G.O.P. takes Massachusetts Senate seat – NY Times

NY Times reports Scott Brown, a little-known Republican state senator, rode to an extraordinary upset Tuesday night when he was elected to fill the Senate seat that was long held by Edward M. Kennedy in the overwhelmingly Democratic state of Massachusetts. By a decisive margin, Mr. Brown defeated Martha Coakley, the state’s attorney general, who had been considered a prohibitive favorite to win just over a month ago after she easily won the Democratic primary. With all precincts counted, Mr. Brown had 52% of the vote to Ms. Coakley’s 47%. “Tonight the independent voice of Massachusetts has spoken,” Mr. Brown told his cheering supporters in a victory speech, standing in front of a backdrop that said “The People’s Seat.” The election left Democrats in Congress scrambling to salvage a bill overhauling the nation’s health care system, which the late Mr. Kennedy had called “the cause of my life.” Mr. Brown has vowed to oppose the bill, and once he takes office the Democrats will no longer control the 60 votes in the Senate needed to overcome filibusters. There were immediate signs that the bill had become imperiled. House members indicated they would not quickly pass the bill the Senate approved last month.

There is hope! Can the American people bring balance back to our capital as well as some much need accountability? Yes, we can! Yes, we can! Yes, we can!

I’m not suggesting Brown is the embodiment of all that is good, but I am saying this is a wakeup call for the political machine that has been grinding the American dream assunder.  A dream that was never built on handouts and entitlements but instead on entrepreneurial spirit, individual freedom and hard work.

Ok, enough of the patriotism. How will this news affect the investment world? I expect the immediate reaction will be a fiscal responsibility trade. The US$ will rally and Treasury bonds will catch a bid as yields go lower. Meanwhile, commodity prices will suffer as will equity prices. However, this trade will not last long. The economic situation is not improving despite all the financial media cheerleading of the last few months. The reaction to Q4 earnings has been disappointing, as we predicted. Companies have been unable to hide the fact that organic growth is nonexistent. Add to this disappointing earnings picture the Brown victory in Massachusetts and you get a recipe for another stimulus package before the November elections.  Hence, the idea of fiscal responsibility is a pipedream.    

If one would care to argue the economic picture is becoming brighter I offer Exhibit A:

Housing Starts Plummet

Housing starts continued their up one month, down the next trend as starts fell 4.0% from 580,000 in November to 557,000 in December. The consensus expected starts to fall only 8,000 to 572,000…The drop in starts was completely attributed to a lack of single-family construction. Single-family home starts fell 6.9% from 490,000 in November to 456,000. It seems builders are well aware of the pitfalls of starting new construction given that the latest increases in existing and new home sales were propped up by government support. Since new homes constructed today would not come onto the market until after the government stimulus expires, it makes sense that builders would hold off on beginning new single-family homes until they are sure demand has stabilized….

The housing starts number is volatile, you say. Things can still get better, you dream. Not without more government stimulus, I reply. And I offer Exhibit B as another nail in the coffin of a housing recovery:

FHA to Lift Mortgage Insurance Fees – WSJ

The Federal Housing Administration will announce more-stringent lending requirements and higher borrower fees on Wednesday to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.

The FHA, which has taken on a major role in the housing market during the economic downturn, doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan.

The FHA is set to raise that fee to 2.25%, the second increase in the past two years, according to people familiar with the matter. The value of the FHA’s reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.

Also to boost the reserve, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually, people said. If the agency were to run short of cash to cover projected losses, it likely would have to ask Congress for money for the first time ever.

This move by the FHA will have the effect of rising rates for FHA borrowers (those most in need of a loan with the worst credit) resulting in a further reduction of demand. With the end of government incentives and the effective increase in mortgage rates is it any wonder housing starts are plummeting?

Rosenthal Capital Management runs the Fortune’s Favorite Family of Funds, including Fortune’s Favor I, Fortune’s Favor Precious Metals and Fortune’s Favor Offshore. For more information visit www.rosenthalcapital.com

Tags: commodities, earnings, economy, FHA, G.O.P., housing, housing starts, Investment, Massachusetts, mortgage, Stimulus, treasury bonds, US$

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The US Federal Reserve’s policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”. “We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como. “If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

China’s reserves are more than — $2 trillion, the world’s largest. “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added. The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

I devoted Monday’s post to the rise of the inflation trade. Well, I thought I’d throw another log on the proverbial fire with the story below. The Chinese realize they are in possession of a bunch of rapidly depreciating paper and they are in the process of plowing said paper into any hard asset they can find. This process is, of course, the very definition of inflation.

CIC looks to pile cash into U.S. real estate - WSJ
The Wall Street Journal reports China’s $300 bln sovereign-wealth fund is eyeing big investments in distressed U.S. real estate, according to people familiar with the matter. To finance some of the deals, China may rely on the U.S. government.

In addition, CIC is weighing investing through one of the U.S. government’s bailout programs, the Treasury’s Public-Private Investment Program, known as PPIP. The program is designed to rid banks of toxic mortgage securities by enticing investors to buy these assets with financing from the U.S. government. Representatives for CIC, BlackRock, Invesco and Lone Star declined to comment.

Now concerns are mounting that the agency — and the U.S. taxpayer — may have to pay the price. The FHA insures loans secured with down payments as low as 3.5%. But values in many markets in which it has been increasing its activity have fallen far more than that in the past year. The result: A growing number of homeowners with FHA-backed loans owe more than their homes are worth and are more likely to default Officials worry that the resulting losses will help push the FHA’s reserves below the level required by Congress. The value of those reserves will be revealed in the agency’s annual review due Sept. 30. If they have fallen below the minimum, that could prompt a new round of questions about the role government should play in stabilizing the housing market.

David Stevens, the FHA’s new commissioner, said on Friday that the agency will continue to support the housing market and isn’t in danger of needing a taxpayer bailout. But some housing analysts warn that, if home prices decline much further, the agency would require taxpayer assistance for the first time in its 75-year history.

Tags: China, china investment corp., cic, commercial real estate, FHA, gold, taxpayer, us money printing

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