Credit World May Become A Battlefield If FICO and Square Butt Heads; Silver on the Move; ADP Fairy Tales

A couple of stories from the world of personal credit are noteworthy as the world enters the third quarter of 2020 hoping for improvement but fearing a repeat of the second quarter from the same enemy which ran roughshod over the world economy.

It's not the virus that people fear, but government response to it in terms of restricted mobility, business operations, and general closures of everything from schools and churches to bars and hair salons.

While the planet and government managers struggle with the virus and their chances in the upcoming US elections in November, credit issues are popping up like daffodils in Springtime. Huge numbers of Americans are foregoing rent and mortgage payments, citing unemployment as the main cause for a diminished cash flow, and delinquencies are piling up not only on mortgages (which are vitally important), but on car loans and leases, student debt, credit cards, and personal loans.

It's because of these issues, or perhaps in spite of them, that FICO (Fair Isaac Corporation) wants to rate your resilience and ability to pay back borrowed money in a recession or economic downturn. The company and its affiliate credit scorekeepers - Experian, TransUnion and Equifax - are looking back at credit histories from the GFC in 2007-09 for hints of riskiness in borrowers.

Their findings, which won't be relevant for at least a few more months, could affect how consumers are judged when applying for any kind of credit, from mortgages to car loans. If economic conditions remain below par, many people with poor resilience scores could find themselves out of luck getting credit.

Countering FICO's foray into past performance of borrowers, Chime continues to innovate in the banking and credit space with the launch of the Chime Credit Builder Visa Credit Card.

Actually a debit card that works like a credit card, users can transfer funds from a secure Chime account to a Visa card, and use that money to charge anything, including everyday items like food, gas, clothing or general expenses. The charges are paid by the card automatically, and the results reported to the credit bureaus. The goal is to improve credit scores for mainly younger folks, who favor debit cards over credit, but who need to establish or improve their credit history.

If it sounds like cheating, it very well may be. This is reporting of purchases made with essentially a debit card being reported as a credit card. The credit bureaus are likely to balk at this methodology. A clash between the old standard bureaus and the upstart Chime might make for some interesting developments in how credit and individual risk are measured down the road.

Tuesday's hands-down big winner was silver, which rocketed up by more than two percent in the futures space, vaulting over the psychologically-challenging $18 mark and holding around $18.20. Gold's little sister has a lot of catching up to do and if this price maintains, should signal that a run up to resistance in the $20-21 range is imminent. Correlated closely to the S&P index (for God only knows what reason), if stocks falter and silver holds or goes even higher, that would qualify as a major development. Keep eyes peeled on that space.

Stocks continued their rally from Monday into Tuesday, which was the final day of the month and of the second quarter, an important milestone, since GDP for the quarter - heavily affected by the coronavirus and state-by-state lockdowns and business closures - is expected to check in with a very negative number on a scale likely never seen before. Estimates for second quarter GDP range between -25% to -52%.

Current stock valuations seem to be suggesting that investors are leaning toward the upper end of that range. A decline of 30-35% might actually be seen as a positive for markets because it will be viewed as a one-off event followed by a rapid recovery, though the jury is still out on whether economic recovery will look like a "V", "W", or an "L".

Any view of the stock market indices over the past five months clearly show a "V" shape, with stocks declining and rising at the same frenetic pace. The recovery pattern for stocks can hardly be taken as definitive by any measure of economic activity. Stocks were skyrocketing off their lows as millions of people were losing their jobs, the government and Federal Reserve exercising emergency measures, and the general economy entering a recession.

A "W" pattern goes along with the "second wave" theory of the virus, already being engineered by increased testing and renewed calls for shutdowns, lockdowns, face masks, social distancing and all the assorted recommendations which were successful only in wrecking the Main Street small business economy.

The "L" pattern is the one most despised by money managers, banking executives, and financial central planners because it offers no realistic hope for the immediate future. The "L" concept implies that the economy falls and stays down for an extended period. Like just about everything else the experts at the biggest banks and financial institutions predict, contrarian view has the slow recovery "L" pattern front of mind and it is actually the most likely pattern - not for stocks or any other asset classes - for the general economy in terms of GDP, personal income, and employment.

Finally, queueing the start of the third quarter in the typical doublespeak manner, ADP's June Employment Report showed a gain of 2,369,000 jobs in the non-farm private sector. This follows a decline of 2,760,000 in May, with June just about covering all those job losses. ADP saw 19.5 million people lose their jobs in April, another 2.8 million lost jobs in May (which has now been revised to +3.065mm!). It's almost as if many of those 20 million people filing continuing unemployment claims don't exist, which is fine, since we're all living in bizarro-world now.

At the Close, Tuesday, June 30, 2020:
Dow: 25,812.88, +217.08 (+0.85%)
NASDAQ: 10,058.77, +184.61 (+1.87%)
S&P 500: 3,100.29, +47.05 (+1.54%)
NYSE: 11,893.78, +116.69 (+0.99%)

Stocks Split in Sloppy Session; Bond Yields Rising, Oil Sliding

Stocks slid at the opening bell, with the Dow down by as many as 117 points in the first half hour of trading, but quickly reversed direction at 10:00 am EST and continued a slow but steady gain the rest of the day.

Apparently, what turned stocks around was the October ISM Services reading, which came in at a solid 55.4, a full pint better than last month's data and a huge beat to the expected 54.0.

While questions concerning the veracity of these kinds of reports after the unusually-strong Chicago PMI data a week ago continue to swirl around, the beat on services - which is now the main production engine of the US, since we've hollowed out our manufacturing core and mostly export inflation - was enough for the Wall Street crowd to lift stocks off their lows.

That they were able to keep buying interest maintained for the remainder of the session was likely due to the usual POMO injection by the Fed, allowing for rampant speculation and unusually-high leverage.

While stocks were seeing the light of day - though the NASDAQ never quite made it into positive territory, bonds were getting slammed, up six bips in yield by the end of the day, as the gains following the end of the government shutdown are gradually being eroded. The closing level of 2.66% on the 10-year note was the highest in two-and-a-half weeks.

The big story happens to be in oil, which continues its retreat from $110/barrel highs just two months ago. Another $5.00 drop in the price of WTI will put oil into a bear market, a condition nobody has considered. While low oil prices relate positively to gas at the pump and is a boost for the economy, releasing more purchasing power, the underlying causes may be more nefarious and significant.

There is, at last, a supply-demand condition that is positive for the US, as more and more oil is being produced in North America, at the same time that demand is dwindling, or rather, has been dwindling for the past three to four years. Americans have tightened their collective belts and are much more careful about their driving habits these days, as lowered incomes have left less for transportation expenses. High unemployment also pays a part, as fewer people are driving to work five or six days a week.

So, while a period of lower gas prices is cause for celebration, the party may not be of the epic variety, with fewer participants and an overhang of disappointing economic circumstances.

Key numbers to watch tomorrow will be the MBA Mortgage Index (7:00 am), September Leading Indicators (10:00 am) and crude inventories (10:30 am).

Dow 15,618.22, -20.90 (0.13%)
Nasdaq 3,939.86, +3.27 (0.08%)
S&P 500 1,762.97, -4.96 (0.28%)
10-Yr Bond 2.66%, +0.06
NYSE Volume 3,485,473,500
Nasdaq Volume 1,899,388,750
Combined NYSE & NASDAQ Advance - Decline: 2064-3571
Combined NYSE & NASDAQ New highs - New lows: 248-74
WTI crude oil: 93.37, -1.25
Gold: 1,308.10, -6.60
Silver: 21.64, 0.064
Corn: 425.00, -1.25

50 State AGs Bend to Will of Banks in Foreclosure Settlement Deal

This is the kind of market that causes financial writers to suffer a severe case of "writers block," the disease that infests the creative part of the mind because there's simply no action in financial markets.

For the fourth day in a row, the major stock indices barely budged, but managed to produce marginal gains, except for the NYSE Composite, which was down slightly. The pattern was virtually the same, with a dip in the morning followed by a quick comeback and a flat to slightly rising curve through the session. One change was that the advance-decline line favored the downside, but guess what? Options expiry is next Friday, so expect the markets to continue climbing though the middle of next week. Bankers gotta eat, ya know?

There was a bit of news from Greece, where the government finally agreed to tougher austerity measures which will reduce wages, headcount, and pensions. The deal cleared the way for talks with the troika to resume, though there are still significant hurdles to be worked out with both the public funding sources and the private ones.

The agreement did little to move US markets, which have been stuck in a regimen of low volume and little movement all week (I mentioned that earlier, I know).

In the other major development of the day, the 50 state Attorneys General announced that their deal with the five major banks involved in the sub-prime, robo-signing mortgage and foreclosure fiasco had been finalized, with the holdouts from California, New York and Delaware finally coming around to see it the banks' way.

The $26 billion deal will provide little relief to underwater homeowners (maybe $1500-2000) and offers a $2000 cash bonus to people who lost their homes to fraudulent foreclosures between 2008-2011. Anyone who paid their mortgage on time, is currently in foreclosure or falls outside those chosen dates: out of luck.

That the deal was yet another windfall for the banks cannot be understated. These banks, through shoddy originations, poor (sometimes none) documentation, fraud and other nefarious tactics, bilked the American public, the US government and mortgage-backed securities bondholders of billions, if not trillions of dollars, worldwide. The paltry sum of $26 billion spread out over a three-year span is nothing more than a rounding error for these white-collar criminals.

If there's outrage to be heard from the general public, don't count on it amounting to much as the US populace has already put up with enough government and business malfeasance the past 12 years that the screamers and shouters are already worn out from 9/11, the security state, illegal wiretaps, TSA gropings, the Iraq and Afghanistan wars, etc. The list goes on and on and the American public has virtually resigned itself to the fact that resisting the influence of a broken, fascist federal government is tantamount to economic suicide and hardly worth the effort.

Little by little, the feds have taken away essential liberties granted by the constitution (that "piece of paper" as GW Bush called it) and are in the process of shredding every last ounce of fight and goodness that typified the America of yesteryear. It's depressing, but blatantly obvious that the direction of the country is careening quickly toward an oligarchy in which the well-connected, well-heeled are treated far differently than the poor working slobs. Money is power and the feds know this well. This is the most corrupt government in the world and neither the Democrats nor the Republicans have a monopoly on the corruptive power as they both drink from the same hose: that of the rich, in deference to the citizenry.

The only potential upside to the plight of the average American is that the federalistas are hopelessly incompetent, so compliance with all their rules, regulations, edicts and taxes can generally be avoided with a little bit of ingenuity and a good dose of umbrage. The downside is that as federal tax revenues decrease (a logical occurrence and already well underway), the bureaucrats and oligarchs will become even more oppressive and brutal. Those of us wishing to stay and fight or hope for the best had better be prepared for another decade of distrust, distortions and dishonesty from the top down, though, as Americans - and others - have been noted for in the past, defiance of officials and mendacious governance can be a powerful elixir for those who have been harmed.

Today's "settlement" with Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly known as GMAC) is nothing more than a cover for the inadequacies of our elected Attorneys General, who found it more expeditious to glad-hand their political donors than follow the rule of law. What a shame. America used to be such a nice place.

Dow 12,890.46, +6.51 (0.05%)
NASDAQ 2,927.23, +11.37 (0.39%)
S&P 500 1,351.95, +1.99 (0.15%)
NYSE Composite 8,081.25, -1.73 (0.02%)
NASDAQ Volume 2,148,275,750
NYSE Volume 4,058,775,250
Combined NYSE & NASDAQ Advance - Decline: 2687-2940
Combined NYSE & NASDAQ New highs - New lows: 289-13 (no comment)
WTI crude oil: 99.84 (really?)
Gold: 1,741.20, +9.90
Silver: 33.92, +0.21

Short Sales Helpful, But Read the Fine Print

While the economy seems to be improving, though modestly, one area of concern remains the shattered real estate market, where home prices have tumbled, homeowners owe more than their house is worth - a condition known as being "upside down" - and the recent foreclosure moratoriums by mortgage servicers like Bank of America, Ally Bank and JP Morgan Chase have slowed the pace of residential real estate sales.

With unemployment close to 10%, many homeowners are facing foreclosure and looking for ways to get out from under a financial burden they did not anticipate. One such method is a real estate short sale, which is a process by which the homeowner sells the property back to the bank at a reduced price. This often results in a win for both sides, as the bank does not have to engage in the time-consuming and costly process of foreclosure and the homeowner walks away from the home and mortgage debt, usually without any residual amount owed, known in the industry as a "deficiency," that being the difference between the original amount owed and the amount of the short sale.

Most states provide for deficiency claims, and banks routinely take judgments against short sale sellers, so this is an area which needs to be negotiated with the lender beforehand, and the services of a lawyer, representing the short seller, are strongly advised. Banks don't like to take losses and will normally try to slip in a deficiency clause into a short sale agreement.

For further information, you can can click here to check for all kinds of sales - including short sales - in your area, or for sales nationwide and more information on all kinds of real estate transactions, click here.

Countrywide "PROTECT OUR HOUSE" Wrist Band on eBay

With the current malaise in the mortgage and credit industry, Countrywide Financial, the nation's largest mortgage lender (and sub-prime abuser), recently initiated a PR campaign designed to improve employee morale and boost the company's image.

The plan included a pledge, to be signed by loyal employees and a cheap rubber wristband with the Protect Our House slogan.

Some employees are taking advantage of the public's fascination with the sleazy, rah-rah tactics by Countrywide management and have decided to auction their wristbands on eBay. This one has already rung up bids of $165.00 and nearly 10,000 hits and ends on Saturday. There are at least 6 more available on the popular auction site.

The Fix Is In

As investors - and guys who wear pinstripe suits but really haven't a clue - nervously watched the Dow Jones Industrials plummet by another 200 points this morning, the intrepid manipulators from the Federal Reserve Bank (working, no doubt, in concert with the Plunge Protection Team) pumped two injections of "liquidity" into the markets in the morning and added a smaller boost in the afternoon.

In other words, the Fed bought stocks from brokers who, as part of the so-called "repo" deal, agreed to deposit the funds in Federally-insured member banks.

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Thus, a mammoth crash and thud was averted.

When the fed buys stocks, they aren't just fishing nor fiddling. Today's double dose was a total of $34 billion, designed to keep order in the face of an imminent sell-off. Late in the session, with the markets still down smartly, the Fed added another $3 billion.

Apparently, it worked, because the markets failed to melt down as many feared they would. However, these measures are little more than band-aids in a market that is hemorrhaging on multiple fronts.

Due to the blow-up of sub-prime mortgage loans, note holders find themselves stuck with much worthless paper. The spill-over into derivative, insurance, M&A and other credit markets has been stoking fears of financial calamity.

Without a doubt, this is a big mess that's not going to end soon or resolve in a pretty way. Billions of dollars are going to be lost, credit markets will become frighteningly tight and even the Fed's money won't be enough to secure liquidity and order in the equity markets. What's especially frightening about the situation is that the Fed was forced to take such extraordinary measures to shore up markets.

The "repo" swaps are not new. They've been used during other stressful periods, such as in the winter after 9/11, but their effect is marginal. The announcement that the Fed is taking the action is actually much more of a salve on the nerves of traders than the actual money making trades.

Dow 13,239.54 -31.14; NASDAQ 2,544.89 -11.60; S&P 500 1,453.64 +0.55; NYSE Composite 9,435.04 -14.27

The downside of such action, however, is that the Fed eventually has to balance its own books, and buying up stocks in a sliding market - catching the proverbial falling knife - is poor investment strategy, to say the least. When the Fed unloads these stocks, often at a loss, it creates a glut on the market and costs the Fed money. Of course, the Fed can just print up more, and they do, making all those dollars in your pockets worth a little less.

Again, it's nothing more than a stop-gap measure and far from a solution. The real solution would be to allow the market to take its own course, and let the losers lose and the winners win. For all the talk of "free markets" by Fed governors and other high government officials, they certainly act like they have little to no faith in what they preach.

The crash is upon us. With the Fed's help, it will be worse than it has to be. Tighten your belts, we're headed for recession-land.

Market internals allow for a much better understanding of what really happened on Wall Street this Friday. Declining issues rolled over advancers by a 9-5 margin. New lows swamped new highs, 736-82. Even with the Fed's helping hand, there were plenty of casualties on the day.

Oil continued to slip, down 12 cents to $71.47, but still far from it's bottom, which is just a matter of time. Gold perked up $8.80 to $681.60; silver rose 17 cents to $12.87. These are still screaming buys and now would be a good time to stock up.

The coming weeks and months hold still more intrigue and downside. The bulk of the sub-prime loans which are subject to repricing and therefore, default, have yet to do so. October through next March will bear witness to an avalanche of mortgage defaults and a share of bank and financial concern failings.

Cash is king for now, especially if it's in Euros or gold.