Forecasting Instability For The Year To Come
December 9 2009

Numbers up front, markets predicted to be unstable in coming year, commercial mortgage default rate doubles, no laws where there should be, forcasting a devaluation courtesy of the Fed, not a recession, a depression

This past week the Dow rose 0.8%, the S&P 1.3%, Nasdaq 1.5% and the Russell 2000 4.4%. Banks rose 2.7%; broker/dearlers 3.9%; cyclicals 2.8%; transports 4.6%; consumer 0.8%; utilities 3.8%; high tech 2.3%; semis 8.2%; Internets 2.4% and biotechs 2.7%. Gold bullion fell $16.00 and the HUI was virtually unchanged. The dollar index USDX rose 1% to 75.75.

Two-year T-bill yields rose 15 bps to 0.84%, the ten-year notes rose 27 bps to 3.48% and the German 10-year bund rose 7 bps to 2.23%.

Freddie Mac 30-year fixed mortgage rates fell 7 bps to 4.71%. The 15’’s fell 2 bps to 4.27% and one-year ARMs fell 10 bps to 4.25%. The 30-year fixed jumbos rose 9 bps to 5.99%.

Fed credit fell $2.8 billion to $2.187 trillion. It has declined $59.5 billion ytd, but has grown $69.3 billion yoy. Fed foreign holdings of Treasuries and Agencies increased $6.2 billion to a record $2.932 trillion. Custody holdings for foreign central banks expanded at a 17.9% rate ytd, and 17.5% yoy, or $437 billion.

Total money market assets declined $10.2 billion to $3.319 trillion. They have declined $511 billion ytd, or 14.4% annualized. This is a result of the end of government guarantees on 9/1809 in order to force big savers out of these funds into Treasuries and Agencies.

M2 narrow money supply was little changed at $8.391 trillion, it is up 4.9% yoy and 2.7% ytd.

European socialists and Marxists are calling for a tax on financial transactions and American Democrats agree. Unfortunately, these types never saw a tax they didn’t like.

Some of the most controversial financing practices of the credit-bubble years – from cov lite loans to Pik toggle notes and dividend recap exercises – have returned to Wall Street, stoking fears that debt markets are growing overheated. The techniques fell into disrepute during the financial crisis. In a cov light – short for covenant light – loan, borrowers are granted credit with few, if any, conditions. Pik toggle transactions make it possible for debt to be repaid with more debt – payment-in-kind notes. In a dividend recap, companies take on additional debt to pay dividends to their owners. The reappearance of such instruments in recent weeks has stirred concerns that government efforts to stimulate lending are having unintended consequences, encouraging lenders to take positions based on rest-of-all-possible-worlds’ assumptions.

Former US Treasury Undersecretary Timothy Adams said financial markets will be unstable next year as nations seek to withdraw emergency policies undertaken during the global recession. My biggest concern is that ‘we are simply creating new bubbles,’ Adams… ‘2010 is a year of volatility, as capital sloshes around the global markets in the search of yield as exit strategies are put in place at different times and at different magnitudes.

Highway-construction companies around the country, having completed the mostly small projects paid for by the federal economic-stimulus package, are starting to see their business run aground. Tim Word, vice president of Dean Word Co., a heavy-construction company said his income is now coming mostly from projects that are winding up. Having something to bid on is the lifeblood of the industry, and it’s running out, said Mr. Word. He isn’t sure what will happen next year without new projects. There’s no pavement fairy that’s going to help.

The Federal Housing Administration, faced with rising losses on home loans that it insures, is set to announce a raft of measures it is considering to protect its dwindling reserves. Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, plans to ask Congress to raise the cap on the annual insurance premium that the FHA can charge borrowers he will also outline steps the agency is considering to set minimum credit scores, to require home buyers to put more money down, and to make lenders more accountable for loans that the agency insures. Those measures are designed to begin rebuilding the agency’s depleted capital reserves.

The commercial mortgage default rate on loans held by US banks more than doubled to 3.4% in the third quarter as vacancies rose and rents declined, Real Estate Econometrics LLC said. Defaults climbed from 1.37% a year earlier and from 2.88% in the second quarter. Mortgages originated in 2006 and 2007 are experiencing the most significant shortfalls in current cash flow relative to current debt-service obligations, Sam Chandan, chief economist said.

New issues of Build America Bonds, the type of subsidized taxable debt Massachusetts will offer today, may rise 40% from this year’s monthly average to total $110 billion in 2010, JPMorgan Chase & Co. strategists said.

Long used to manageable property tax bills, California homeowners have been lamenting over the last few years that their assessments did not reflect the enormous slide in the value of so many homes here. Now, for the first time in more than 30 years property tax bills will reflect negative price inflation, reducing most homeowners’ tax bills come January.

Two members of the Academy of Motion Picture Arts and Sciences have called on the group to take back the Oscar awarded to former Vice President Al Gore for the documentary "An Inconvenient Truth."

Roger L. Simon and Lionel Chetwynd made the request based on the e-mails that a hacker/whistle blower released revealing that so-called scientists at the Climatic Research Unit at the University of East Anglia in England systematically falsifying data to support the theory that the earth is heating up and that humans caused it.

"An Inconvenient Truth," a film based on a climate-change speech that Gore developed, won the Academy Award for best documentary feature in 2007. (Coincidentally, the next day, the Tennessee Center for Policy Research uncovered that Gore’s Nashville home guzzled 20 times more electricity than the average American household.)

That same year, the Academy elevated Gore's PowerPoint lecture, helping him to snag a Nobel Peace Prize as well.

The academy members' request that Gore return his statue is happening as preparations are under way for next week's United Nations climate change meeting in Copenhagen, where 16,500 people from 192 countries will fly in using private jets, consume 200,000 meals, and produce an estimated 41,000 tons of carbon dioxide, roughly the same as the carbon emissions of Morocco in 2006.

Our government continues to do its best to suppress gold and silver and commodity prices. Their ham-fisted presence was quite evident this past week and it was only marginally successful. All they accomplished was to make an unnatural correction in a market that could have needed a natural correction. The underlying fundamental factors are still very bullish. The technicals and the long-term charts as well as pro-gold and silver psychology are still in place. The reality is that gold, silver and commodities are still in bull markets and intervention by the President’s “Working Group on Financial Marketsâ€