The Big Picture |  |
- Succinct summation of week’s events (10/21/2011)
- SPX Breakout
- QOTD: The Illusion of Skill
- What Now? Bevilacqua v. Rodriguez Leaves Toxic Foreclosure Titles Unclear After U.S. Bank v. Ibanez
- Friday 10 AM Reads
- Stocks vs. Bonds
- Tactical Shift in Portfolios: Reducing Cash
- Europe/inflation/QE3 coming
- Does Water Have Memory? (No)
- Europe’s Undercapitalized Banks
| Succinct summation of week’s events (10/21/2011) Posted: 21 Oct 2011 12:30 PM PDT Succinct summation of week’s events: Positives:
Negatives:
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| Posted: 21 Oct 2011 09:00 AM PDT click for larger charts > Markets are in the process of breaking out. As the charts above show, the S&P500 is now out of its August/September/October trading range. The Dow has broken out; the Nasdaq 100 broke out of a less defined range on 10/14. The small cap Russell2000 is still mired in that range. As the 2nd chart shows, the SPX has moved above its 50 moving average, and has penetrated the 100 day. The 200 day seems to be acting as a magnet, pulling equities towards it. A better way to describe that phenomena is that when the SPX was 20+% away from the 200 day, it sets up a bit of mean regression. The caveat is we have seen bull and bear traps in the past. I prefer to use closing data. Any reversals here would be ugly, especially heading into the weekend.
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| Posted: 21 Oct 2011 08:00 AM PDT Our quote of the day comes from an article in this Sunday’s NYT magazine, Don't Blink! The Hazards of Confidence by Daniel Kahneman:
I find that, unfortunately, to be terribly true. For those of you who may be unfamiliar with Kahneman, he is a professor at Princeton and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, and behavioral economics.
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| What Now? Bevilacqua v. Rodriguez Leaves Toxic Foreclosure Titles Unclear After U.S. Bank v. Ibanez Posted: 21 Oct 2011 07:30 AM PDT Richard Vetstein is a nationally recognized real estate attorney, frequently quoted in the media. He was recently named one of Inman News' 100 Most Influential in Real Estate. Mr. Vetstein is the founder of the Vetstein Law Group and TitleHub Closing Services LLC. The former outside claims counsel for a national title company, he has an active real estate litigation practice. He blogs at massrealestatelawblog.com No Easy Options For Toxic Foreclosure Titles The Massachusetts Supreme Judicial Court issued its opinion today in the much anticipated Bevilacqua v. Rodriguez case. (Text of case is embedded below). Previously, I discussed the oral argument here and detailed background of the case here. The final ruling is mix of bad and good news for owners of property whose titles have been rendered defective due to improper foreclosures stemming from the landmark U.S. Bank v. Ibanez ruling last January. The Court held that owners cannot bring a court action to clear their titles under the "try title" procedure in the Massachusetts Land Court. Left open, however, was whether owners could attempt to put their chains of title back together (like Humpty-Dumpty) and conduct new foreclosure sales to clear their titles. Unfortunately, the SJC did not provide the real estate community with any further guidance as to how best to resolve these complicated title defects. The vast majority of real estate experts will tell you that the ruling is not a surprise. Sorry Daily Kos, but the court did not take away a property from a foreclosure sale buyer. The buyer never owned it in the first place. If you don't own a piece of property (say the Brooklyn Bridge), you cannot come into court and ask a judge to proclaim you the owner of that property, even if the true owner doesn't show up to defend himself. It's Property Law 101. In the larger scheme, however, we are now seeing full scale real estate nuclear fallout from the banking crisis. As Barry Ritzholz eloquently states, "a deadly combination of MERS, robo-signing, and illegal shortcuts have created a horrific situation. A bedrock of our society — the ability for the owner of a piece of real estate to confidently convey that property, along with all associated property rights — is now in danger." So the bigger question remains where do we go from here and what are banking regulators and attorneys general going to do about it. Background: Developer Buys Defective Foreclosure Title Frank Bevilacqua purchased property in Haverhill out of foreclosure from U.S. Bank. Apparently, Bevilacqua invested several hundred thousand dollars into the property, converting it into condominiums. The prior foreclosure, however, was bungled by U.S. Bank and rendered void under the Ibanez case. Mr. Bevilacqua (or presumably his title insurance attorney) brought an action to "try title" in the Land Court to clear up his title, arguing that he is the rightful owner of the property, despite the faulty foreclosure, inasmuch as the prior owner, Rodriguez, was nowhere to be found. Land Court Judge Keith Long (ironically the same judge who originally decided the Ibanez case) closed the door on Mr. Bevilacqua, dismissing his case, but with compassion for his plight.
Given the case's importance, the SJC took the unusual step of hearing it on direct review. No Standing To "Try Title" Action In Land Court The SJC agreed with Judge Long that Bevilacqua did not own the property, and therefore, lacked any standing to pursue a "try title" action in the Land Court. The faulty foreclosure was void, thereby voiding the foreclosure deed to Bevilacqua. The Court endorsed Judge Long's "Brooklyn Bridge" analogy, which posits that if someone records a deed to the Brooklyn Bridge, then brings a lawsuit to uphold such ownership and the "owner" of the bridge doesn't appear, title to the bridge is not conveyed magically. The claimant in a try title or quiet title case, the court ruled, must have some plausible ownership interest in the property, and Bevilacqua lacked any at this point in time. The court also held, for many of the same reasons, that Bevilacqua lacked standing as a "bona fide good faith purchaser for value." The record title left no question that U.S. Bank had conducted an invalid foreclosure sale, the court reasoned. Door Left Open? Re-Foreclosure In Owner's Name A remedy left open, however, was whether owners could attempt to put their chains of title back together and conduct new foreclosure sales in their name to clear their titles. The legal reasoning behind this remedy is rather complex, but essentially it says that Bevilacqua would be granted the right to foreclosure by virtue of holding an "equitable assignment" of the mortgage foreclosed upon by U.S. Bank. There are some logistical issues with the current owner conducting a new foreclosure sale and it's expensive, but it could work. In Bevilacqua's case, he did not conduct the new foreclosure sale, so it was premature for the court to rule on that issue. Look for Bevilacqua to conduct the new foreclosure and come back to court again. The SJC left that option open. The other remedy, which is always available, is to track down the old owner and obtain a quitclaim deed from him. This eliminates the need for a second foreclosure sale and is often the "cleanest" way to resolve Ibanez titles. The last resort is to force the foreclosing lender to re-do its foreclosure sale. The problem is that a new foreclosure could open the door for a competing bid to the property and other logistical issues. Title insurance companies who have insured Ibanez afflicted titles have been steadily resolving these titles since the original Ibanez decision in 2009. I'm not sure how many titles are out there unfixed. Those without title insurance, of course, have borne the brunt of this mess. Source:
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| Posted: 21 Oct 2011 07:00 AM PDT Some morning reads to end your week with:
What are you reading? >
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| Posted: 21 Oct 2011 05:30 AM PDT Bloomberg.com – Cooperman 'Wouldn't Be Caught Dead' Owning U.S. Treasuries Comment Cooperman's comment reminded us of a Nassim Taleb comment from February 5, 2010: Nassim Nicholas Taleb, author of "The Black Swan," said "every single human being" should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration. It's "a no brainer" to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. "Every single human being should have that trade." Taleb said investors should bet on a rise in long-term U.S. Treasury yields So how has Taleb's "no brainer" call performed? From February 5, 2010 to October 18, 2011:
What is Cooperman missing? As we said yesterday: In an August post we asked Who Is Buying Treasuries? In it, we noted that bonds have had a series of "price insensitive" buyers. This began with the Bank of Japan from the late 1990s to 2003. Then it was the Bank of China from 2003 to 2008. Finally the Federal Reserve stepped in with its QE "money printing" from 2008 to present. Those arguing that bonds have little value (an argument we are sympathetic with) assume that the bond market is bought by investors who care about value. Since the dominant player has been central banks, this has not been the case. Add to this the fact that bonds offer a place to hide in the midst of great volatility and the poor returns of "risk-on" markets. Add this all up and the standard bearish bond market forecast has not worked. These bearish forecasts will only prove to be correct once the dominant buyer of bonds is someone who cares about value. That means no Federal Reserve printing money, no Bank of China and no scared money hiding from a potential loss in risky markets. That is not happening anytime soon. So while we agree that bonds offer little value relative to stocks, we do not look for the markets to correct this anytime soon. To borrow a phrase from John Meynard Keynes, the Federal Reserve's printing press can run longer than most can remain solvent in waiting for yields to go up. Source:
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| Tactical Shift in Portfolios: Reducing Cash Posted: 21 Oct 2011 04:30 AM PDT This week, I made several changes in the Core Asset Allocation model, adding several new names and increasing our exposure to equities. And, we did that by reducing our cash position significantly, rather than selling bonds. Recall back on August 1, we sold emerging markets, technology and small cap positions. There were a variety of reasons why, detailed in There's Something Happening Here. Since then, I have been patiently waiting for an opportunity to redeploy that capital. The trader in me wanted to get long for a quick pop (9/15), but . . . there is a huge difference between managing people’s retirement money, and swinging cash around for short term P&L. I insist on something beyond a mere gut feel (i.e., blink-like recognition). I need some hard data to confirm that the buys are a high probability trade, and by last Friday, we received it. Monday’s whackage gave us the opportunity to put money to work after a 2% drop. So we legged into a few positions Tuesday (and the rest of the week); Josh discusses our buys here on Oct 18th. There were three major factors that went into this decision. The first is simply based on seasonality. November and December are the best months of the year, and kick off the best half of the year for market gains (October-April). If you want to stay in cash, statistically that is the worst time to do so. The second factor was sentiment. Short interest was at record highs. By our measures, too many investors were bearish, and too many hedge fund managers were caught leaning the wrong way. (The counter argument was mutual fund managers cash levels are low, but they seem to be a non-factor lately). The last reason is market history. The 11.4% gain we saw for the S&P500 in only 5 trading sessions was unusual to say the least. Since 1950, there have been only 16 occasions when we saw "buying panics" like that. There was 1 loss (2001) 2 break-evens ('01 and '02) and the rest saw healthy gains. (Source: Laszlo Birinyi) Thus, we have redeployed into Technology, and added Berkshire Hathaway and Visa for our managed accounts. More aggressive accounts purchased Small Cap Growth index as well. An important caveat: Note that this does not reflect a shift in my economic expectations, and we still believe a recession is more likely than most economists expect. Nor does it change our longer term secular market view, which remain negative. Before all is said and done, i expect maroets will go lower than where they are right now. However, this is merely a recognition that markets can and do run on factors beyond the fundamental: Sentiment, liquidity, seasonality and internals suggest to us that cash will be an under-performing asset class for the next quarter or two. Hence, we are reducing our cash exposure, and making selective tactical buys, raising our equity position significantly from 50% to 75-80%.
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| Posted: 21 Oct 2011 04:08 AM PDT While we won’t get a definitive response from the Europeans this weekend on how best to deal next with their debt crisis, officials are still holding out hope that just a few extra days will complete the job. With the S&P 500 above 1200, the DAX near 6000 and the euro closer to 1.40 than 1.30, markets are assuming something. Whether what is put in place actually works or not is a different discussion, markets just want satisfaction now. While yields continue higher in France, Fitch said changes to the EFSF won’t threaten their AAA rating and Fitch has no plans to change their rating. German IFO business confidence fell to the lowest since June ’10 but was a touch better than expected. French business confidence fell to the weakest since July ’10. Canada’s Sept CPI rose 3.2% y/o/y, the 7th straight month above 3%. The world thus has inflation still high in Asia and Latin America, 3% in Europe and Canada, almost 4% in the US, and 5.2% in the UK as central bankers have fingers crossed that it won’t last. In the meantime, some Fed members want more money printing now. Voting member Tarullo last night said if things don’t get better in the next few months, “there will be a strong case for additional measures…I believe we should move back up toward the top of the list of options the large scale purchase of additional MBS…in order to provide more support to mortgage lending and housing markets.” It’s GroundHog Day and these academics at the Fed again want to enlarge their role of allocating credit and fixing prices. They need to toss out their econometric models.
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| Posted: 21 Oct 2011 03:00 AM PDT The answer is No — this appears to be a thoroughly disproven concept. Hat tip @Lippard for the correction Water — just a liquid or much more? Many researchers are convinced that water is capable of “memory” by storing information and retrieving it. The possible applications are innumerable: limitless retention and storage capacity and the key to discovering the origins of life on our planet. Research into water is just beginning. Join Oasis HD Facebook page for more exclusive videos http://facebook.com/oasishdchannel
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| Europe’s Undercapitalized Banks Posted: 21 Oct 2011 02:51 AM PDT We've posted several pieces recently about Europe's over banked and undercapitalized financial system. The markets have pounded European bank equities this year and forced the eurozone political leaders to cobble together a bank recapitalization plan, which we all wait for on pins and needles. No other chart illustrates the vulnerability of European banks than the following. We use the simple common equity to total asset ratio, which excludes the risk weighting of assets and tiering of capital. It may be too simplistic and distort cross-country comparisons, but it is certainly revealing, if not shocking. The bank recapitalization in Europe will be a difficult task and it's no wonder they need more time to reveal the "plan." Stay tuned. >
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