One thing that may be helping the US economy is squatters’ rent:
Millions of Americans have more money to spend since they fell delinquent on their mortgages amid the worst housing collapse since the Great Depression. They are staying in their homes for free about a year and a half on average, buying time to restructure their finances and providing an unexpected support for consumer spending, which makes up about 70 percent of the economy.
So-called “squatter’s rent,” or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The extra cash could represent a boost to spending that’s equal to about half the estimated savings generated by cuts to payroll withholding in December’s bipartisan tax plan.
Even after all the carnage, the situation is still deteriorating:
More than 28 percent of U.S. homeowners owed more than their properties were worth in the first quarter as values fell the most since 2008, Zillow Inc. said today.
Homeowners with negative equity increased from 22 percent a year earlier as home prices slumped 8.2 percent over the past 12 months, the Seattle-based company said. About 27 percent of homes were “underwater” in the fourth quarter, according to Zillow, which runs a website with property-value estimates and real-estate listings.
Home prices fell 3 percent in the first quarter and will drop as much as 9 percent this year as foreclosures spread and unemployment remains high, Zillow Chief Economist Stan Humphries said. Prices won’t find a floor until 2012, he said.
Thinking of protesting your credit card bill? Don’t:
Three Citibank debt collectors allegedly killed Irzen Octa, 50, secretary general of the National Unity Party (PPB), on Tuesday after he protested an increased credit card bill, the police said on Thursday.
“The motive of the murder is due to debt [issues], a credit card bill that didn’t fit [the formerly-given figure],” South Jakarta Police chief detective Adj. Sr. Comr. Budi Irawan said on Thursday.
Budi said the victim objected to his Citibank credit card bill, which had grown to Rp 100 million (US$11,500) from the Rp 48 million of which Irzen had been expecting.
Irzen only learned of the “unfitting” bill as he was about to pay it at the Citibank office branch at Jamsostek Tower in South Jakarta on Tuesday, the police said.
“We’ve found evidence at the crime scene in form of blood traces on the curtains and on the walls of the room on the fifth floor,” he added.
Budi said Citibank debt collectors A., H. and D., now named suspects, attacked Irzen because they were angered by his protest.
Forensic results show broken blood vessels in the victim’s brain.
SEC Chairman Mary L. Schapiro used an opportunity to vilify High Frequency Trading in a speech to the Investment Company Institute:
In thinking through our next steps, we need to consider several important questions:
- First, what is “excessive short-term volatility?” Put another way, what level of volatility is appropriate in continuous trading, and at what point should circuit breakers or limit up/limit down take effect?
- Second, how does excessive volatility affect – and how is it affected by – different market participants, including traders, investors, individual securities and mutual funds?
- And finally, should high-frequency traders, who often derive significant benefit from their role as de facto market makers, also have the obligations of market makers as well as other responsibilities with respect to the impact of their technology and trading strategies on the markets?
There are a number of similarities between 1962 and 2010. For example, neither of these severe price moves could be readily explained by a particular news event. On both days, some market data systems were overwhelmed by the heavy volume.
And, in both instances, the sudden declines struck at investor confidence, leading them to question the stability and integrity of the equity markets.
But the differences between those two events are even more striking.
First, the magnitude of the declines, both at the broad market index level and for worst-hit individual securities, was much more severe in 2010 than 1962. In ‘62, the Dow declined to intraday lows of 6.3 percent compared to 9.9 percent on May 6. And one of the worst-hit individual securities in 1962 dropped 9.3 percent in a 12-minute period. In 2010, many securities lost 100 percent of their value in a matter of seconds.
Perhaps the biggest difference – and one that may help explain the difference in the magnitudes of the declines – is the volume and trading behavior of the professional traders who were expected to be the primary liquidity providers.
In ’62, the specialists who were then the primary liquidity providers, represented approximately 17 percent of market volume and were net buyers in aggregate during the decline. In 2010, the high frequency traders who are today’s liquidity providers represented well more than 50 percent of market volume and were net aggressive sellers during the broad index price decline.
High frequency traders turned what was a very down day for many investors into a very profitable one for themselves by taking liquidity rather than providing it. I think their activity that day should cause us to thoroughly examine their current role.
…
Also, if the plan is approved, these pauses could provide a period in which market participants have an opportunity to assess the market and decide whether and at what prices they wish to buy or sell. The result should be trading driven less by momentum-seeking algorithms and more by rational trading based on fundamentals.
…
We need to continue examining the effects of high speed trading on the markets and on buy-side and fundamental investors. The role of these traders, whose prominence in the markets seems only to increase, should be subject to further scrutiny. The possibility of imposing obligations during times of potential turmoil must remain on the table. And we need to pay attention to other potential flaws that could bring about equally disruptive events.
I’m sure that anybody offered the chance to get the deal that market-makers got in 1962 would jump at the chance. Fixed Commissions! One-eighth ticks! Preferential access to the order book!
She continues to ignore the impact of Stop-Loss orders – and it is Stop-Loss orders, I remain convinced, that turned a hiccup into a rout. There’s an example of a “momentum-seeking algorithm” if ever there was one!
It is also interesting that she refers to profits of HFT – I haven’t seen the question of HFT profitability addressed before. I’m sure that there are some players who made good money – but where are the figures?
The other statement of interest is the notion of imposing obligations on HFT to make markets. Generally, market makers have obligations for which they are paid in privileges. I find it very difficult to believe that the SEC intends to grant privileges to HFT, so the SEC will have to recast some otherwise normal elements of market activity as privileges. This is a very slippery slope; and there is still nothing being done about the Stop-Loss Orders.
The Federal Reserve Bank of Kansas City has released the May 2011 Edition of Fed Letter:
The May 2011 issue of Fed Letter contains the following articles: Ag finance conditions strengthen, databook finds; Community Affairs newsletter now available; District manufacturing moderates in April; Latest Economic Review research available; and Regulatory Developments.
Remember Basis Yield Alpha Fund? It was one of the first hedge funds to go under during the credit crunch, despite the managers’ assurances that they were pretty smart cookies. But the whining continues:
The day after the United States Senate released what has been described as a “scathing report” on the activities of Goldman Sachs leading up to and during the financial crisis, Australian-based Basis Yield Alpha Fund (which has waged a legal battle with the investment bank over its Timberwolf CDO), released a comment saying “Yesterday’s Senate Report confirms that in fact Goldman made a concerted effort to mislead and defraud investors, including Basis.”
The Basis Fund suit was filed in June 2010 after the fund saw an $80m investment into Timberwolf disintegrated in a matter of weeks (the suit alleges the fund lost $50m in losses and margin calls). The fund is arguing that Goldman used aggressive sales tactics and assurances that the secondary CDO market was stable, knowing that these statements were false. In August 2010, Goldman submitted a motion asking that the case be thrown out entirely due to jurisdiction because The Basis Fund executives are based in Australia. That motion was denied and the case is still working itself through the US Federal Court System.
In Thursday’s statement the Basis Fund legal team says that having asked Goldman executives questions regarding the Timberwolf security “they were met with carefully constructed lies and non-disclosures.” Eric Lewis, lead counsel for the fund says “Goldman created Timberwolf to fail, so Goldman could bet against it, and Goldman then sold the security to Basis as stable and well priced, when its own internal analysis showed that Timberwolf’s value was sinking like a stone. It is time for Goldman to be held accountable.”
I last mocked the fund and its crybaby principals on 2010-5-18. In essence, these superstars of analytical prowess bought the issue with clients’ money because Goldman said it was good. They should lose their licenses, if they still have them.
David Papell, Professor of Economics at the University of Houston, writes an interesting guest-post on Econbrowser, titled The Taylor Rule and QE2:
What are the implications of our research for current policy? With Taylor’s original rule, the prescribed federal funds rate for 2009 – 2010 is zero or slightly negative. With a variant of the Taylor rule that doubles the size of the output gap coefficient, it is about negative four percent. This is important because, with the constraint of a zero lower bound on the federal funds rate, large negative prescribed interest rates provide a rationale for the Fed’s quantitative easing in 2009 (QE1) and 2010-2011 (QE2). Our paper does not say whether or not QE1 and QE2 were good policies, a topic that is beyond the scope of our research. It does say that, if you are going to use negative prescribed interest rates to justify quantitative easing, you need to use a rule that can be justified by historical experience. Taylor’s original rule, which can be justified by historical experience, does not produce negative prescribed interest rates for 2009-2011. Variants of Taylor rules with larger output gap coefficients, which do produce negative interest rates, cannot be justified by historical experience. The Taylor rule does not provide a rationale for quantitative easing.
Strange things are happening with the TMX-LSE deal:
Traders who profit from mergers and acquisitions are betting for the first time a higher offer will trump the London Stock Exchange Group Plc (LSE)’s deal for Toronto- based TMX Group Inc. (X), leaving both bidders as losers.
A group of Canadian banks is in talks with the nation’s pension funds on alternatives to LSE’s $3.1 billion bid to keep the Toronto Stock Exchange under local ownership, the head of the pension plan in Alberta said last week. The discussions caused TMX’s share price to rise above LSE’s all-stock offer on May 6 for the first time since it was announced in February, as arbitragers bet a competing bid will emerge once LSE gains regulatory approval, according to data compiled by Bloomberg.
- Under our sovereign ratings criteria, a commercial debt rescheduling typically constitutes a default.
- In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously-issued government bonds.
- Accordingly, we are lowering both the long- and short-term ratings on Greece to ‘B’ and ‘C’, respectively.
- We are leaving both ratings on CreditWatch
The premium investors demand to hold Greek 10-year securities instead of benchmark German bunds rose 27 basis points to 1,261 basis points. The cost of insuring Greek debt for five years rose 30 basis points to a record 1,371 basis points, according to CMA prices for credit-default swaps. The Portuguese 10-year yield increased 12 basis points to 9.67 percent, while the equivalent-maturity Spanish yield advanced 8 basis points to 5.32 percent.
European leaders had an unscheduled meeting over the weekend, with Luxembourg Prime Minister Jean-Claude Juncker saying Greece “does need a further adjustment program.” Another credit-rating cut would make Greece the lowest-rated country in Europe as today’s reduction, the fourth by S&P since April 2010, left it even with Belarus.
And it was a good day of across the board strength in the Canadian preferred share market, with PerpetualDiscounts up 16bp, FixedResets gaining 14bp and DeemedRetractibles winning 19bp. Not a lot of volatility, with only three entries in the Performance Highlights table. Volume was average.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0235 % | 2,438.2 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0235 % | 3,667.0 |
| Floater | 2.47 % | 2.26 % | 39,160 | 21.62 | 4 | 0.0235 % | 2,632.6 |
| OpRet | 4.86 % | 3.68 % | 61,056 | 1.17 | 9 | -0.1411 % | 2,417.1 |
| SplitShare | 5.20 % | -0.06 % | 66,767 | 0.60 | 6 | -0.0628 % | 2,498.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1411 % | 2,210.2 |
| Perpetual-Premium | 5.74 % | 5.52 % | 137,847 | 2.33 | 9 | -0.0022 % | 2,060.8 |
| Perpetual-Discount | 5.54 % | 5.55 % | 117,991 | 14.50 | 15 | 0.1643 % | 2,142.2 |
| FixedReset | 5.15 % | 3.34 % | 208,185 | 2.87 | 57 | 0.1419 % | 2,304.3 |
| Deemed-Retractible | 5.20 % | 4.99 % | 306,161 | 8.12 | 53 | 0.1945 % | 2,110.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IAG.PR.A | Deemed-Retractible | 1.06 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.90 Bid-YTW : 6.30 % |
| SLF.PR.A | Deemed-Retractible | 1.16 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.71 Bid-YTW : 6.02 % |
| SLF.PR.F | FixedReset | 1.48 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 27.50 Bid-YTW : 2.97 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.G | Deemed-Retractible | 104,232 | Desjardins crossed three blocks 24,900 at 23.87, followed by 45,000 and 25,000 at 23.90. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.91 Bid-YTW : 5.03 % |
| GWO.PR.N | FixedReset | 60,500 | Nesbitt crossed 50,000 at 24.65. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.60 Bid-YTW : 3.94 % |
| BMO.PR.J | Deemed-Retractible | 58,570 | Scotia crossed 15,000 at 24.62; Desjardins crosed 10,900 and 11,900 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.55 Bid-YTW : 4.72 % |
| CM.PR.D | Deemed-Retractible | 54,200 | Nesbitt crossed 50,000 at 25.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-06-08 Maturity Price : 25.25 Evaluated at bid price : 25.47 Bid-YTW : -3.16 % |
| BNS.PR.Y | FixedReset | 52,860 | TD bought 10,000 from anonymous at 25.25. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 3.55 % |
| BNS.PR.L | Deemed-Retractible | 49,135 | Desjardins crossed blocks of 22,400 and 10,100, both at 24.15. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.18 Bid-YTW : 4.94 % |
| There were 34 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| FTS.PR.G | FixedReset | Quote: 26.35 – 26.80 Spot Rate : 0.4500 Average : 0.3299 YTW SCENARIO |
| CIU.PR.A | Perpetual-Discount | Quote: 22.61 – 22.99 Spot Rate : 0.3800 Average : 0.2941 YTW SCENARIO |
| BAM.PR.H | OpRet | Quote: 25.29 – 25.57 Spot Rate : 0.2800 Average : 0.1980 YTW SCENARIO |
| IAG.PR.E | Deemed-Retractible | Quote: 25.60 – 25.87 Spot Rate : 0.2700 Average : 0.1971 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 25.80 – 26.20 Spot Rate : 0.4000 Average : 0.3328 YTW SCENARIO |
| NA.PR.N | FixedReset | Quote: 26.60 – 26.80 Spot Rate : 0.2000 Average : 0.1403 YTW SCENARIO |