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How to Fix Mortgage Mess in Three Steps: Laurence Kotlikoff

Fannie Mae and Freddie Mac. What cute-sounding names. They suggest adorable siblings, not twin financial disasters that may cost $1 trillion when we get the final bill.

According to Edward Pinto, Fannie Mae’s former chief credit officer, in 2008 the two government-supported mortgage finance companies, along with the Federal Housing Administration and other U.S. agencies, were holding or guaranteeing some 19 million subprime home loans, or about 70 percent of all such debt.

Much of these toxic assets, as well as many of Fannie and Freddie’s prime mortgages, aren’t performing or will likely default. Nationwide, 8 million mortgages -- or one in 10 -- are under water, with the property’s value at least 25 percent below what’s owed.

The Federal Housing Financing Agency puts Fannie and Freddie’s losses at about $300 billion. But industry experts, like Janet Tavakoli, suggest the real number is closer to $700 billion. And if home prices fall another 20 percent to return to their long-term trend, the tab might climb to $1 trillion. (more)

JP Morgan Wins: CFTC Position Limits Do Not Apply (To Them)

Gold and silver are now down hard over the past two days, and the reason may have something to do with the fact that the CFTC utterly caved to JPM in their long-awaited decision on position limits in a 4-1 vote.

While position limits will eventually be set, maybe, someday, the course of action taken by the CFTC grandfathers in JPM's (and HSBC, et al.) current outlandish positions.

Here's the background (emphasis mine):

On July 21, 2010, the Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the Dodd-Frank Act amended the Commodity Exchange Act to:

• Require the Commission, as appropriate, to limit the amount of positions, other than bona fide hedge positions, that may be held by any person with respect to commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of a designated contract market (DCM).
• Require the Commission to establish position limits, including aggregate position limits, for swaps that are economically equivalent to DCM contracts in exempt and agricultural commodities (collectively, economically equivalent swaps). Such limits must be imposed simultaneously with limits on DCM contracts. (more)
  

Bloomberg Businessweek - 17 January-23 January 2011

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When This Stock Market Signal Flashes, It's Time to Get Short

Periods of low volatility in the stock market are always followed by periods of high volatility. Always.

It's as certain as spring following winter.

Of course, when you're suffering through temperatures that would make an Eskimo shiver, it's hard to remember spring is on its way. And when stocks are a one-way bet, when the market moves higher day after day in unending bullishness, it's hard to imagine it moving in the other direction.

But it always does. You can bet on it.

By the look of the Volatility Index (VIX), the market may be about to change temperature...

The blue lines on the chart are the Bollinger Bands. They indicate the range of volatility on a chart. When the Bollinger Bands squeeze closer together, as they're doing right now, it indicates a period of contracting volatility. When they expand, as they did back in May, it indicates a period of high volatility. One always follows the other.

The bottom graph charts the width of the Bollinger Bands. The width is now as narrow as it was last April – just before the "flash crash" and the start of a 20% correction in the S&P 500. There are many other similarities between today's market environment and that of last April. Investor sentiment is wildly bullish. And there are multiple technical divergences.

The biggest warning sign, however, is coming from the VIX and the contracting Bollinger Bands. This condition existed for several weeks last spring before stocks finally got hit. So the bullish party may continue for a little while longer.

Now is definitely not the time to get complacent. Keep an eye on the VIX. When the Bollinger Bands start to expand, we'll know the long awaited correction has finally arrived. Long-term investors should head for the sidelines. Short-term traders can speculate with short sales and put options.

Those Calling for a Market Correction Make Me Laugh

After stocks ended 2010 making new highs, many experts have been calling for a healthy correction before putting more money into equities. And if you had listened to those folks you would have missed out on even more gains in the opening days of the New Year.

There are 2 main camps of folks that are calling (nay, praying) for this correction. Let me share with you their sad stories and why you should continue to pass on their faulty strategies.

Correction Camp #1: Missed the Party All Along

In 2008 it was easy (and 100% sane) to be a bearish investor as most signs looked like we were headed towards a second Great Depression. Even through most of 2009, when stocks rebounded, it was hard to fully embrace the turnaround story while economic booby traps seemed around every corner.

However, by the latter half of 2010 the clarity of the economic rebound story should have been obvious to all. But not all embraced this notion because their egos were so fully invested in being members of the bearish camp.

These double-dippers and doomsayers have already missed out on the lion’s share of the easy gains to be made from this rebound. So they need to invent reasons to get back in that allow them to save some face. And that reason is the “great correction.” Unfortunately for them, that correction keeps not coming. And they continue to miss out. (more)

HES Radio: World Financial Report

The World Financial Report brings you timely information on the worlds most exciting markets like oil, precious metals, currencies, commodities and hard money markets like very rare color diamonds and collectibles. The World Financial Report makes predictions and gives investment advice and has been very successful in identifying trends in the marketplace.

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