BofA Becomes a Landlord

March 23, 2012

“Essentially, TARP successfully stabilized markets and helped prevent another Great Depression, but it failed horrifically in meeting its equally important Main Street goals—including preserving home–ownership—and institutionalized Too Big to Fail and the moral hazard that accompanies it.” –Neil Barofsky, NYU law professor

US markets are set to conclude their worst weak of the year after a tremendous start to the first quarter. After opening flat, markets today inflected downwards after new home sales fell short of expectations. Month over month sales declined by 1.6% vs. an expected increase of 1.3%. Measured in units, new home sales hit 313K vs. expectations of 325K.

Bank of America (BAC) has announced a pilot program in which they will take over the note on a delinquent home and rent it back to the owner at market rates. My guess is that they will eventually repackage these notes for sale, but should be able to garner a higher sales price than just selling the unmodified notes. If the bank rolls the program country-wide, It should be a boon for property management companies.

EnergySource opened the first geothermal plant in 20 years, near the Salton Sea in California. Geothermal is the most efficient, low cost method of generating electricity via renewables. The biggest downside is the release of heavy metals and other toxins from deep in the earth’s core.

King Abdullah of Saudi Arabia vowed to use his nation’s oil to lower global prices in an effort to stimulate the global economic recovery. He said he will work with other Gulf producing nations to ensure adequate and stable supplies. Oil pulled back on the news.

The Washington Post is citing a study done by economists refuting the notion that increases in productivity have resulted in a significant loss of manufacturing jobs. The report concluded that manufacturing employment fell due to an inability to compete globally.

The Fed sold $225 billion in mortgage back securities for a $25 billion profit. The profits from Fed activities are sent back to the Treasury.

The President may be reversing course on his stance against new pipelines after backlash from killing the Keystone XL and a corresponding spike in gasoline prices. Yesterday he called on federal agencies to move quickly to review the southern leg of the pipeline, and cited the importance of pipelines in fulfilling our energy needs.

The UK is taking a page from Margaret Thatcher and supply side economics by targeting cuts to their highest income tax rate of 50%.

We have discussed the swing in exports for Japan, but nothing prepared us for the swing in the country’s trade surplus in February-$395 million. The yen has declined by 7% vs. the dollar since mid-February, pushing exports up as the economy slowly gathers steam.

Nike (NKE) reported slightly better than expected earnings last night, but cited weak demand out of Europe. The stock is down slightly on the open.

What happens if two countries with huge current account surpluses, China and Japan, continue shrinking those surpluses or, frighteningly, turn them into deficits? The result could be negative for the Yen, gold and US treasury bonds. Jack Cooks wrote the following:

If so, it means Japan and China recycle less of their yen and yuan, respectively, back into the U.S. capital markets. And that means the global economy could finally see some rebalancing between the major deficit country, the U.S., and the major surplus country, China.

It also means the U.S. current account deficit, which seems to worry many people and economists alike, is likely to improve, as Japan and China morph increasingly into capital importers instead of capital exporters.

Has this rebalancing begun?

We don’t know yet. But interestingly, given the needs for Japan to rebuild and China to change its growth model, it could very much be the next major global macro trend for the global economy.

APAC markets were weak last night with the Nikkei losing 1.1%, ASX 2000 flat, Kospi down 0.1%, Hang Send -.1%, and Shanghai down 0.7%.

Have a great weekend

Ned