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Mark's Market Blog

6-14-09: Oil, Mortgage Rates, Trade Deficit, Citi Stock: All Up!

By Mark Lawrence

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The markets continue to bounce off a ceiling of an S&P of 950. Today our chart is another open-high-low-close, meaning the open is a dash to the left, the vertical line goes from low to high, and the dash to the right is the close. We have briefly traded above 950 a couple times, but always pulled back. As I've been saying, I don't expect the market to do anything dramatic for a few more weeks, there's still avocado dip, chips and beer left at this party.

After last two week's increase in the mortgage rate by 3/4%, the green shoot of new mortgage demand is withering. I don't understand this: in these days of the new economic reality, I don't see why demand should contract just because price increases. Maybe Congress can pass a law to make more people want more mortgages. Actually, they already have, with their "new home buyer" $8,000 tax credit. Current talk is that this December it will be raised to $15,000.

RealtyTrac forecasts about 4 million foreclosure filings will be made this year on about 3.1 million households with loans. Last year, there was a record 3.1 million filings on about 2.4 million households. In a more typical year there would be around 800,000 filings on 550,000 households.

Oil is up from the low this winter of about $35 per barrel to over $70 per barrel. This means Obama's $60B tax cut will go to the Arabs in the form of $60B higher costs of oil.

The trade deficit is rearing it's ugly head again. US exports are dropping faster than imports, leading to a $30B deficit in April. As we've seen, sustained trade deficits are a major contributor to asset bubbles.

Chrysler is set to "emerge" from bankruptcy. What this means is that the roughly half of the assets that Chrysler had that have any value will be "sold" out of bankruptcy to a new company, "The Chrysler Group," owned by the UAW, the US and Canadian governments, and Fiat. Fiat paid nothing. The undesirable half of Chrysler's assets will now languish in bankruptcy court for the next several years, but no one cares as those assets have essentially no value.

Citigroup finalized plans Wednesday to convert its US Treasury capital injection into common stock. The conversion would affect a total of $58 billion in preferred shares, including $25 billion from the US government. The US government will have a 34 percent stake in Citi under the expanded conversion. This converts loans, which count against Citi's capital, into stock, which counts for capital. Existing shareholders would have their stake diluted to 24 percent. The move reorganizes Citi's capital without adding new funds, but increases the so-called common equity which is considered more robust by banking regulators. "Following completion of the exchange offers, Citi will be among the best capitalized banks in the world," said Citi chief executive Vikram Pandit. The Government of Singapore Investment Corporation (GIC) and a Saudi prince were among the other investors converting to common stock.

A large argument is starting now: the 10 banks which have been approved by the Treasury to repay their Tarp money are arguing that they should also be allowed to buy back their stock warrants at a discount. Their claim is that they never really needed the Tarp money, so their stock price shouldn't be penalized by the Government making money. Curiously, only a few months ago when the four horsemen were in their lobbies, the stock warrants seemed like a small price to pay for their survival. Furthermore, absent the Tarp program which kept many of their customer banks from going bankrupt and stiffing them, they would obviously be gone.

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