulson & Co, a regulatory filing shows. Hedge fund ValueAct Holdings is the third-biggest owner.

For Ackman's investors - pension funds across the country and wealthy private investors - the losses were beginning to wear and speculation had been mounting that they might not endure another year of declines. Ackman's gains at the start of the year have already turned into losses.

It takes two years for investors to exit Pershing Square Capital Management, but Ackman has protected himself by building permanent capital of roughly $6 billion, which should ensure that his roughly $12 billion hedge fund can endure some investor departures.


Article Link To Reuters:

Tillerson Used Email Alias At Exxon To Talk Climate

By Karen Freifeld
Reuters
March 14, 2017

U.S. Secretary of State Rex Tillerson, the former chairman and chief executive of Exxon Mobil Corp (XOM.N), used an alias email address while at the oil company to send and receive information related to climate change and other matters, according to New York Attorney General Eric Schneiderman.

The attorney general's office said in a letter on Monday that it found Tillerson had used an alias email address under the pseudonym "Wayne Tracker" from at least 2008 through 2015.

Wayne is Tillerson's middle name.

The letter was sent to a New York state judge overseeing Schneiderman's investigation into whether Exxon misled shareholders and the public about climate change.

In a statement on Monday, Exxon spokesman Alan Jeffers said, "The email address, Wayne.Tracker@exxonmobil.com, is part of the company’s email system and was put in place for secure and expedited communications between select senior company officials and the former chairman for a broad range of business-related topics."

Jeffers said the company had provided 2.5 million pages of documents in response to a subpoena from Schneiderman's office and would respond to the claims in the letter in court filings.

A State Department spokeswoman declined to comment on the matter.

The letter, seen by Reuters, said Exxon had not previously disclosed the alias account. It asked the judge to order Exxon to explain whether documents from the "Wayne Tracker" email and 34 additional accounts assigned to other Exxon executives and board members had been preserved.

The letter said that Exxon had produced some 60 documents bearing the "Wayne Tracker" email but never said it was used by Tillerson for relevant communications at Exxon.

It asked the court to order Exxon to identify whether any other email accounts were used by Tillerson.

"Exxon's top executives, and in particular, Mr. Tillerson, have made multiple representations that are at the center of OAG's (attorney general's office) investigation of potentially false or misleading statements to investors and the public," the letter said.

The case is People of the State of New York v PricewaterhouseCoopers and Exxon Mobil Corporation, New York State Supreme Court, New York County, No. 451962/2016.


Article Link To Reuters:

Hedge Funds Exit Emerging-Market Assets As Real Money Swoops In

Real money 4-week FX inflows near highest level in 16 months; Divergence with hedge fund flows widest in Latin America.


By Ben Bartenstein
Bloomberg
March 14, 2017

Short-term investors are escaping emerging markets ahead of a likely U.S. interest-rate hike this week amid concern a strengthening dollar will undermine credit quality in developing nations.

Meanwhile, longer-term investors have increased their exposure, pointing to equity and currency valuations that linger below their five-year averages and arguing developed nations from the U.S. to France carry greater political risks.

The divergence between the two camps hasn’t been this pronounced since October 2015. Over the past four weeks, hedge funds and other leveraged investors posted their biggest emerging-market currency outflows since early December, while institutional money managers such as pension funds boosted their inflows to near the highest level in 16 months, according to data from Citigroup Inc.



"I wouldn’t say that real money investors aren’t concerned, but perhaps there’s a greater willingness to be patient," said Steve Hooker, a Hartford, Connecticut-based emerging-market money manager at Newfleet Asset Management, which oversees $12 billion of assets for endowments, foundations and mutual funds.

The biggest dichotomy was seen in Poland’s zloty, where real-money flows rose to near the highest in more than 18 months as indexed flows for hedge funds decreased to the lowest level this year. India’s rupee and South Korea’s won had the next largest differentials between hedge fund outflows and real money inflows relative to past trading.

Two of the most volatile currencies in the developing world were also points of contention. Hedge funds posted outflows from the Mexican peso and slightly increased flows in the Turkish lira. Both currencies ranked among the six most favored by institutional investors, according to Citigroup strategist Kenneth Lam, who noted that the bank doesn’t have access to 100 percent of flow data across the market.

Traders were in closest agreement over trimming exposure to Hungary’s forint. Taiwan’s dollar, Peru’s sol and South Africa’s rand were rare exceptions where hedge funds bulked up and real money fled.

Low equity volatility and bond spreads at multi-year lows have become a warning sign for some emerging-market investors. Since depreciating by 2.6 percent between Donald Trump’s election and the New Year, developing-market currencies have gained 3.3 percent. Equities have more than recovered from their November dip, and bonds have rallied 2.8 percent over the past three months, according to a Bloomberg sovereign index.

Overcrowded trades in the highest yielding assets, such as bonds from Venezuela and Mozambique, could be scaring some leveraged investors away, according to Stuart Culverhouse, the chief economist at Exotix Partners LLP in London. Previous favorites like Argentina and Ukraine no longer offer the double-digit yields many shorter-term investors seek for taking on high-risk investments, he said.

Instead, hedge funds have been buying U.S. assets since Trump’s election, according to Lucy Qiu, a New York-based analyst at UBS Wealth Management, which oversees more than $1 trillion. Horseman Capital Management, Pine River Capital Management and Black River Asset Management have shuttered emerging-market sections over the past two years. Many funds are now prioritizing private equity, said Emre Tiftik, the deputy director of global capital markets at the Institute of International Finance.



Institutional investors still see value in developing nations.

Templeton Emerging Markets Group chief investment officer Stephen Dover, who oversees about $80 billion, sees "dramatically improved" valuations across Latin America and significant growth potential in Southeast Asian economies. He traveled to Thailand, Laos, Vietnam, Malaysia, Singapore and Hong Kong for five weeks earlier this year, sizing up investment opportunities.

"We’re trying to look for broad waves of growth and not get distracted by the day-to-day noise," he said. "That’s very difficult to do."


Article Link To Bloomberg:

This Is The Most Overvalued Stock Market On Record -- Even Worse Than 1929

John Hussman says run from an overvalued S&P 500.


By Brett Arends
MarketWatch
March 14, 2017

This is the most dangerous and overvalued stock market on record — worse than 2007, worse than 2000, even worse than 1929.

Or so warns Wall Street soothsayer John Hussman in his scariest jeremiad yet.

“Presently, we observe the broadest market valuation extreme in history,” writes the chairman of the cautious Hussman Funds investment group, “with the steepest median valuations on record, and the most reliable capitalization-weighted measures within a few percent of their 2000 peaks.”

On top of such warning signs as “extreme valuations, bullish sentiment, and consumer confidence,” he adds, “market action has deteriorated in interest-sensitive sectors... As of Friday, more than one-third of stocks are already below their 200-day moving averages.”

Don’t be fooled by the booming headline indexes. More NYSE stocks hit new 52-week lows last week than new 52-week highs, he notes.

In a nutshell: Run.

OK, so, it is always easy to criticize. Husssman, a professional economist and well-known Wall Street figure, has been here before. He’s been warning about stock-market valuations for several years. He’s in that camp that the permabulls, wrongly, call “permabears.”

He’s been wrong — or, perhaps, just very early — many times.

But he was, notably, also correct and prescient about both the 2000 and 2008 crashes before they happened, when few others were.

Opinions, of course, are free. But facts are sacred. And more than a few are suggesting caution.

According to the World Bank, the total U.S. stock market is now valued at more than 150% of annual gross domestic product. That is way above historic norms, and about the same as it was at the market extreme of 2000.

This is a measure that Warren Buffett has praised in the past as a good indicator of whether or not stocks are overvalued.

According to Yale finance professor Robert Shiller, the S&P 500 SPX, +0.04% now trades on a cyclically adjusted price-to-earnings ratio of 30, compared to a historic fair value for this measure of about 16.

And according to the Federal Reserve, the so-called “q,” which compares stock-market values with the real-world prices of corporate assets, is 1.0. Again, that’s way above historic average, which is around 0.65, even though it’s not yet in crazy year-2000 territory.

Both measures have solid track records over more than 100 years of predicting long-term stock-market returns, though their most recent record is either poor or still unproven, depending on whom you ask.

Market veterans note that even if Wall Street is overvalued, as some of these things suggest, there is nothing to prevent it becoming even more so before any correction. That’s what happened in 1929, 2000 and 2007-2008. But the more valuations get stretched, the more dangerous it becomes.

None of this proves for certain that the current euphoria is misguided. But it is something to bear in mind before we let it go to our heads. Hussman, wisely, recalls the warning of the late, great investor Sir John Templeton, that euphoria is how bull markets die.


Article Link To MarketWatch:

Wall Street Has Found Its Next Big Short In U.S. Credit Market

Struggling retailers such as Macy’s are fueling mall defaults; Investors are betting against commercial mortgage-backed debt.


By Rachel Evans and Matt Scully
Bloomberg
March 14, 2017

Wall Street speculators are zeroing in on the next U.S. credit crisis: the mall.

It’s no secret many mall complexes have been struggling for years as Americans do more of their shopping online. But now, they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, much the way many homeowners did nearly a decade ago.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing.

In recent weeks, firms such as Alder Hill Management -- an outfit started by protégés of hedge-fund billionaire David Tepper -- have ramped up wagers against the bonds, which have held up far better than the shares of beaten-down retailers. By one measure, short positions on two of the riskiest slices of CMBS surged to $5.3 billion last month -- a 50 percent jump from a year ago.

“Loss severities on mall loans have been meaningfully higher than other areas,” said Michael Yannell, the head of research at Gapstow Capital Partners, which invests in hedge funds that specialize in structured credit.

Nobody is suggesting there’s a bubble brewing in retail-backed mortgages that is anywhere as big as subprime home loans, or that the scope of the potential fallout is comparable. After all, the bearish bets are just a tiny fraction of the $365 billion CMBS market. And there’s also no guarantee the positions, which can be costly to maintain, will pay off any time soon. Many malls may continue to limp along, earning just enough from tenants to pay their loans.

But more and more, bears are convinced the inevitable death of retail will lead to big losses as defaults start piling up.

The trade itself is similar to those that Michael Burry and Steve Eisman made against the housing market before the financial crisis, made famous by the book and movie “The Big Short.” Often called credit protection, buyers of the contracts are paid for CMBS losses that occur when malls and shopping centers fall behind on their loans. In return, they pay monthly premiums to the seller (usually a bank) as long as they hold the position.

This year, traders bought a net $985 million contracts that target the two riskiest types of CMBS, according to the Depository Trust & Clearing Corp. That’s more than five times the purchases in the prior three months.

Dying Malls

Sold in 2012, the mortgage bonds have a higher concentration of loans to regional malls and shopping centers than similar securities issued since the financial crisis. And because of the way CMBS are structured, the BBB- and BB rated notes are the first to suffer losses when underlying loans go belly up.

“These malls are dying, and we see very limited prospect of a turnaround in performance,” according to a January report from Alder Hill, which began shorting the securities. “We expect 2017 to be a tipping point.”

Cracks have started to appear. Prices on the BBB- pool of CMBS have slumped from roughly 96 cents on the dollar in late January to 87.08 cents last week, index data compiled by Markit show.

That’s still far too high, according to Alder Hill. Many of the malls are anchored by the same struggling tenants, like Sears, J.C. Penney and Macy’s, and large-scale closures could be “disastrous” for the mortgage-backed securities. In the worst-case scenario, the BBB- tranche could incur losses of as much as 50 percent, while the BB portion might lose 70 percent.

Bearish Consensus


Alder Hill isn’t alone. Deutsche Bank, which famously bet against residential mortgage bonds in the run-up to the crisis, recommended buying credit protection on the BBB- tranche last month. So did Morgan Stanley.

There’s good reason to be pessimistic. After retailers had one of the worst Christmas-shopping seasons in memory, J.C. Penney said in February it plans to shutter up to 140 stores. That echoed Macy’s decision last year to close some 100 outlets and Sears’s move to shut about 150 locations. Delinquencies on retail loans have risen to 6.5 percent, a percentage point higher than CMBS as a whole, according to Wells Fargo.

Still, some aren’t completely convinced. Credit Suisse said last month non-CMBS specialists are helping drive the recent run-up in demand for credit protection. That raises concern too many people are chasing the same trade.

“The short feels crowded to us,” said Matthew Weinstein, principal at Axonic Capital, a hedge fund that specializes in structured products. “If these defaults start happening soon, the short will work, but if the defaults do not occur quickly, the first guy out could drive the market meaningfully higher.”

Cautionary Tale

Even though TCW Group says CMBS sold in 2012 and 2013 might fall as low as 20 cents on the dollar, the firm isn’t betting against them because it’s hard to know when the wagers might pay off. Plus, the contracts aren’t cheap. It costs about 3 percent a year to short BBB- rated securities and 5 percent to bet against BB notes, plus an upfront fee to put on the trade.

Consequently, it’s “more speculative than it is the next big short,” according to Sorin Capital Management’s Tom Digan.

Whatever the case, here’s what the endgame might look like. About two hours north of Manhattan, in Kingston, New York, stands the Hudson Valley Mall. It used to house J.C. Penney and Macy’s. But both then left, gutting the complex. In January, the mall was sold for less than 20 percent of the original $50 million loan. Mortgage-bond holders exposed to the loan were partly wiped out.

“When a mall starts to falter, the end result is typically binary in nature,” said Matt Tortorello, a senior analyst at Kroll Bond Rating Agency. “It’s either the mall is going to survive or it’s going take a substantial loss.”


Article Link To Bloomberg:

Why The Fed Will Defend Raising Interest Rates

By John Crudele
The New York Post
March 14, 2017

Unless the sky falls at the same time the earth starts spinning in the opposite direction, the Federal Reserve will increase interest rates on Wednesday.

That became a foregone conclusion after the Labor Department announced last Friday that there were 235,000 new jobs created in February and that the unemployment rate declined by one-tenth of a percentage point, to 4.7 percent.

Why does the Fed need to raise interest rates?

-- Reason one: The bond market has already gotten ahead of the Fed and boosted rates on its own. If the Fed doesn’t follow the lead of the bond market, people around the world will realize what has been obvious for years — the Fed has screwed up and is no longer in control of monetary policy.

-- Reason two: The ultra low interest rates, while very beneficial to some for a while, have been hurting a large segment of the American population. Savers have forfeited about $1 trillion in interest income over the past nine years, and this is now hurting the economy.

-- Reason three: It’s sort of bizarre but, unless the Fed raises rates, it won’t be able to lower them when the economy fizzles. That’s like one person lending money to another so that the first person can borrow it back.

-- Reason four: This is the most interesting one. The economy is already declining even though the Fed’s near-zero interest rate policy never really got it going, anyway.

The job figures aside, the economy looks as if it was barely growing in the first quarter of 2017. According to the Atlanta Federal Reserve Bank, the US gross domestic product was expanding at only a 1.2 percent annual rate in the first 2 ¹/₂ months of 2017.

And it’s unlikely that anything could happen in these waning days of March to change that very much.

First-quarter GDP looks as if it will be a lot worse than it was in the fourth quarter of 2016 — as well as for all of last year. The final three months of 2016 saw the economy grow at only a 1.9 percent annual rate. And for all of 2016, growth was only 1.6 percent.

The fact that the Fed has forced itself into a position of raising interest rates during such a weak economy is evidence of just how desperate Fed chief Janet Yellen is.

Last Friday’s job report and the one for January, when growth was an unexpectedly strong 227,000 jobs, gave the Fed the excuse it wanted to do what it has to. All Yellen needs to do is close her eyes to all the other bad numbers.

What the Fed will do this week will also set up an interesting political drama that will play out early next year when Yellen’s term as Fed chairwoman runs out. It’s very unlikely that President Trump will pick her for another term, especially if the three rate hikes expected this year harm the economy.

But Yellen also has the right to stay on the Federal Reserve Board as an ordinary member until 2018. That will give her some authority over what the Fed does but not the kind of power she now possesses.

Trump hasn’t specifically said that Yellen will exit as chair after her term expires, but he’s let his dissatisfaction be known.

It’s going to get interesting.


Article Link To The New York Post:

Voters Won't Ignore This CBO Score

By Megan McArdle
The Bloomberg View
March 14, 2017

Well, the Congressional Budget Office has released its score for the new Republican health care bill. And those of us who covered Obamacare’s passage are having flashbacks to 2009.

Those flashbacks, however, are not completely parallel. During the process of passing the Patient Protection and Affordable Care Act, or PPACA, many of us complained that Democrats were gaming the CBO process, tossing out desperate cuts and pay-fors over and over until they got the score they wanted, in much the way video-gamers try to kill a hard boss. They ended up jamming in a bunch of provisions that made Obamacare’s finances look sturdier than they were, but realistically, had no hope of ever taking effect (among my favorites: a never-never long-term care program, and a requirement that everyone in the country had to issue 1099s to anyone who sold them more than a few hundred dollars worth of stuff). We certainly can’t accuse Republicans of that!

The CBO score says that under the Republican plan, 24 million fewer people would have insurance in 2026, compared to their projections under current law. Premiums for the next few years would be higher than projected under Obamacare, then lower, as the markets stabilized with a younger insurance pool and somewhat less generous insurance being purchased by those younger, healthier customers. In 2026, the budget deficit would be $92 billion lower than currently projected, with a total savings of $336 billion over ten years.

I mean, I sure do like those budget numbers. On the other hand, 24 million is a whole lot of folks. Republicans are going to stand accused of taking insurance away from a lot of needy people in order to cut nearly a trillion dollars worth of taxes. And in fairness, that is kind of what this bill does.

Now, to be sure, some folks will not so much be losing insurance as deciding not to buy it because they don’t get good value out of it right now -- or can’t afford it. According to the CBO, under Obamacare, a 64-year-old making 450 percent of the federal poverty line, or about $53,000 a year, can expect to pay $15,300 a year for a plan that covers 65% of their expected medical expenses. You can easily see why someone in that situation would be reluctant to pay that much for insurance. Many others will be “young invincibles” who see no reason to pay for insurance when they never get sick, and thanks to the repeal of the mandate, now won’t have to.

On the other hand, let’s look at what happens to a near-senior who’s currently eligible for big subsidies, and benefits from a rule which says that insurers cannot charge older people more than three times what they charge their youngest customers. While the 64-year-old in the above example actually benefits slightly from the Republican health care law, seeing their premiums drop by $700, their twin brother making 175 percent of the federal poverty line, around $20,000, will see their premiums rise from $1,700 to $14,600 -- an amount that would be pretty much mathematically impossible for them to pay. Indeed, as you get nearer to the poverty line, it is theoretically possible for a 64-year-old to face premiums that actually exceed their income.

That’s going to be … a hard sell. The AARP will not like it, nay, they will not like it at all. And things the AARP does not like tend to have a hard time getting made into law.

Moreover, many of the folks who will see their insurance options shrink are those older white voters in rural districts who helped put Trump over the top. The merely middle aged won’t get hurt too badly, though they, too, will see their premiums go up. But the older, not-poor-but-sure-not-rich folks? They get creamed.

Regardless of what you think of Obamacare, or the new Republican bill, the politics of this are dreadful. Republicans made fun of Democrats for spending a year wrangling over trivia and tossing ideas into the CBO black box to see what kind of numbers it would spit out. They vowed they wouldn’t repeat that mistake. But this is what happens when you don’t repeat that mistake: You get a score that’s going to make your bill darned hard to take to voters.

Oh, sure, they can quibble with the score. I can quibble with the score, as I did with the scores that Obamacare got. The CBO does not retire into its back office with a crystal ball and read off the budget numbers it sees therein; they do the best they can to guess at the future with very limited knowledge and imperfect models. (That is in no way a slam on the CBO; all I’m saying is, economic science has not advanced to the point of perfect forecasting, and probably never will.) We do not rely on CBO scores because they are particularly accurate, but because they are consistent, allowing us to compare bills to each other -- and because they provide an exceptionally useful check on the wildly overoptimistic estimates that politicians would produce on their own.

So we could argue about whether 14 million people are going to lose or give up insurance coverage in 2018, mostly due to the lapsing of the individual mandate. We could argue about whether the insurance markets are going to stabilize with a younger, healthier pool, as the CBO suggests, or whether I’m right that there’s a substantial risk they won’t stabilize and will instead start spiraling towards death. We can argue about whether a bunch more states were really going to do the Medicaid expansion (some of the increase in the uninsured projected by the CBO stems, not from people who now have insurance losing it, but from people who would have become eligible for Medicaid if their state had expanded the program, even though this hasn’t happened yet).

But I do not think this is apt to be a very successful tactic, politically. You know what voters are not interested in? Abstract technical arguments about forecasting assumptions. As someone who enjoys nothing than a lively conversation about such abstruse topics, you will have to trust me when I say that the ordinary voter’s eyes glaze over and they rapidly start remembering very important appointments all the way across town. Oh, sure, a few thousand people on internet message boards will become very passionate on the subject. The average voter is going to remember whatever numbers were in the headlines, or scrolling by on the nightly news.

Thus, for want of a crystal ball in anyone’s hands, the CBO score is going to provide the canonical numbers in discussing this bill, no matter how hard Republicans complain about their assumptions. And that number is going to make it difficult -- I don’t say impossible, but surely very difficult -- to get this thing passed.

Of course I said the same thing in 2009: it was political suicide for Democrats to pass Obamacare. I was right. And yet, they went ahead and did it anyway. The policy effects of bills aren’t the only thing that’s hard to predict.


Article Link To The Bloomberg View:

Monday, March 13, Night Wall Street Roundup: Wall St. Drifts Along With Eyes On Fed

By Rodrigo Campos 
Reuters
March 13, 2017

U.S. stocks ended little changed in light volume on Monday, with traders eyeing a Federal Reserve meeting expected to result in an interest rate increase later this week.

The S&P 500 traded in its tightest range of the year, in and out of slight losses, while the CBOE Volatility index .VIX was on track to close at its lowest in more than a week.

Shares of Mobileye (MBLY.N) jumped nearly 30 percent to a high of $61.51 after chipmaker Intel (INTC.O) agreed to buy the driverless technology maker for $15.3 billion. Mobileye closed up 28.2 percent at $60.62 and Intel fell 2.1 percent to $35.16.

Investors looked ahead to the Fed's two-day meeting that starts on Tuesday. Traders saw a 94 percent chance that the U.S. central bank will lift interest rates by 25 basis points on Wednesday.

"Other than the Fed on Wednesday I don’t see anything going on to make any (investment) decisions on," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"Intel buying Mobileye is the story of the day, moving into that market sector," he said, adding they advised some clients to "fade in" into Intel stocks. "We think this is a very good support point," said Mendelsohn.

Nvidia (NVDA.O) rose 2.8 percent to $101.85 while Delphi Automotive DLPH.O added 4.0 percent to $80.20. Both are involved in developing technology for cars.

The Dow Jones Industrial Average .DJI fell 21.5 points, or 0.1 percent, to 20,881.48, the S&P 500 .SPX gained 0.87 points, or 0.04 percent, to 2,373.47 and the Nasdaq Composite .IXIC added 14.06 points, or 0.24 percent, to 5,875.78.

Citrix Systems (CTXS.O) jumped 6.8 percent to $84.93 after Bloomberg reported that the cloud-services company is working with advisers to seek potential suitors.

Wynn Resorts (WYNN.O) gained 4.8 percent to $104.30 after Morgan Stanley reiterated its "buy" rating and said the company could gain a meaningful market share in Macau.

About 6.14 billion shares changed hands in U.S. exchanges, compared with the 6.93 billion daily average over the last 20 sessions.

Advancing issues outnumbered declining ones on the NYSE by a 1.54-to-1 ratio; on Nasdaq, a 1.68-to-1 ratio favored advancers.

The S&P 500 posted 39 new 52-week highs and 3 new lows; the Nasdaq Composite recorded 107 new highs and 48 new lows.

The S&P 500's average true range hit 5.9, its lowest of the year. The year-to-date average of that daily measure of volatility is 14.


Article Link To Reuters:

Monday, March 13, Morning Global Market Roundup: Asian Shares Edge Up But Caution Prevails Ahead Of Fed

By Hideyuki Sano 
Reuters
March 13, 2017

Asian shares rose on Monday, taking their cue from gains on Wall Street after strong U.S. job data, though the mood was cautious as oil prices plunged to 3 1/2-month lows on fresh worries of oversupply.

A confluence of major events this week including an expected interest rate hike by the U.S. Federal Reserve, a potentially divisive election in the Netherlands and a Group of 20 (G20) finance ministers' meeting kept many investors on edge.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.6 percent, led by gains in tech-heavy South Korean shares .KS11 and Taiwanese shares .TWII.

Japan's Nikkei .N225 edged 0.2 percent higher, with exporters' shares buoyed by a weaker yen.

Global stocks rose on Friday, with the MSCI's index of 46 markets .MIWD00000PUS gaining 0.5 percent, snapping six straight days of losses after the robust U.S. jobs report.

Strong U.S. jobs data all but sealed the chance of a rate increase by the Federal Reserve on Wednesday.

"The markets are focusing on when the Fed will raise rates next time or the pace of its rate hike, so the tone of Fed Chair Janet Yellen will be closely watched," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

U.S. interest rate futures <0> are pricing in about a 50 percent chance of another rate hike in June. By the end of 2017, a total of nearly three hikes were fully priced in, including the likely move in March.

In Reuters poll of primary dealers, twelve of the 23 dealers saw a rate increase to 1.00-1.25 percent by the June 13-14 meeting, while 10 expected such a move by the Fed's September meeting.

The 10-year U.S. Treasuries yield US10YT=RR slipped a tad on Friday partly as markets had already expected strong payroll figures.

Still, it last stood at 2.584 percent, not far from its two-year high of 2.641 percent touched on Dec 15.

U.S. junk bonds have also faltered, with high-yield bond ETF (HYG) posting its biggest weekly loss in more than a year.

Global bond prices also came under pressure following a report that some European Central Bank policymakers had discussed the possibility of rate hikes before the end of its quantitative easing program.

The 10-year German Bund yield DE10YT=TWEB rose to 0.496 percent on Friday, near its one-year high of 0.498 percent hit in January.

A break of those previous peaks in major bond yields could spark a fresh sell-off in global bond markets.

The talk of ECB rate hike, even though it is still seen as a remote possibility, helped to lift the euro.

The single currency traded at $1.0690 EUR=, after hitting a one-month high of $1.06995 on Friday.

On the other hand, worries about the European project could resurface if Wednesday's parliamentary election in the Netherlands will see the far-right gain more ground than expected.

Polls suggest the far-right ticket will double its vote and its results could investors perceptions' on upcoming elections in France and Germany later this year.

The dollar slipped to 114.85 yen JPY= from Friday's seven-week high of 115.51 yen after U.S. Commerce Secretary Wilbur Ross said on Friday that Japan will be on high on the U.S. priority list for trade agreements.

Traders suspect Washington, keen to reduce its trade deficit, may put pressure on Japan not to cheapen the yen in upcoming bilateral economic talks.

"The G20 will be an important event for the dollar," said Yoshinori Shigemi, Tokyo-based global market strategist at JPMorgan Asset Management.

"I had assumed, until last week, that the dollar would gain on a rise in U.S. rates. But if the G20 say something like they want to reduce trade imbalances, that could give rise to the speculation that they may not want a strong dollar," said Yoshinori Shigemi, Tokyo-based global market strategist at JPMorgan Asset Management.

G20 finance ministers and central bankers will meet in Germany on March 17-18, their first meeting attended by representatives of the administration of U.S. President Donald Trump.

A draft communique circulated last week showed they may no longer explicitly reject protectionism or competitive currency devaluations.

Oil skidded to 3 1/2-month lows after posting biggest three-day loss in a year by Friday on worries that OPEC-led production cuts have not yet reduced a global glut of crude as U.S. drillers kept adding rigs.

U.S. crude futures dropped 0.8 percent to $48.11 per barrel CLc1, having shed more than 11 percent so far this month.


Article Link To Reuters:

Oil Prices Hit 3-Month Low As U.S. Rig Count Climbs

By Jane Chung
Reuters
March 13, 2017

Oil prices dropped to their lowest in three months on Monday despite OPEC efforts to curb crude output, dragged down as U.S. drillers kept adding rigs.

Brent crude LCOc1 had fallen 35 cents, or 0.68 percent, to its lowest since Nov. 30 at $51.02 per barrel. It closed the previous session down 1.6 percent at $51.37.

U.S. West Texas Intermediate crude (WTI) CLc1 declined 42 cents, or 0.87 percent, to its weakest since late November at $48.07 a barrel.

U.S. drillers added oil rigs for an eighth consecutive week, Baker Hughes said on Friday, as energy companies increased spending to take advantage of a recovery in crude prices since the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut output. [RIG/U]

OPEC and other major oil producers including Russia reached a landmark agreement late last year to rein in production by almost 1.8 million barrels per day (bpd) in the first half of 2017.

Overshadowing the curbs, crude inventories in the United States, the world's top oil consumer, surged last week by 8.2 million barrels. [EIA/S]

"With the market still digesting the big increase in inventories, oil prices are likely to remain under pressure today," ANZ bank said in a note.

Hedge funds and other money managers cut their net long U.S. crude futures and options positions in the week to March 7, according to data from the U.S. Commodity Futures Trading Commission (CFTC) on Friday.

Michael McCarthy, chief market strategist at Sydney's CMC Markets, said markets would be dominated by expectations that the U.S. Federal Reserve is set to hike interest rates this week.

A rise in U.S. rates would likely buoy the dollar, making greenback-denominated oil more expensive for importing countries.

"The week ahead is packed with potentially market defining releases," said McCarthy. "However, the key to market performance this week is the response to the U.S. lift in rates."


Article Link To Reuters:

Millennial Love For Snapchat Extends To The Stock

By Angela Moon 
Reuters
March 13, 2017

For some millennial investors, loyalty to one of their favorite apps matters more than financial details in the case of Snap Inc (SNAP.N).

The stock of Snapchat's parent company has been on a roller-coaster ride since its market debut last week, surging more than 70 percent from the initial public offering price in the first two days of trading and plunging back down by a quarter since.

Some seasoned investors have been wary of the volatile, relatively high-priced stock of a company that has yet to report a profit. But novice investors said their deep affinity with the disappearing-message app prompted them to jump in.

"I bought it even when I was pretty positive I would not make a profit in the short run, but just because I am a fan of the product," said Chris Roh, a 25-year-old software engineer in San Francisco, who has only been trading stocks for about a month on Robinhood, a mobile trading app popular among millennials.

Snap sold shares at $17 a piece in its IPO on March 1. The day after, on the first day of trading on the New York Stock Exchange, the stock popped as high as $26.05.

Roh said he bought the stock on that first trading day at $25 a share.

Trading activity on Robinhood jumped by 50 percent on the day of Snap's debut, with more than 40 percent of those who traded that day buying Snap shares. The median age of Snap shareholders on the platform were 26, the same age as Snap Chief Executive Evan Spiegel, according to Robinhood.

Snap's surge extended into the second day of trading, March 3, when its stock went as high as $29.44. It has sunk 25 percent since, closing on Friday at $22.07.

Kaleana Markley, a 29-year-old human resources consultant in San Francisco, bought Snap shares as her first stock market investment.

"Snap just felt like the IPO of my time and seeing where Facebook and Amazon are now, I really think Snap has the potential to grow (like them)," said Markley, who bought the shares through Stockpile, another online brokerage aimed at millennials, generally defined as people reaching young adulthood in the early part of this century.

Markley said she bought some shares in Snap on the first day of trading and some more on the second day, when the stock hit the highest level of its short lifetime.

"There are a lot of companies I don't know or recognize, but Snap, I use the product, and know everyone - my friends, my co-workers, even my parents - uses it."

Although some more experienced investors have avoided loss-making Snap, millennials were not alone in their hunger for shares of the company, which now has a market value of more than $25 billion.

Many sophisticated institutional money managers were also intent on getting a piece of the hottest tech IPO in years, despite concerns about the company's slowing user growth and lack of voting rights for new shareholders.

Snap declined to comment on trading in its shares.

Inflated Levels?


Companies with especially enthusiastic customer bases, such as action-camera maker GoPro Inc (GPRO.O), social games company Zynga Inc (ZNGA.O) and English football club Manchester United Plc (MANU.N), have in the past attracted fans to dabble in their IPOs.

But the wildly popular Snapchat - with an average of about 158 million daily active users - appears to be taking the enthusiasm to another level, some analysts and brokers said.

"One of the non-fundamental reasons driving the stock is that many millennials purchased Snap shares at inflated levels due to their preference for the product," said Shebly Seyrafi, managing director at FBN Securities. "That is, not due to a real understanding of the number or valuation."

Snapchat's users, mostly in the 18-34 age range coveted by advertisers, spend an average of 25 to 30 minutes on the app and visit it more than 18 times a day, according to the company, making it more visited than any other social media platform.

"Snap is tapping into the pride of ownership (for millennials) which we don't see often in the stock market," said Dan Schatt, chief commercial officer at Stockpile.

Snap's IPO gave Stockpile its biggest single day since it launched in 2015, nearly 10 times the service's daily average in transaction and sales.

"Snap is offering the comfort of buying something that you know so well, understand and use it every day, which is what these young investors want," said Schatt, whose teenaged daughter and son also bought Snap shares with his approval on Stockpile.

On StockTwits, a Twitter-like platform for sharing trading ideas, where 40 percent of users are between the ages of 18 and 34, Snap has been the most talked-about stock for days.

There are concerns about slowing user growth and competition from Facebook Inc (FB.O). The overall sentiment on the stock is now 44 percent bullish and 56 percent bearish, compared to early February when bullish sentiment was 100 percent, according to StockTwits.

That has not deterred Tiffany Dun, a San Francisco-based mortgage consultant in her late 20s who purchased 125 shares in Snap on the first day of trading at about $22 a share.

"There's always risk to everything," she said. "I use the product and I like it, so I bought some."


Article Link To Reuters:

U.S. To Keep AAA-Rating After Debt Ceiling: Moody's

By Richard Leong
Reuters
March 13, 2017

Moody's Investors Services said on Monday the United States will retain the rating agency's top-notch debt rating as long as it meets its interest payments even if the government's borrowing cap is reinstated on Thursday.

Back in November 2015, federal lawmakers suspended the federal debt ceiling, which would be about $19.9 trillion, if they do not vote to extend the suspension which ends on Wednesday.

"While the periodic impasse over raising the debt ceiling is a credit negative feature of the country's debt management, it has not affected the sovereign's credit rating to date," Moody's analysts wrote in a research report published on Monday.

Like Moody's, Fitch has kept its top AAA-rating on U.S. government debt.

However, Standard & Poor's downgraded the U.S.' rating by one notch to AA+ in August 2011. It cited its high level of debt and uncertainty about the federal government's ability to manage that debt load following a debt ceiling showdown.

The Treasury Department said last week it will embark "extraordinary measures" to meet its debt obligation if the debt ceiling goes into effect.

These steps include suspension of SLUGS, which are used by state and local governments to temporarily store the proceeds of their bond sales and ensure tax compliance; stopping investments in federal employee pension plans and halting sales of U.S. savings bonds.

"There is little risk the Treasury will exhaust such measures before the end of fiscal year 2017. These extraordinary measures would have a limited impact on the economy," Moody's analysts said.

The government's current fiscal year ends on Sept. 30.

U.S. Treasury Secretary Steven Mnuchin on Thursday called on Congress to raise the federal debt ceiling "at the first opportunity." and announced the first of several likely cash management measures aimed at staving off a U.S. default.

Meanwhile, U.S. Senate majority leader Mitch McConnell told Politico on Thursday the Unite States will not default on its debt and will raise its debt limit in some fashion.


Article Link To Reuters:

Trump Aides Attack Agency That Will Analyze Health Bill's Costs

By David Lawder 
Reuters
March 13, 2017

Aides to U.S. President Donald Trump on Sunday attacked the credibility of the nonpartisan agency that will analyze the costs of a replacement for Obamacare, as the White House sought to quell opposition from many conservative Republicans.

The Congressional Budget Office, which provides official estimates of the budget impact of proposed legislation, is expected to issue a report as soon as Monday that will assess the healthcare legislation put forward by Republican House of Representatives leaders.

The report could influence sentiment toward a bill already under fire from Democrats and some Republicans, especially if it suggests the legislation would reduce the number of Americans with health coverage or worsen U.S. budget deficits.

Republicans have long opposed Obamacare, formally called the Affordable Care Act, on the grounds it was government overreach and led to higher insurance premiums. The 2010 law, Democratic President Barack Obama’s signature legislation, provided 20 million previously uninsured Americans with health coverage.

Trump has called Obamacare a "disaster" and made its repeal and replacement a key campaign pledge.

Several Republican lawmakers said on Sunday the replacement bill was unacceptable in its current form, including conservative Senator Tom Cotton of Arkansas, who said the plan could not pass the Senate and could put the Republican House majority at risk in 2018 congressional elections.

"I believe it would have adverse consequences for millions of Americans and it wouldn't deliver on our promises to reduce the cost of health insurance for Americans," Cotton said.

In a series of television interviews, White House budget director Mick Mulvaney and top White House economic adviser Gary Cohn said the CBO was focusing on the wrong metrics with the estimates it will provide on the number of people who are insured. Cohn and Mulvaney said the CBO should instead should analyze whether patients can actually afford to go to a doctor.

"I love the folks at the CBO, they work really hard, they do, but sometimes we ask them to do stuff they're not capable of doing, and estimating the impact of a bill of this size probably isn't the - isn't the best use of their time," Mulvaney told ABC's "This Week" program.

Speaking on Fox News, Gary Cohn, director of the White House National Economic Council, said: "We will see what the score is, in fact in the past, the CBO score has really been meaningless."

"They've said that many more people will be insured than are actually insured. But when we get the CBO score, we'll deal with that," Cohn said.

'Cowardly'

The Trump administration's criticisms of the CBO are unusual. Prior administrations, both Republican and Democratic, steered clear of attacking the credibility of the agency, which many lawmakers regard as a neutral arbiter. The CBO's current director, Keith Hall, was appointed by Republicans in 2015.

The credit rating agency Standard & Poor's has estimated 6 million to 10 million people could lose health insurance coverage under the Republican plan.

Senator Bernie Sanders, who ran for president in 2016 as a Democrat, said it was "cowardly" for Republicans to proceed with a healthcare bill without CBO estimates, telling CBS' Face the Nation show: "This is a disgrace."

In recent weeks, Trump administration officials and Republican lawmakers have criticized what they said were overly optimistic estimates from the CBO of the number of Americans who would sign up for health insurance on government-run exchanges.

The CBO estimated in 2013 that 22 million people would be purchasing insurance through the exchanges in 2016. Only 10.4 million were signed up for those plans by the middle of last year, according to Department of Health and Human Services data.

The House Republican legislation would scrap tax penalties for Americans without health insurance, roll back an expansion of Medicaid insurance for the poor, and replace Obamacare's income-based subsidies with a system of fixed tax credits to help people buy private insurance on the open market.

Cohn also disputed the notion that millions of people on Medicaid would become uninsured as Obamacare's expansion of the program is rolled back over a period of years. He said many of these people would be transitioned into new private and employer-sponsored plans that would become more affordable under the Republican plan.

House Speaker Paul Ryan, the Republican plan's top backer in Congress, said he was "certain" the CBO would show a reduction in the number of Americans with coverage.

"You know why? Because this isn't a government mandate," Ryan told NBC's Meet the Press.

Conservative Republicans said, however, they could not support the plan without significant changes. Republican Representative Jim Jordan of Ohio, a founder of the conservative House Freedom Caucus, said it did not go far enough to meet Republicans' promise to kill Obamacare.

"We told them we were going to replace it with something that would bring down the cost of insurance. That's what we told them," Jordan told Fox News Sunday. "This legislation that the speaker's brought forward doesn't do that."


Article Link To Reuters:

Some Bank Bulls Grow Wary On Policy Uncertainty

By Sinead Carew
Reuters
March 13, 2017

Bank shares have been the runaway winners of the post-election U.S. stock market boom as investors wagered that higher interest rates, lighter regulation, lower taxes and faster economic growth would boost profits for lenders.

Up 32 percent since the election of Donald Trump, the S&P 500's bank index has outpaced the wider market's gain by roughly 3-to-1. Now, however, a changing dynamic in the bond market as the U.S. Federal Reserve gears up to raise interest rates at a faster pace than many had previously expected is beginning to give pause to some early bank stock bulls.

With another strong U.S. jobs report in the books, the Fed is widely expected to raise overnight interest rates on Wednesday, and is now seen delivering three rate hikes in 2017.

Rising rates can boost bank profits, but bank profitability also hinges on the difference between short-term rates, like those set by the Fed and which tend to mark the cost for banks to acquire their funds, and long-term rates, which serve as benchmarks for what banks charge their customers for loans.

When that difference, or spread, is large, bank profits can rise rapidly. When it narrows, or flattens, profit growth can suffer.

At issue now is what some investors see as a growing risk of a flattening yield curve under a more aggressive rate-hike path by the Fed. Forwards pricing for 2- and 10-year Treasury yields suggests the spread between them will narrow to about 93 basis points by year-end from the current 122 points.

That is why Jeffrey Gundlach, chief executive officer at DoubleLine Capital and an early buyer of the Trump rally, said he has sold his financial stocks.

"When the Fed tightens more than once a year, historically it is very consistent with a flatter curve," Gundlach said. "The yield curve won't help the sector."

In the month after the Nov. 8 U.S. Presidential election the S&P 500 bank index rose 24 percent. Since then the stocks have risen 5.7 percent as many investors awaited concrete signs of regulatory and tax reform.

"Post-election, that was the easy money on financials right there," DoubleLine's Gundlach said.

More Than Just The Curve

To be sure, the bank rally has been grounded on more than just rate hike expectations and yield curve forecasts. Investor interest has also been stoked by assumptions about Trump's agenda in Washington.

Investors have been betting that Trump's promises of tax cuts would boost consumer spending and company profits, which would drive loan demand. Meanwhile, his promise to slash regulations could also cut compliance costs and allow banks to expand their loan portfolios more rapidly than possible under restrictions imposed following the financial crisis.

That is among the reasons why David Lebovitz, global market strategist at J.P. Morgan Asset Management, still expects more gains for financial stocks.

Even if regulatory and tax reform looks like it will take a long time, investors will likely be patient as long as Trump's administration provides more specifics on its plans including timetables, Lebovitz said.

But he cautioned that "disappointment on the policy front is the biggest risk" to stocks right now as investors have priced in policy changes already.

Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago, said that the bank sector's outperformance may be "done" but stopped short of calling for a correction.

"I'm not sure investors are looking at the shifting yields and market conditions. It seems to be buy and worry about the 'why' later," he said.


Article Link To Reuters:

Concerns About Riskier Mortgages Are Sprouting

By Paul Davidson
USA Today
March 13, 2017

Riskier borrowers are making up a growing share of new mortgages, pushing up delinquencies modestly and raising concerns about an eventual spike in defaults that could slow or derail the housing recovery.

The trend is centered around home loans guaranteed by the Federal Housing Administration that typically require down payments of just 3% to 5% and are often snapped up by first-time buyers. The FHA-backed loans are increasingly being offered by non-bank lenders with more lenient credit standards than banks.

The landscape is nothing like it was in the mid-2000s when subprime mortgages were approved without verification of buyers' income or assets, setting off a housing bubble and then a crash. Still, for some analysts, the latest development is at least faintly reminiscent of the run-up to that crisis.

"We have a situation where home prices are high relative to average hourly earnings and we're pushing 5%-down mortgages, and that's a bad idea," says Hans Nordby, chief economist of real estate research firm CoStar.

The share of FHA mortgage payments that were 30 to 59 days past due averaged 2.19% in the fourth quarter, up from about 2.07% the previous quarter and 2.13% a year earlier, according to research firm CoreLogic and FHA. That's still down from 3.77% in early 2009 but it represents a noticeable uptick.

While that could simply represent monthly volatility, "the risk is that the performance will continue to deteriorate and then you get foreclosures that put downward pressure on home prices," says Sam Khater, CoreLogic's deputy chief economist. Such a scenario likely would take a few years to play out.

The early signs of some minor turbulence in the mortgage market add to concerns generated by recent increases in delinquent subprime auto loans, personal loans and credit card debt as lenders target lower-income borrowers to grow revenue in the latter stages of the recovery.

FHA mortgages generally are granted to low- and moderate-income households who can't afford a typical downpayment of about 20%. In exchange for shelling out as little as 3%, FHA buyers pay an upfront insurance premium equal to 1.75% of the loan and 0.85% annually.

FHA loans made up 22% of all mortgages for single-family home purchases in fiscal 2016, up from 17.8% in fiscal 2014 but below the 34.5% peak in 2010, FHA figures show. The share has climbed largely because of a reduction in the insurance premium and home price appreciation that has made larger downpayments less feasible for some, says Matthew Mish, executive director of global credit strategy for UBS. House prices have been increasing about 5% a year since 2014.

At the same time, the nation's biggest banks, burned by the housing crisis and resulting regulatory scrutiny, largely have pulled out of the FHA market as the costs and risks to serve it grew. Non-bank lenders, which face less regulation from government agencies such as the FDIC, have filled the void.

Non-banks, including Quicken Loans and Freedom Mortgage, comprised 93% of FHA loan volume last year, up from 40% in 2009, according to Inside Mortgage Finance. Meanwhile, the average credit score of an FHA borrower fell to 678 in the fourth quarter from 693 in 2013, according to FHA, below the 747 average for non-FHA borrowers. Mish says non-banks generally have looser credit requirements, and lenders have further eased standards – such as the size of a monthly mortgage payment relative to income – as median U.S. wages stagnated even as home values marched higher.

Here's the worry: If home prices peak and then dip, homeowners who put down just 5% and are less creditworthy than their predecessors will owe more on their mortgages than their homes are worth. That would increase their incentive to default, especially if they have to move for a job or face an extraordinary medical or other expense, Khater says. Foreclosures would trigger price declines that ignite more defaults in a downward spiral.

In turn, funding for the non-bank lenders from banks and hedge funds likely would dry up, and FHA loans would be harder to get, dampening the housing market and the broader economy, Mish says.

Guy Cecala, publisher of Inside Mortgage Finance, says such fears are unfounded, noting Federal Reserve officials have complained that FHA loan standards have been too rigorous.

"The non-banks are bringing a welcome change," he says. They still must meet FHA standards, he says, and are regulated by agencies such as the Consumer Financial Protection Bureau.

Bill Emerson, vice chairman of Quicken Loans, the largest non-bank lender, says the credit standards of his firm and his peers are actually stringent by historical standards and appear looser only because banks sharply tightened their requirements after the housing crash.

"I don't have any concerns about" a potential increase in delinquencies or defaults, Emerson said in an interview. "In the last three, four years, consumers have more access to credit….and all of a sudden it's, 'Here we go again.' Likening the mid-2000's meltdown to a 100-year flood, he added, "I don't believe we're anywhere close."


Article Link To USA Today:

What Happened in Sweden? Trump's World View And The Volvo SUV

Home of H&M, Spotify, Ikea prospering thanks to globalization; Industry minister says protectionism ultimately doesn’t work.


By Johan Carlstrom
Bloomberg
March 13, 2017

Volvo’s luxury XC90 SUV has a quintessentially Scandinavian design. But the cabling comes from Morocco, the catalysts from South Africa, the leather keys from Portugal and its plug-in hybrid batteries from South Korea. Oh, and its owners are Chinese.

When the Swedish car manufacturer was struggling to make ends meet at the height of the global financial crisis, the government in Stockholm made no effort to help even as countries from Germany to the U.S. supported their auto industries. Eventually, Volvo was sold to China’s Geely. Just a few years earlier, local politicians had stood by as the company was sold to Ford Motor Co.

The story of Volvo -- which has suppliers from around 50 countries -- reflects Sweden’s love affair with globalization. Unlike U.S. President Donald Trump, most Swedish policy makers remain convinced that global competition and free trade are key to preserving the country’s status as one of the world’s most prosperous.

Competition from abroad means “our companies have been forced to adopt new ideas and new technologies, or risk going extinct,” said Johan Norberg, a Swedish author on globalization and a senior fellow at the Cato Institute in Washington. “That has been key to Sweden’s success.”

Modern Sweden may show little mercy for businesses that can’t compete, but its fabled welfare state, shaped by decades of Social Democratic rule, ensures that its workers are taken care of if they lose their jobs.

Open Policy


The high taxes needed to finance this safety net may have "had a negative effect on growth," but it has also "created greater tolerance for the job losses caused by competition and free trade,” said Lars Jonung, an economics professor at Sweden’s Lund University.

It wasn’t always like this.

Back in the 1960s and 1970s, successive governments wasted billions in taxpayers’ money trying to save jobs as the ship-building industry -- once its pride and joy -- succumbed to competition from Asia. But in the last few years, Sweden has lost both its car makers -- in 2011, Saab Automobile went belly up after the government refused to rescue it -- with hardly any regret.

Instead, the government has shored up public finances following years of mismanagement compounded by a home-brewed financial crisis in the early 1990s. Today, Sweden boasts one of the world’s lowest public debt loads.

Openness to change has helped replace old industries with international giants like Hennes & Mauritz and Ikea. Sweden has also emerged as one of the world’s biggest exporters of music and computer games, with Spotify and Minecraft now household names, thanks to an aggressive public policy encouraging computing ownership. All this in a small country of just 10 million people.



Not Perfect

Sweden’s “drawbridge down” approach is not without its challenges. In 2015, close to 160,000 asylum seekers were drawn to its generous immigration policy, meaning Sweden had welcomed almost as many refugees as the U.S., according to the United Nations High Commissioner for Refugees. Trump’s comments during a Florida speech notwithstanding, integrating such large numbers into the labor market doesn’t come without challenges, and has stoked support for the anti-immigration Sweden Democrats. Though still a pariah in Sweden’s political landscape, the party has grown to become the country’s second largest in a recent poll after entering parliament for the first time in 2010.

But even the Sweden Democrats don’t agree with Trump on trade. Party leader Jimmie Akesson said in a recent interview that the problem with having open borders is the people coming through, not the flow of capital.

According to Norberg, the solution isn’t closing borders but reforming the economy, for instance by allowing lower entry-level salaries and deregulating new sectors.

As for trade, Trump needs to reconsider his protectionist stance. The struggle in the U.S. car industry is a case in point: Efforts to protect workers from wage competition merely ended up hurting its competitiveness, Norberg said.

It’s a view shared by Sweden’s minister for enterprise and innovation, Mikael Damberg.

"It’s a mistake if the United States turns its back to the world on trade," Damberg said in a recent interview in London. "If you think you can defend the old world from technology and innovation, then over time, technology will run you over."

As for Volvo Cars, its Chinese owners have turned losses into profits. After launching a raft of new models, the company last year reported a 66 percent increase in operating profit to 11 billion kronor as global sales hit a record of more than half a million cars. Its luxury XC90 SUV is still being built in Sweden.

“No one wants to produce all of the cars in the country where they’re selling them,” said Hakan Samuelsson, chief executive officer at Volvo Cars, last month in Stockholm. “Trade barriers will always drive up the cost for consumers. One should remember that.”


Article Link To Bloomberg:

The Fed Has A Choice To Make, With Enormous Stakes

By Robert J. Samuelson
The Washington Post
March 13, 2017

Toward the end of 1942, Winston Churchill, in announcing a rare victory over the German army, uttered one of his more memorable phrases: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” The same might be said today of the American economic recovery. Progress, though real, is incomplete.

Nine years after Bear Stearns’s collapse — the first sign that the economy was in serious trouble — the recovery seems to have healed the Great Recession’s worst wounds. Job creation has been steady. Payroll jobs total 145.8 million, up about 16.1 million from the slump’s low point and 7.5 million from the pre-recession peak.

There’s also upbeat news on wages. In a new report, economist Elise Gould of the left-leaning Economic Policy Institute (EPI) reports that median wages, adjusted for inflation, grew 3.1 percent between 2015 and 2016 — a feat that, if repeated for a decade, would mean an increase of a third. (The median wage is the one exactly in the middle of all wages.)

“What stands out in this last year of data is that the economic recovery appears to finally be reaching a broad swath of American workers,” writes Gould. “In fact, wage growth in 2016 was more rapid for middle- and low-wage workers than for those at the top.” The unemployment rate, 4.7 percent in February, is close to what many economists think is “full employment.”

And yet, stubborn problems linger. Corporate managers, small-business owners and consumers all remember the traumatizing effects of the financial crisis and Great Recession. To protect against a repetition, they’ve become more risk-averse. Similarly, some of the recovery’s “good news” needs to be qualified.

Consider wages. Recent increases for middle-income workers mostly represent catch-up from losses suffered in the recession. The table below reflects data in Gould’s report. It shows the median hourly wage for men and women in four recent years, corrected for inflation.

MEDIAN HOURLY WAGES -- MEN:WOMEN

2000 $19.44; $15.22
2007 $19.45; $15.90
2015 $19.18; $15.87
2016 $19.33; $16.08

As can be seen, men’s median hourly wage — not counting fringe benefits — is slightly below its levels in 2000 and 2007, the peak year before the recession. Women’s median wage is up about 6 percent since 2000 and slightly more than 1 percent since 2007.

(A note for policy wonks: You will notice that for 2016 the increase in the median wage for all workers, men and women combined, is greater than the increase for either men or women separately. The likely explanation: The composition of the labor force changed, favoring higher-paid men who pulled up the overall median.)

The recovery, though encouraging, is certainly no economic panacea. Mounting inequality remains a big issue. From 2000 to 2016, the best-paid 5 percent of men achieved a 30 percent wage increase, according to Bureau of Labor Statistics data analyzed by Gould. For women, the comparable gain was 24 percent.

Another glaring problem has been the dismal performance of productivity. To remind: Productivity is economic jargon for efficiency; without improved productivity, broad gains in living standards are impossible. From 1948 to 2016, productivity gains averaged 2 percent annually; but since 2012, gains have been less than 0.4 percent a year. If continued, and combined with rising inequality, this suggests stagnant living standards or worse for millions.

With unemployment low and price pressure rising, the Federal Reserve usually increases interest rates to slow the economy and preempt higher inflation. This is happening. Later this week, the Fed is expected to raise the so-called Fed funds rate to 1 percent. Many economists expect two more comparable increases in 2017, bringing the rate to 1.5 percent.

But might the Fed be oversensitive to inflation? Other economists think so. Writing last week in the Wall Street Journal, Jason Furman — recently President Barack Obama’s chief economist — urged the Fed to run the economy “a little hotter, driving up wage growth and bringing more people back into the workforce.”

Economist Josh Bivens of EPI likewise favors a “high-pressure economy” that would lead to bigger wage gains and stronger demand. But rather than feeding mostly into higher inflation, these pressures would “spur employers to boost capital investments and other drivers of productivity growth,” which would offset wage and price increases.

In other words: The Fed should give the economy “room to run” — meaning fewer interest-rate increases. Perhaps. But what seems sensible also could be wishful thinking. The lesson of the double-digit inflation of the late 1970s and early 1980s is that, once higher inflation captures popular psychology, it takes a crushing recession to purge it. That’s probably still true.

The stakes here are enormous. If the Fed gets it wrong, we will all pay.


Article Link To The Washington Post:

President Trump’s Report Card After 50 Days In Office

By Michael Goodwin
The New York Post
March 13, 2017

President Trump is halfway through his First 100 Days, so it’s time to give him the Ed Koch test. “How am I doin’?” the late New York mayor used to ask, and he always got an answer.

Trump isn’t asking, but he gets a report card anyway. Assessing his start in three key subject areas, I see a mix of solid hits and key misses, with huge potential and reasons for optimism.

On Subject No. 1, whether he is keeping his campaign promises, Trump scores an A. His focus on doing what he said he would do is the best part of his young presidency because faithfulness is the key to restoring Americans’ trust in government.

Corruption in the halls of power is a perennial problem, but more corrosive these days is the near universal belief that all politicians say one thing and do another. Trump was elected largely because he was an outsider untainted with that baggage, and on that score, he is proving that voters made the right choice.

His focus on fixing immigration, creating jobs and replacing ObamaCare is consistent with his main campaign themes. Two others, tax reform and rebuilding the military, are next in line. Even those who disagree with Trump must concede he is serious about his pledge to put Americans first.

On Subject No. 2, whether he is delivering results, Trump gets a B. From the moment of the election, he eyed low-hanging fruit he could pick through executive orders, which he issued right out of the gate. Those changes already show impressive gains.

Economic confidence is rising among businesses, entrepreneurs and consumers, thanks in part to the president’s push to keep companies from moving plants and jobs to Mexico. He meets regularly with corporate titans, small business owners and unions, all of who have ideas on getting the economy roaring.

Trump’s order that federal agencies reduce two regulations for each new one is boosting animal spirits, and the stock market surge has added more than $2 trillion to national wealth. To top it off, Friday’s strong jobs report and firm wage growth for February add to the happy sense that growth is accelerating.

Something positive also is happening on immigration, with officials saying the number of people caught trying to enter illegally from Mexico in February was the lowest in five years. Even The New York Times grudgingly concedes the Trump effect, saying interviews in America, Mexico and Central America turned up few people who “quibbled with the idea that President Trump had altered the climate for immigration.”

Simply put, even before the wall is built, America is finally on course to getting border control and creating an immigration system of our choosing.

The contrast with President Obama’s lackluster performance on the economy and immigration is stark. Good ideas and new presidential leadership are bringing swift results that Obama never delivered.

Alas, not everything went as Trump planned. His first order on immigration and refugees had a clumsy rollout and was blocked by the courts, while his second, though more tailored, is drawing suits from states trying to stop it. It is also mystifying that the White House can’t say what, if anything, officials are doing to tighten security vetting in the meantime.

Regarding ObamaCare, the complexity of health care guarantees results will not be immediate, but Trump is not ducking the fight.

With legislation roiling the GOP, he is playing a constructive role by meeting with both sides and encouraging swift resolution while also staying open to changes. His promise to help sell the final measure to the public reflects his commitment.

Subject No. 3, working with others, is the least impressive part of the president’s start and earns him a mediocre C.

His lack of political experience shows in his slow, uneven actions in forming a government. On one hand, his Cabinet is generally first-rate, with Secretary of Defense James Mattis, Homeland chief John Kelly and Secretary of State Rex Tillerson looking like stalwart pillars.

"Even those who disagree with Trump must concede he is serious about his pledge to put Americans first."

On the other hand, the White House has only itself to blame for being behind schedule in nominating people for the bulk of the 1,100 positions that require Senate confirmation. Combined with the Democrats’ obstruction, the result is too many empty desks and too many Obama holdovers, some of whom are undermining Trump by leaking secrets.

Still other leaks are coming from Trump’s own team. Unflattering reports about him cite sources “close to the president” or
“people around him,” which signals inner circle discontent. That is troubling so early in an administration.

Most worrisome, Trump often seems like a lone ranger fighting the world. Even Superman needed help, and governing is a team sport.

His explosive tweets accusing Obama of wiretapping him caught Trump’s aides off guard, and reportedly resulted in him having furious arguments with Steve Bannon and Reince Priebus.

While Trump is right to suspect he is the victim of dirty tricks started by the last administration, his accusing Obama personally was a combustible way of making the point and probably ended any possibility of a constructive relationship.

Some critics blame Trump’s use of Twitter, but he has no intention of giving it up and I don’t blame him. Twitter gives him a fast way of speaking without the filter of a press corps that is biased and hostile, and conveys a personal touch that official statements don’t.

Yet the advantages disappear when he uses it to pick a fight nobody on his team is ready for. The all-hands-on-deck alarm pulls everybody into an emergency and locks him into an agenda that hasn’t been discussed and may be a mistake.

It also reinforces fears that Trump is too undisciplined. While his free-wheeling style is often refreshing, many Americans still find his unpredictability unnerving.

On other subjects, such as his response to challenges from foreign adversaries, it is too soon to offer a grade.

When I interviewed Trump before the inauguration, he said he didn’t expect to be tested by Iran, Russia, China and North Korea.

“I’m not a game player,” he told me. “They understand me.”

Yet many of those powers are indeed testing the new president to see how he reacts to provocation.

Trump so far has kept his cool while signalling he won’t turn the other cheek. Still, we have no idea how any of this will turn out, so a grade would be premature.

The domestic report card then shows an A, a B and a C, giving the president a solid B average for the first 50 days. That’s a very good start and there is opportunity for big improvement when he gets more experience and has his full team in place.

Here’s the best news: We have a president determined to succeed and willing to work tirelessly to make America great. That’s why I remain optimistic.


Article Link To The New York Post: