Back in January I listed several policies and agreements that were expected soon. Here is a status update ...

• Extension of payroll tax cut and extended unemployment benefits: Signed into law today by President Obama.

• Mortgage Servicer Settlement. Announced, but still waiting for documents on the National Mortgage Settlement website.

• REO to Rental Program: A pilot program was announced on Feb 1st, from the FHFA: FHFA Announces Interested Investors May Pre-Qualify For REO Initiative. Reuters reported last week: Freddie Mac pitches REO plan to mortgage-bond investors Freddie Mac has begun talks with institutional mortgage-bond investors interested in buying hundreds of distressed single-family residential properties across the US in order to convert them to rental units, according to people with knowledge of the discussions.

Freddie Mac is making efforts to fast-track its own version of a proposed US foreclosure-rental program ...And the NAR chief economist Lawrenece Yun said today: "A government proposal to turn bank-owned properties into rentals on a large scale does not appear to be needed at this time.”It still isn't clear how soon this program will be in place (or the size).

• A surge in refinance activity in March from HARP. Still waiting ...

And on Europe:
• Greek debt deal: Announced, but there are several hurdles over the next couple of weeks.

• The second round of the ECB's 3 year Long Term Refinancing Operation (LTRO) will be held on February 29th.

Note: The Case-Shiller House Price index for December will be released Tuesday, Feb 28th. CoreLogic has already reported that prices declined 1.4% in December (NSA, including foreclosures). It appears that the Case-Shiller indexes (both SA and NSA) were at new post-bubble lows in December.

• Today from FNC: December Residential Property Values Decline 0.7%
Based on the latest data on non-distressed home sales (existing and new homes) through December, FNC’s national RPI shows that single-family home prices fell in December to a seasonally unadjusted rate of 0.7%. ... As a gauge of underlying home value, the RPI excludes sales of foreclosed homes, which are frequently sold with large price discounts reflecting poor property conditions.
...
All three RPI composites (the National, 30-MSA, and 10-MSA indices) show month-to-month declines in December, ranging from -0.7% at the national level to -1.1% in the nation’s top 10 housing markets.

The indices’ year-to-year trends generally show the pace of price declines slowing. The national RPI indicates that December home prices declined at a seasonally adjusted rate of 3.5%, the smallest year-to-year declines since May 2010 when home prices rebounded under the federal homebuyer tax credits program. The year-to-year declines at the nation’s top housing markets, as indicated by the 30- and 10-MSA composites, have also decelerated to their slowest pace.The FNC index tables for four composite indexes and 30 cities are here.

• Zillow Forecast: Zillow Forecast: December Case-Shiller Composite-20 Expected to Show 4.0% Decline from One Year AgoZillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will decline by 4.0 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will decline by 3.9 percent. The seasonally adjusted (SA) month-over-month change from November to December will be -0.5 percent and -0.6 percent for the 20 and 10-City Composite Home Price Index (SA), respectively.Case-Shiller will probably report house prices were at a new post-bubble lows in December for both the seasonally adjusted (SA) index and the Not Seasonally Adjusted (NSA) index.

 Case Shiller Composite 10Case Shiller Composite 20NSASANSASACase Shiller (actual)December 2010156.04155.91142.39142.32  November 2011151.9150.89138.49137.52 Zillow December ForecastYoY-3.9%-3.9%-4.0%-4.0% MoM-1.3%-0.6%-1.3%-0.5% Zillow Forecasts1150149.9136.7136.7 Post Bubble Lows150.44150.89137.64137.52 Date of LowApril 2009November 2011 March 2011November 20111Estimate based on Year-over-year and Month-over-month Zillow forecasts

HORIZONS ETFS ANNOUNCES FEBRUARY 2012 DISTRIBUTIONS

TORONTO, February 21, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the distribution amounts per unit (the “Distributions”) for certain of the Horizons ETFs family of exchange traded funds (the “ETFs”), for the period ending February 29, 2012, as indicated in the table below.

The ex-dividend date for the Distributions is anticipated to be February 27, 2012, for all unitholders of record on February 29, 2012. The Distributions will be paid in cash or, if the unitholder has enrolled in the respective ETF’s dividend reinvestment plan (DRIP), reinvested in additional units of the applicable ETF, on or about March 12, 2012.

[Complete Press Release] Horizons ETFs Announces February 2012 Distributions
HORIZONS ENHANCED U.S. EQUITY INCOME FUND ANNOUNCES MONTHLY DISTRIBUTION

TORONTO, February 21, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the monthly distribution of the Horizons Enhanced U.S. Equity Income Fund (the “Fund”) for February 2012 in the amount of $0.06392 per Class A unit of the Fund. The Class A units of the Fund are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol HES.UN.

The distribution represents an 8.07% annualized yield on the Fund’s initial public offering price of $10.00 per Class A unit. The February distribution ex-dividend date is anticipated to be February 27, 2012, for all Class A unitholders of record on February 29, 2012. The distribution is payable on March 12, 2012.

[Complete Press Release] Horizons Enhanced U.S. Equity Income Fund Announces Monthly Distribution

HORIZONS GOLD YIELD FUND ANNOUNCES FEBRUARY 2012 DISTRIBUTION

TORONTO, February 21, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. (“AlphaPro”) are pleased to announce the monthly distribution rate for the Horizons Gold Yield Fund (the “Fund”) for February 2012 in the amount of $0.07780 per Class A unit and Class F unit of the Fund. The Class A units of the Fund are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol HGY.UN. The Class F units of the Fund are not publicly listed.

This distribution rate, which is equivalent to $0.9336 per annum or a yield of 9.34% per annum on the initial issue price of $10.00 per Class A unit and Class F unit. The February distribution ex-dividend date is anticipated to be February 27, 2012, for all Class A and Class F unitholders of record on February 29, 2012. The distribution is payable on March 12, 2012.

[Complete Press Release] Horizons Gold Yield Fund Announces February 2012 Distribution

For further information:
Martin Fabregas, Investor Relations, (416) 601-2508 or 1-866-641-5739.

Note: This index is a leading indicator for new Commercial Real Estate (CRE) investment.

From AIA: Architecture Billings Index Remains Positive for Third Straight Month
On the heels of consecutive months of strengthening business conditions, the Architecture Billings Index (ABI) has now reached positive territory three months in a row. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the January ABI score was 50.9, following a mark of 51.0 in December. This score reflects a slight increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 61.2, down just a notch from a reading of 61.5 the previous month.

“Even though we had a similar upturn in design billings in late 2010 and early 2011, this recent showing is encouraging because it is being reflected across most regions of the country and across the major construction sectors,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “But because we still continue to hear about struggling firms and some continued uncertainty in the market, we expect overall economic improvements in the design and construction sector to be modest in the coming months.” Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 50.9 in January (slight expansion). Anything above 50 indicates expansion in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this suggests further declines in CRE investment in early 2012, but perhaps stabilizing later in 2012.


All current Commercial Real Estate graphs

First a comment from Michelle Meyer and Ethan Harris at Merrill Lynch: One of the most encouraging aspects of the report was the continued drop in inventory. The number of homes on the market for sale fell further in January after plunging 11.5% in December. This has left inventory almost 21% below the level last January. Combined with the recent gain in home sales, months supply has tumbled to 6.1 months, the lowest since April 2006. However, we expect this to be a temporary cyclical low. Part of the drop in inventory reflects delays in the foreclosure process which has slowed the flow of distressed properties into the market. We think the foreclosure process will accelerate, which will speed up the flow of distressed inventory. We expect supply to edge back to 8 months this year.The NAR reported inventory fell to 2.31 million in January. This is down 20.6% from January 2011, and this is about 8% above the inventory level in January 2005 (mid-2005 was when inventory started increasing sharply). This decline in inventory was a significant story in 2011.

The following graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending.

Click on graph for larger image.

This year (dark red for January) inventory is at the lowest level for a January since 2005. Inventory is still elevated - especially with the much lower sales rate - but lower inventory levels put less downward pressure on house prices (of course the level of distressed properties is still very high, and there is a significant shadow inventory).

Part of the reason inventory has fallen is because there are fewer foreclosures listed for sale. Merrill Lynch analysts think supply will edge back up to 8 months-of-supply as the lenders increase foreclosure activity.

There is also a seasonal pattern. Inventory usually starts increasing in February and March, and peaks in July and August. The seasonal increase in inventory will be something to watch this spring and summer, but the Merrill forecast would mean that inventory increases to over 3 million units this summer (assuming sales at the current rate). I don't think we will see inventory that high.

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Sales NSA (red column) are slightly above the sales for the last four years (2008 through 2011), but well below the bubble years of 2005 and 2006.

The level of sales is still elevated due to investor buying. The NAR noted:
All-cash sales were unchanged at 31 percent in January; they were 32 percent in January 2011. Investors account for the bulk of cash transactions.

Investors purchased 23 percent of homes in January, up from 21 percent in December; they were 23 percent in January 2011. Earlier:
• Existing Home Sales in January: 4.57 million SAAR, 6.1 months of supply
• Existing Home Sales graphs

The NAR reports: Existing-Home Sales Rise Again in January, Inventory Down
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 4.3 percent to a seasonally adjusted annual rate of 4.57 million in January from a downwardly revised 4.38 million-unit pace in December and are 0.7 percent above a spike to 4.54 million in January 2011.
...
Total housing inventory at the end of January fell 0.4 percent to 2.31 million existing homes available for sale, which represents a 6.1-month supply at the current sales pace, down from a 6.4-month supply in December.Click on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in January 2012 (4.57 million SAAR) were 4.3% higher than last month, and were 0.7% above the January 2011 rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 2.31 million in January from 2.32 million in December. This is the lowest level of inventory since March 2005.

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory decreased 20.6% year-over-year in January from January 2011. This is the eleventh consecutive month with a YoY decrease in inventory.

Months of supply decreased to 6.1 months in January, down from 6.4 months in December.


All current Existing Home Sales graphs

From Peter Tchir of TF Market Advisors

A Breather And Some Time To Sort Through Some Greek Details

Details continue to leak out, making it somewhat easier to analyze what is coming out of Europe.

It looks like the ECB and National Central Banks will get preferential treatment.  The ECB has already allegedly exchanged their bonds for new ones, though I don’t see a reduction in notional of existing bonds – which could be a fact that they haven’t settled yet.  It will be interesting to know definitively what the ECB owned.  And then the NCB’s since they were kind enough to do the swaps (whether legal or not, particularly in the case of English law bonds) on different days.

Greece did take the time to announce that the budget deficit will be 6.7% of GDP instead of the 5.4% that had been projected. With a real GDP of €225 billion in 2010 that would have been about €3 billion, but with GDP dropping so quickly, it is less additional money needed than you might think (positive thinking).  The fact that they cobbled together this whole deal based on a base case that is unattainable and worse than anyone expected just 3 months ago shows the power of being locked into a negotiating stance.  Even Germany must feel a bit guilty that they put a puppet in charge of Greece whose sole function was to negotiate this deal and didn’t actually spend any time to see if there was a better alternative for Greece than more austerity and decreased sovereignty.  Killing with kindness.  Also on the European economic data front, European PMI was below 50 for the composite, services, and manufacturing.

The European Investment Bank said that Greece needs a Marshal Plan.   They kicked in €2 billion last year and seem prepared to kick in more this year.  That is reassuring that someone is focused on growth, and thankfully we live in a world where entities like the EIB can exist and issue as much debt as they want based on guarantees and promises, without impacting the credit of the guarantor.

Speaking of that, how much is the EFSF going to come up with for the Greek bailout?  It is hard to tell where all the money is coming from (at this stage – though I assume we will get more clarity any day), but Germany in particular just added a lot of debt.  If you want to assume that Italy is really participating, then Italy is on the hook for about 20% of the money coming from the EFSF (and I assume from the EU).  In that case Germany is only on the hook for 30% of the money.  If the money is really coming from those countries still mostly AAA (including France) then Germany is on the hook for 50% of the EFSF/EU money, and Italy is not burdened. I’m sure Sarkozy is quietly hoping no one in France, or the rating agencies, notice just how much more debt France has committed themselves to.  He has been awfully quiet during this process.  The Dutch seem to be getting more involved, but seem to be leaning more towards the Finnish view, than the save Europe at all costs view.  The benefit of the current structure is that it is hard to pin the specific obligation of any one country, but in some real world of finance (that is no longer seems to exist), some countries just saw their debt burden rise.  Fortunately in the world of unlimited central bank liquidity it may not matter how much debt anyone takes on (until the day it does).

After months (it seems like years) of trying to avoid a CDS Credit Event, it looks like one is inevitable.  The Greek 5 year CDS is at least 70 bid which may be the highest ever.  The game plan seems to be that Greece will put in retroactive CAC laws.  The PSI will come in below 100%.  Greece will trigger the CAC clauses on the Greek bonds, and we will get 100% participation in all those bonds, and we will get a Credit Event.  The interesting part is that depending on what they manage to do with English law bonds, the only bonds outstanding (not in the hands of the central bank only bonds, and troika loans) will be the new bonds.  If they start CAC’ing each bond, it is possible that there will be no existing bonds outstanding left. Settlement would be based on the new bond (yes, ISDA has a Sovereign Restructured Deliverable Obligation clause – Section 2.16 of the definitions).  With the amortization schedule in place (and not including any value attributable to the GDP strippable warrants), I get that the new bonds would trade at 30% of par with a yield of just over 13%.  I would be careful paying up for CDS here, because settlement will be against these new bonds, not existing bonds if every old bond is CAC’d.  And given the attitude out of Greece late yesterday, and harsh IMF demands, we may well see that.

The ECB’s secondary market purchases have slowed to a trickle. Without a doubt, the fact that the market is trading so well has played a role.  They haven’t needed to buy bonds.  That is good, but will they resume their buying if markets show any weakness?  With everything that is going on with their holdings of Greek debt, they may not be so eager to return to active SMP.  They have given the banks the ability to buy whatever they want (with LTRO) and maybe that will be enough?  Draghi’s responses to questions about their Greek bond holdings have lacked for any finesse.  He seems annoyed with the situation and being caught in the middle.  For the “integrity” of the ECB’s core mandate (and yes I’m laughing as I type) they may shy away from building a balance sheet of direct holdings of sovereign debt (as collateral for loans to banks, they have no problem).  I don’t think they like being caught in the middle as a direct lender, have felt like they are being ordered around by a bunch of politicians, and at this stage he can still largely blame the whole mess on Trichet in his memoirs.  I still think they will do SMP, but I think they will be a little more reluctant than in the past, and will use bank lending tools to try and calm markets, rather than direct intervention in sovereign debt markets.  Besides, that is the EFSF’s responsibility, if the EFSF still has any money left.

Some noise about this being the last LTRO?  I’m sure it won’t be the last LTRO if or when we get another round of fear, but makes sense with things so calm to start ratcheting down expectations.  We will see what the demand is for the February 29th one, and how much LTRO money is used to add assets as opposed to just managing funding risk.

In the meantime, I’m not sure how central banks solve the deteriorating situation in Iran, and since they are the only ones who seem to be able to accomplish anything we should continue to watch developments there.  And although less exciting, probably more important, is figuring out if China can really manufacture a soft landing.  Expectations that things are under control there seem high, relative to evidence that all is not good.

Pretty good explanation here by Jim Bianco on what the term “money printing” is and what the Federal Reserve does when this term is used.

“The ability of the Fed to increase the amount of money in banks’ reserve accounts; that’s what most people mean when they talk about money printing and that’s under the direction of the Fed,” Bianco says.

The Fed can try to stimulate or restrict bank lending by either raising or lowering the amount of money banks are required to keep on reserve, respectively. This seems pretty straightforward. But “the Fed has the ability to go in and just change the number on [banks'] reserve accounts” — literally creating money electronically by changing the amount of money in reserve accounts, Bianco notes.

“If you or I did that it would be fraud, it would be counterfeiting and we’d go to jail,” he quips. “But when the Fed does it, it’s sophisticated monetary policy.”

5 minute video – email readers will need to come to site to view

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

Other than that rally last Thursday that caught a lot of technicians flat footed (i.e. post the Apple reversal) the breadth in this market has been relatively poor the past 5 sessions or so.  The Russell 2000 has been lagging the major indexes dominated by large caps, and my watch lists have contained far more red than green.   Some people have been calling it the NBA market (“Nothing but Apple”) but it’s been a bit broader than that – i.e. Microsoft has acted well, and some groups are still working.

A bearish take on this is of course what I cited above – breadth is narrowing which usually happens near tops.  Fewer and fewer stocks are pushing the market forward; many more are faltering.  The bullish take is “a correction is happening under the surface while the indexes hold in.”  Obviously this market has not rewarded a bearish take in a very long time.  So until we see at least a break of the 20 day moving average on a few major indexes it is difficult to continue to ride the bear, since he runs into a buzz saw every few days.

That said the transports I cited this morning continue to suck wind; the index is down another 1.6% and now sits right at its 50 day moving average.  Oil continues to go up (at what point does that stop being “bullish”?).

While the action in some of the giants, especially tech, remains impressive – the market has become much more difficult the past month under the surface.  A lot of stocks rally a few days and then give much/all of it back in 1 session.  They churn while the big boys rally and take the indexes with them upward.   To put it in perspective the NASDAQ contains about 3000 stocks but 10 of them are 35% of the weighting.  It’s a different story than the first three weeks of January where just about anything that was not a leadership stock of late 2011 (i.e. utilities, boring healthcare, consumer staples) was rallying together.

Showcasing the lack of breadth, we are actually lower on the Russell 2000 than we were on jobs report Friday….

…. but you wouldn’t know it as long as you piled into big cap tech

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

The PBoC’s announcement of a 0.5% cut in the reserve requirement rate (RRR) of Chinese banks has significant consequences not only for the Chinese economy but also for China’s stock market. The cut to 20.5% for large banks follows a similar cut in December last year after hikes since January 2010 that saw the RRR increasing in 12 increments from 15.5% to 21.5%. It is estimated that one half percent change in the RRR amounts to a change of approximately 400 billion yuan or roughly US$60 billion in liquidity. It therefore means that the jump in the RRR since January 2010 has effectively drained overall liquidity by approximately US$720 billion. That is equal to approximately 6% of China’s GDP in 2010 and 2011 combined.

Although the PBoC cited weak external demand as the main reason for the drop in the RRR, liquidity became very tight in recent weeks and forced interbank rates significantly higher. The CFLP Manufacturing PMI that I seasonally adjust continues to indicate lackluster growth in China’s manufacturing sector largely as a result of weak export orders. As in 2008 the PBoC held off on further increases in the RRR in 2011 when weakness in the manufacturing PMI became apparent. The first cut in the RRR last year was announced when the manufacturing PMI contracted – again similar to what happened in 2008. The latest cut therefore indicates that the manufacturing PMI for February is likely to again show abysmal growth.

Sources: CFLP; Li & Fung; BIS; Plexus Asset Management

The weakness of China’s economy is not only confined to the manufacturing sector, though. While still signaling growth, my seasonally adjusted CFLP Non-manufacturing PMI indicates that growth has slowed to about half of the average since the recovery after the 2008/2009 crisis.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

The weakness in the non-manufacturing sector is driven by weak consumer confidence.

Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.

My GDP-weighted seasonally adjusted CFLP PMI indicates that China’s year-on-year GDP growth has slowed to approximately 8 – 8.5% from 8.9% in the fourth quarter last year.

Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.

The cut in the RRR is consistent with what happened in 2008 when GDP growth fell below 9%.

Sources: NBSC; BIS; Plexus Holdings.

Assuming that a 0.5% change in the RRR equaled US$60 billion throughout, I calculated the cumulative liquidity drain. It is evident that changes in liquidity lead GDP growth by approximately two quarters and the seasonally adjusted manufacturing PMI by three months.

Sources: NBSC; BIS; Plexus Holdings.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

 

I view the cut in the RRR as very bullish for Chinese stocks. Changes in the direction of the RRR had a major impact on the Shanghai Composite Index (SSEC 2403.59 ↑0.00%) in the recent past. In 2008 the first cut in the RRR coincided with the bottom in the Shanghai Composite Index, while the hike in January 2010 coincided with the start of the slide in equity prices.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

The market is currently not out of sync with the underlying economy and is discounting a not seasonally adjusted CFLP Manufacturing PMI of approximately 50 for February. March and April are normally exceptionally strong months from a seasonal perspective and are likely to be supportive of stock prices. Together with the likely impact of the increase in liquidity I think the next strong bull market in Chinese stocks is underway. I stick to my view that the Chinese stock market will be the best performing equity market globally in 2012.

Sources: CFLP; Li & Fung; Plexus Holdings.

1. Hedge fund manager Jim Chanos says slowing demand in China will continue and may have ripple effects around the global economy.

2. China skeptic Jim Chanos says the air has already started to come out of China’s housing bubble.

Source: CNNMoney, February 21, 2012.

While nothing is more certain than death and taxes (and central bank largesse), David Rosenberg of Gluskin Sheff uncovers The Unlucky Seven major tax-related uncertainties facing households and businesses that will likely lead to multiple compression in markets (rather than the much-heralded multiple expansion ‘story’ which appears to have topped the talking-head charts – just above ‘money on the sidelines’ and ‘wall of worry’, as ‘earnings-driven’ arguments are failing on the back of this quarter). As he notes the radically changed taxation climate in 2013 and beyond will have an impact on all economic participants as they will probably opt to bolster their cash reserves in the second half of the year in preparation for the proverbial rainy day.

First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.

Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate.

Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).

Fourth, the top 15% rate on long-term capital gains rises to 20%.

Fifth, dividends will once again be taxed at ordinary rates — 39.6% for the top income earners.

Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250.000 for joint filers).

Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases). The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%).

Forty-one separate tax provisions expire this year — see page 32 of the Economist. Of course, there is always the chance that after the November 6th election, a Congress that can never seem to allow anything temporary to meet its expiry date will pass an extension — for more on all this, see More Uncertainty for 2013 on page B9 of the Weekend WSJ.

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey
The Refinance Index decreased 4.8 percent from the previous week. The seasonally adjusted Purchase Index decreased 2.9 percent from one week earlier.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.09 percent from 4.08 percent ...

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500)increased to 4.32 percent from 4.30 percent ...The purchase index is still moving sideways at a very low level.

There were some interesting comments from the Home Depot CEO today (transcript with via Seeking Alpha). Home Dept CEO Francis Blake talked about the favorable weather, but he thought there was more: There are some interesting challenges in setting expectations for 2012. First, the macro data on housing suggest uncertainty. ... The Fed has noted that housing remains a drag on economic recovery with factors such as delayed household formation and credit supply, contributing to a continued imbalance between housing supply and demand. The Fed has suggested the policy actions will be needed to fix this, but it wouldn't appear that any major policy changes are likely in the near-term.

Second, despite this, the performance of our business particularly in the back half of 2011, would suggest the strengthening market. This quarter's comps were achieved against a very strong fourth quarter comp in 2010 and exceeded our internal forecast. But we're mindful that this past December and January were the fourth warmest on record, with much of the nice weather occurring across the heavily populated eastern U.S. Better weather translates into improved sales for exterior categories like building materials and also translates into increased customer transactions, which lift the entire business.And in the Q&A:Dennis McGill, Zelman & Associates: Just a question focused on some of the regions, you mentioned California being at the company average and Florida being above and 2 areas that we wouldn't normally attribute to being volatile from the weather standpoint. So just wondering if you could elaborate there, particularly in California, where it seemed like weather was pretty steady year-over-year, especially with some of the housing metrics improving in those markets?

CEO Blake: Dennis, I think that's exactly the point. I mean, wanted to call out California and Florida because they really aren't weather-related. And so that's an indication that there was more than just weather ... And I think just exactly as you said, that those markets are more reflective of not a housing recovery, but a stabilization in the markets that we've seen over the last 2 years, as they've just -- they've gotten kind off there, off the floor in effect on housing.In other comments, Blake mentioned that we've seen a little improvement before, but those were policy related (like the housing tax credit). CEO Blake: [W]e are now not -- we have no government programs to cloud what's happening. ... And the way we look at it is, there are some positives that you definitely see on housing.He mentioned some negatives too, but it seems like they are seeing some improvement.

LPS released their First Look report for January today. LPS reported that the percent (and number) of loans delinquent declined in January from December, but that the percent (and number) of loans in the foreclosure process increased slightly.

The following table shows the LPS numbers for January 2012, and also for last month (Dec 2011) and one year ago (Jan 2011).

LPS: Loans Delinquent and in ForeclosureJan-12Dec-11Jan-11 Delinquent7.97%8.15%8.90%In Foreclosure4.15%4.11%4.16% Less than 90 days 2,226,0002,309,0002,551,000 More than 90 days1,772,0001,792,0002,168,000 In foreclosure2,084,0002,066,0002,203,000Total6,082,0006,167,0006,922,000

At the current rate of decline, the number of delinquent lonas will be back to "normal" in about three years (around 4.5% to 5% of loans are delinquent even in good times). However the number of loans in the foreclosure process hasn't change year-over-year - although that will probably change soon with the mortgage servicer settlement (around 0.5% of loans in foreclosure is "normal").

Note: Vehicle miles have moved sideways for over four years. And gasoline consumption has declined slightly over the same period. For a discussion of the causes, see NDD's post at the Bonddad blog this morning: Why the decline in gasoline demand doesn't mean a recession -- yet. Among other points, NDD writes: "It appears that gasoline conservation is a top priority of consumers." and he provides a list (with data): Ridership of mass transit is up, online retail purchases have increased, automakers are selling more fuel efficient cars, teen driving is down, and more.

The Department of Transportation (DOT) reported:
• Travel on all roads and streets changed by +1.3% (3.2 billion vehicle miles) for December 2011 as compared with December 2010.

• Cumulative Travel for 2011 changed by -1.2% (-35.7 billion vehicle miles). The following graph shows the rolling 12 month total vehicle miles driven.

Even with a small year-over-year increase in December, the rolling 12 month total is mostly moving sideways.

Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 49 months - and still counting!

The second graph shows the year-over-year change from the same month in the previous year.

This is the first year-over-year increase in miles driven since February 2011.

With the recent increases in gasoline prices, we might see year-over-year declines again in January or February. But this doesn't mean a recession - instead, as NDD notes, it appears that behavior is changing, and also that the fleet is becoming more efficient ... and, of course, growth is still sluggish and holding back driving too.

From economist Tom Lawler: Number of Seriously-Delinquent FHA-Insured SF Loans Jumped Again in January; HUD Secretary “Fiddles” as FHA Burns

Data from the FHA’s Neighborhood Watch Early Warning System indicate that the number of FHA-insured loans that were seriously delinquent jumped again in January. According to report on the EWS for servicers who combined have an “active” FHA servicing portfolio of over 7.33 million loans, 732,775 of these loans were seriously delinquent at the end of January. While this report does not exactly match the SDQ numbers reported in various monthly FHA reports (which have not yet been released in January, it tracks the “official” numbers pretty closely. These data, combined with other data from the EWS (not shown here), suggest that the performance of the FHA’s pre-2010 book has continued to deteriorate significantly.

Based on this report, I estimate that the serious delinquency rate on FHA’s SF book in January (as measured by the FHA Monthly Outlook and/or FHA Monthly Report to the FHA commissioner) jumped to around 9.9% last month, up from 9.59% in December, 8.18% last June, and 8.89% last January.

As I noted last week, the pace of FHA loan modifications slowed dramatically in the latter part of last year, while the pace of property “conveyances” was shockingly low given the large number of seriously delinquent/in-foreclosure loans. Obviously, the slow pace of problem-loan “resolutions” has been at least partly behind the sharp increase in the number of seriously-delinquent FHA loans.

Many find it moderately disturbing that HUD Secretary Donovan has of late been working mainly on the big “mortgage settlement” -- and even worked to have part of the mortgage settlement money go to FHA – and has been “jawboning” Fannie and Freddie to “embrace” principal write-downs, while at the same time FHA’s problem-loan resolution activity plunged and the number of seriously delinquent FHA loans has surged. However, headlines such as “Donovan Fiddles as FHA Burns” seem a bit strong – but I used it anyway!

Unusual Drawdown Risk

by John P. Hussman, Ph.D., Hussman Funds

In order to estimate likely returns and risks in the financial markets, our general approach is to identify a set of historical instances that match current conditions on a broad range of important dimensions (in practice, using an “ensemble approach” that randomizes over scores of subsets of historical data). We then look at various features of that cluster, including the average return that followed over various horizons, the deepest loss over various horizons, and the overall spread of those outcomes. In general, the clusters include a mix of both positive and negative outcomes, resulting in moderate estimates of expected return and moderate estimates of risk. In some cases, the average return across the cluster of instances is very positive, and the individual instances show few negative outcomes at all. That sort of condition justifies a very aggressive investment position. In contrast, since the late-1990′s, the average returns of the clusters have been quite poor, with a preponderance of negative outcomes in historical instances having similar characteristics.

There have been a few exceptions, including the bulk of 2003 (and on the basis of the ensemble methods we presently use, the period between early-2009 and early 2010 – see Notes on Risk Management for details on our unpleasant “miss” during that period). But generally speaking, market conditions since the late-1990′s have supported a defensive investment stance much more often than is typical on a historical basis. Of course, the near-zero total return of the S&P 500 since the late-1990′s, coupled with two separate market losses of more than 50%, is a reflection that on average, concerns about poor return and high risk during this period have been well-placed.

In reviewing market conditions this week, what strikes me most is the pattern that emerges when we look across various horizons, from 2 weeks out to 18 months. When we examine the average 2-week outcome that has historically followed periods that cluster with present conditions, the average outcomes are negative, but not strikingly so. Specifically, the expected return is in the lowest 26% of all historical observations, but that average return is only about -1%, a figure that is overwhelmed by typical short-term noise. That’s another way of saying that guessing the market’s outcome over the next couple of weeks is like guessing the throw of a very slightly biased pair of dice.

But the profile starts to change significantly as we move out the investment horizon. Looking out 5 weeks, for example, the prospective return falls into the lowest 8% of historical observations. Now, this could certainly change on the basis of shifts in various market conditions, but here and now, the 5-week horizon is more defensive than we’ve seen in the other 92% of historical data.

Most striking, though, is what we observe on the basis of prospective drawdown (the deepest loss the market experiences within a given horizon) looking out over the coming 18 months. On that front, the present drawdown estimate is in the worst 1.5% of all historical observations.

Keep in mind the distinction between the drawdown and the return over a given period. The drawdown over an 18-month period is the deepest loss experienced by the market from the current point to the lowest point within that horizon, even if the deepest loss occurs fairly early in that window. In contrast, the return over a given period is measured from the starting point to the ending point. Importantly, once we observe conditions that associate with a significant risk of drawdown, we can almost always find some point later on that provides a better entry opportunity to accept market risk.

Elevated Markets and Drawdown Risks

The chart below identifies periods in recent years where we reported market conditions as being at least “overvalued” and “overbought” in these weekly commentaries. Those two conditions alone aren’t enough, by themselves, to put the market in a “hard-negative” situation, but even those two tend to be enough to invite drawdown risk. The overvalued, overbought periods are shaded in blue on the chart below. The red lines indicate the deepest drawdown experienced by the market over the following 18 months (right scale), while the blue line charts the S&P 500 (left scale). Notably, even with weakly negative conditions – overvalued and overbought – the market has typically moved lower at some point in the next 18 months, wiping out all intervening gains. That surrender of intervening gains usually begins with a very hard and unexpected initial loss that takes out the bulk of upside progress within a period of a few days or weeks. This is a general pattern that we also see throughout market history.

Of course, our present concerns are based on a smaller and more negative subset of conditions that we’ve seen even less frequently – presently featuring not just “overvalued” and “overbought” conditions, but adding overbullish sentiment, modest but clear upward pressure on short-term and some longer-term yields, and an “exhaustion syndrome” (a combination of “whipsaw” conditions coupled with falling earnings yields – see Goat Rodeo ), which have historically had a particularly hostile aftermath, including a small set of historical plunges that include 1987, 2000 and 2008.

The article below comes courtesy of Central Bank News, an authoritative source on monetary policy developments.

The past week in monetary policy saw 3 monetary policy interest rate changes; Kazakhstan -50bps to 7.00%, Sweden -25bps to 1.50%, and Ghana +100bps to 13.50%.  Meanwhile the central banks of Pakistan 12.00%, Japan 0.10%, Chile 5.00%, and Georgia 6.50% all held interest rates unchanged.  The other key headline was the Bank of Japan expanding its quantitative easing program by another 10 trillion Yen to 65 trillion. The Reserve Bank of India also made a technical adjustment to one of its old policy rates.

Following are some of the key quotes and comments from the central bankers that met to review monetary policy settings over the past week:

• Bank of Japan (held rate at 0.10%, added to 10T to APP):  ”Japan’s economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen.  On the other hand, financial  conditions in Japan have continued to ease.  On the price front, the year-on-year rate of  change in the CPI (all items less fresh food) is around 0 percent.”
• Sweden’s Riksbank (cut rate -25bps to 1.50%):  ”Inflationary pressures in the Swedish economy are low. The economic outlook in Sweden has weakened as a result of developments abroad. In order to stabilise inflation around 2 per cent and resource utilisation in the economy around a normal level, the Executive Board of the Riksbank has decided to cut the repo rate by 0.25 percentage points to 1.50 per cent. The repo rate is expected to remain at this level until some time in 2013.”
• Bank of Ghana (hiked rate 100bps to 13.50%):  ”The Committee concluded that the balance of risks to inflation is elevated. To contain future inflation pressures and realign interest rates in favour of domestic assets, it is necessary that monetary policy continues to be fine tuned to ensure that inflation expectations remain anchored to keep inflation within the target band.”
• Banco Central de Chile (held rate at 5.00%):  ”Domestically, economic activity and domestic demand have tended to outperform forecasts from the latest Monetary Policy Report. The labor market is still tight. Credit market conditions are stable. Y‐o‐y CPI inflation is slightly above the tolerance range, while core inflation measures have normalized.  Inflation expectations remain around the target.”
• National Bank of Georgia (held rate at 6.50%):  ”Despite low inflation the real exchange rate had been appreciating in the end of last year. This is related to the faster nominal appreciation of the national currency vs. currencies of main trade partners. Real appreciation on one hand causes further widening of the trade deficit and on the other causes weakening of the demand.”

Looking at the central bank calendar, the only major central bank scheduled to meet next week is the Central Bank of Turkey.  Elsewhere the Bank of England will release its recent monetary policy meeting minutes (where it increased its APP by GBP 75B) on Wednesday; likewise the Reserve Bank of Australia will release its most recent monetary policy meeting minutes on Tuesday.

• TRY – Turkey (Central Bank of Turkey) expected to hold at % on the 21st of Feb

Also during the past week Central Bank News released data, extending back to January 1999, for the Global Monetary Policy Rate Index – Developed Markets.

Source: Central Bank News, February 19, 2012.

The latest report from Morgan Stanley’s Graham Secker can be summarized simply as follows: i) in January everything has disconnected as traditional linkages between asset classes have broken down, ii) also in January every major asset class (equities, treasurys, gold, oil) was up materially, iii) such a phenomenon has been seen only 5 times in the past 5 years, iv) a double digit decline followed 3 of the past 4 such surges. Then again, as Bob Janjuah lamented earlier, when a bunch of bespectacled economists who have never held a real job in their academic careers since transplanted with banker blessings to various central bank buildings, and who continue to plan the fate of the world in secrecy (a fate that can be summarized as follows: CTRL+P), as the only marginal decision makers, who really cares anymore?

From MS:

Breadth of positive returns across asset classes is rare …

Reading the January version of our global cross-asset strategy team’s excellent ‘Global In The Flow’, it struck us just how unusual performance trends were last month. While we’re all aware that we’ve just witnessed the best start to the year in equities since 1994, what was more interesting to us was the sheer breadth of positive performance across a wide array of assets. Effectively, the only major asset to fall in value in January was the dollar, and the only other laggards we could see were corn, coffee, coal and natural gas.

… and has often preceded equity market corrections

Unfortunately, the report in question hasn’t been in existence long enough for us to see just how rare such a breadth of positive performance is. So we have screened the past five years to identify periods of coinciding monthly price appreciation in the S&P, Treasuries, Oil and Gold. As shown in Exhibit 1, January 2012 was only the fifth month in the past five years when all four of these major asset classes have risen in unison. More interesting, on three of these four prior occasions that month proved to be a significant peak in equities and was followed by a substantial double-digit decline.

The traditional relationship between equities, treasuries and gold has broken down in recent months

While this analysis doesn’t guarantee that the market is about to suffer a reversal, it probably does reflect an abundance of liquidity plus rising investor optimism that this liquidity can lift asset prices across the board. Exhibit 3 and Exhibit 4 chart the longer-term performance of equities relative to USTs and to gold, and both clearly show a breakdown in the relationship in recent months. Of course, it is possible this gap can close through either falls in stocks or declines in the other assets, but we think it is unlikely this disconnect will continue for very long.

We see the breadth of recent strong performance as a warning sign

While we believe Exhibit 1 is a powerful argument to position for a market pullback, investors should note that this rule-of-thumb was less compelling in prior years. For example, although it gave correct sell signals in June 2000 and August 2002, it also gave a number of false sell signals during 2003 and at the end of 2004, as shown in Exhibit 2. We believe the macro environment going forward is more akin to the last five years than the preceding decade, and hence consider this signal is an important warning sign; however, we acknowledge that others may take a different view. [yes, like ChairSatan]

Speculators are bullish on equities, bonds and oil …

In seeking corroborating evidence to support the rule-of-thumb suggested by Exhibit 1, we have analysed CFTC positioning across similar asset classes. Exhibit 5 plots CFTC net speculative longs as a % of open interest for the NASDAQ (historically this metric has been a good predicator of European equity performance), US treasuries and the oil price. Within the chart the grey shading indicates areas when investors were net long all three asset classes based on a rolling 3-month moving average basis. To illustrate its efficacy for stocks Exhibit 6 then shows the S&P and MSCI Europe with the same periods again shaded grey.

… which has provided strong sell signals over the last decade

If anything, we think Exhibit 6 suggests the CFTC analysis is even more powerful than that shown in Exhibit 1, as there do not appear to be any false sell signals (although it was a little early at the tail end of 2010) even when we take the analysis back to 1999. Further, Exhibit 7 details some standard performance analysis around this data – for example, since July 1999 the average 6-month return from MSCI Europe has been 0% and the probability the market rises (hit ratio) is 54%. However, when we measure performance from periods when net longs were present across the three asset classes, we find the average subsequent 6-month return was -6.6% with a hit ratio of just 19%.

Ze charts: