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OCWEN Fakes foreclosure Notices To Steal Homes – Downgrade Putting RMBS at Risk

foreclosure for sale

by Carole VanSickle Ellis

If you really would rather own the property than the note, take a few lessons in fraud from Owen Financial Corp. According to allegations from New York’s financial regulator, Benjamin Lawsky, the lender sent “thousands” of foreclosure “warnings” to borrowers months after the window of time had lapsed during which they could have saved their homes[1]. Lawskey alleges that many of the letters were even back-dated to give the impression that they had been sent in a timely fashion. “In many cases, borrowers received a letter denying a mortgage loan modification, and the letter was dated more than 30 days prior to the date that Ocwen mailed the letter.”

The correspondence gave borrowers 30 days from the date of the denial letter to appeal, but the borrowers received the letters after more than 30 days had passed. The issue is not a small one, either. Lawskey says that a mortgage servicing review at Ocwen revealed “more than 7,000” back-dated letters.”

In addition to the letters, Ocwen only sent correspondence concerning default cures after the cure date for delinquent borrowers had passed and ignored employee concerns that “letter-dating processes were inaccurate and misrepresented the severity of the problem.” While Lawskey accused Ocwen of cultivating a “culture that disregards the needs of struggling borrowers,” Ocwen itself blamed “software errors” for the improperly-dated letters[2]. This is just the latest in a series of troubles for the Atlanta-based mortgage servicer; The company was also part the foreclosure fraud settlement with 49 of 50 state attorneys general and recently agreed to reduce many borrowers’ loan balances by $2 billion total.

Most people do not realize that Ocwen, although the fourth-largest mortgage servicer in the country, is not actually a bank. The company specializes specifically in servicing high-risk mortgages, such as subprime mortgages. At the start of 2014, it managed $106 billion in subprime loans. Ocwen has only acknowledged that 283 New York borrowers actually received improperly dated letters, but did announce publicly in response to Lawskey’s letter that it is “investigating two other cases” and cooperating with the New York financial regulator.

WHAT WE THINK: While it’s tempting to think that this is part of an overarching conspiracy to steal homes in a state (and, when possible, a certain enormous city) where real estate is scarce, in reality the truth of the matter could be even more disturbing: Ocwen and its employees just plain didn’t care. There was a huge, problematic error that could have prevented homeowners from keeping their homes, but the loan servicer had already written off the homeowners as losers in the mortgage game. A company that services high-risk loans likely has a jaded view of borrowers, but that does not mean that the entire culture of the company should be based on ignoring borrowers’ rights and the vast majority of borrowers who want to keep their homes and pay their loans. Sure, if you took out a mortgage then you have the obligation to pay even if you don’t like the terms anymore. On the other side of the coin, however, your mortgage servicer has the obligation to treat you like someone who will fulfill their obligations rather than rigging the process so that you are doomed to fail.

Do you think Lawskey is right about Ocwen’s “culture?” What should be done to remedy this situation so that note investors and homeowners come out of it okay?

Thank you for reading the Bryan Ellis Investing Letter!

Your comments and questions are welcomed below.


[1] http://dsnews.com/news/10-23-2014/new-york-regulator-accuses-lender-sending-backdated-foreclosure-notices

[2] http://realestate.aol.com/blog/2014/10/22/ocwen-mortgage-alleged-foreclosure-abuse/

http://investing.bryanellis.com/11703/lender-fakes-foreclosure-notices-to-steal-homes/


Ocwen posts open letter and apology to borrowers
Pledges independent investigation and rectification
October 27, 2014 10:37AM

Ocwen Financial (OCN) has taken a beating after the New York Department of Financial Services sent a letter to the company on Oct. 21 alleging that the company had been backdating letters to borrowers, and now Ocwen is posting an open letter to homeowners.

Ocwen CEO Ron Faris writes to its clients explaining what happened and what steps the company is taking to investigate the issue, identify any problems, and rectify the situation.

Click here to read the full text of the letter.

“At Ocwen, we take our mission of helping struggling borrowers very seriously, and if you received one of these incorrectly-dated letters, we apologize. I am writing to clarify what happened, to explain the actions we have taken to address it, and to commit to ensuring that no borrower suffers as a result of our mistakes,” he writes.

“Historically letters were dated when the decision was made to create the letter versus when the letter was actually created. In most instances, the gap between these dates was three days or less,” Faris writes. “In certain instances, however, there was a significant gap between the date on the face of the letter and the date it was actually generated.”

Faris says that Ocwen is investigating all correspondence to determine whether any of it has been inadvertently misdated; how this happened in the first place; and why it took so long to fix it. He notes that Ocwen is hiring an independent firm to conduct the investigation, and that it will use its advisory council comprised of 15 nationally recognized community advocates and housing counselors.

“We apologize to all borrowers who received misdated letters. We believe that our backup checks and controls have prevented any borrowers from experiencing a foreclosure as a result of letter-dating errors. We will confirm this with rigorous testing and the verification of the independent firm,” Faris writes. “It is worth noting that under our current process, no borrower goes through a foreclosure without a thorough review of his or her loan file by a second set of eyes. We accept appeals for modification denials whenever we receive them and will not begin foreclosure proceedings or complete a foreclosure that is underway without first addressing the appeal.”

Faris ends by saying that Ocwen is committed to keeping borrowers in their homes.

“Having potentially caused inadvertent harm to struggling borrowers is particularly painful to us because we work so hard to help them keep their homes and improve their financial situations. We recognize our mistake. We are doing everything in our power to make things right for any borrowers who were harmed as a result of misdated letters and to ensure that this does not happen again,” he writes.

Last week the fallout from the “Lawsky event” – so called because of NYDFS Superintendent Benjamin Lawsky – came hard and fast.

Compass Point downgraded Ocwen affiliate Home Loan Servicing Solutions (HLSS) from Buy to Neutral with a price target of $18.

Meanwhile, Moody’s Investors Service downgraded Ocwen Loan Servicing LLC’s servicer quality assessments as a primary servicer of subprime residential mortgage loans to SQ3 from SQ3+ and as a special servicer of residential mortgage loans to SQ3 from SQ3+.

Standard & Poor’s Ratings Services lowered its long-term issuer credit rating to ‘B’ from ‘B+’ on Ocwen on Wednesday and the outlook is negative.

http://www.housingwire.com/articles/31846-ocwen-posts-open-letter-and-apology-to-borrowers

—-
Ocwen Writes Open Letter to Homeowners Concerning Letter Dating Issues
October 24, 2014

Dear Homeowners,

In recent days you may have heard about an investigation by the New York Department of Financial Services’ (DFS) into letters Ocwen sent to borrowers which were inadvertently misdated. At Ocwen, we take our mission of helping struggling borrowers very seriously, and if you received one of these incorrectly-dated letters, we apologize. I am writing to clarify what happened, to explain the actions we have taken to address it, and to commit to ensuring that no borrower suffers as a result of our mistakes.

What Happened
Historically letters were dated when the decision was made to create the letter versus when the letter was actually created. In most instances, the gap between these dates was three days or less. In certain instances, however, there was a significant gap between the date on the face of the letter and the date it was actually generated.

What We Are Doing
We are continuing to investigate all correspondence to determine whether any of it has been inadvertently misdated; how this happened in the first place; and why it took us so long to fix it. At the end of this exhaustive investigation, we want to be absolutely certain that we have fixed every problem with our letters. We are hiring an independent firm to investigate and to help us ensure that all necessary fixes have been made.

Ocwen has an advisory council made up of fifteen nationally recognized community advocates and housing counsellors. The council was created to improve our borrower outreach to keep more people in their homes. We will engage with council members to get additional guidance on making things right for any borrowers who may have been affected in any way by this error.

We apologize to all borrowers who received misdated letters. We believe that our backup checks and controls have prevented any borrowers from experiencing a foreclosure as a result of letter-dating errors. We will confirm this with rigorous testing and the verification of the independent firm. It is worth noting that under our current process, no borrower goes through a foreclosure without a thorough review of his or her loan file by a second set of eyes. We accept appeals for modification denials whenever we receive them and will not begin foreclosure proceedings or complete a foreclosure that is underway without first addressing the appeal.

In addition to these efforts we are committed to cooperating with DFS and all regulatory agencies.

We Are Committed to Keeping Borrowers in Their Homes
Having potentially caused inadvertent harm to struggling borrowers is particularly painful to us because we work so hard to help them keep their homes and improve their financial situations. We recognize our mistake. We are doing everything in our power to make things right for any borrowers who were harmed as a result of misdated letters and to ensure that this does not happen again. We remain deeply committed to keeping borrowers in their homes because we believe it is the right thing to do and a win/win for all of our stakeholders.

We will be in further communication with you on this matter.

Sincerely,
Ron Faris
CEO

YOU DECIDE

Ocwen Downgrade Puts RMBS at Risk

Moody’s and S&P downgraded Ocwen’s servicer quality rating last week after the New York Department of Financial Services made “backdating” allegations. Barclays says the downgrades could put some RMBS at risk of a servicer-driven default.

http://findsenlaw.wordpress.com/2014/10/29/ocwen-downgraded-in-response-to-ny-dept-of-financial-services-backdating-allegations-against-ocwen/

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Assisted-Living Complexes for Young People

https://i2.wp.com/www.cenozoico.com/wp-content/uploads/2013/12/Balcony-Appartment-Outdoor-Living-Room-Ideas-1024x681.jpg

by Dionne Searcey

One of the most surprising developments in the aftermath of the housing crisis is the sharp rise in apartment building construction. Evidently post-recession Americans would rather rent apartments than buy new houses.

When I noticed this trend, I wanted to see what was behind the numbers.

Is it possible Americans are giving up on the idea of home ownership, the very staple of the American dream? Now that would be a good story.

What I found was less extreme but still interesting: The American dream appears merely to be on hold.

Economists told me that many potential home buyers can’t get a down payment together because the recession forced them to chip away at their savings. Others have credit stains from foreclosures that will keep them out of the mortgage market for several years.

More surprisingly, it turns out that the millennial generation is a driving force behind the rental boom. Young adults who would have been prime candidates for first-time home ownership are busy delaying everything that has to do with becoming a grown-up. Many even still live at home, but some data shows they are slowly beginning to branch out and find their own lodgings — in rental apartments.

A quick Internet search for new apartment complexes suggests that developers across the country are seizing on this trend and doing all they can to appeal to millennials. To get a better idea of what was happening, I arranged a tour of a new apartment complex in suburban Washington that is meant to cater to the generation.

What I found made me wish I was 25 again. Scented lobbies crammed with funky antiques that led to roof decks with outdoor theaters and fire pits. The complex I visited offered Zumba classes, wine tastings, virtual golf and celebrity chefs who stop by to offer cooking lessons.

“It’s like an assisted-living facility for young people,” the photographer accompanying me said.

Economists believe that the young people currently filling up high-amenity rental apartments will eventually buy homes, and every young person I spoke with confirmed that this, in fact, was the plan. So what happens to the modern complexes when the 20-somethings start to buy homes? It’s tempting to envision ghost towns of metal and pipe wood structures with tumbleweeds blowing through the lobbies. But I’m sure developers will rehabilitate them for a new demographic looking for a renter’s lifestyle.

Hillary: “Business Does Not Create Jobs”, Washington Does

Hillary_Clinton_2016_president_bid_confirmed by Tyler Durden

We have a very serious problem with Hillary. I was asked years ago to review Hillary’s Commodity Trading to explain what went on. Effectively, they did trades and simply put winners in her account and the losers in her lawyer’s. This way she gets money that is laundered through the markets – something that would get her 25 years today. People forget, but Hillary was really President – not Bill. Just 4 days after taking office, Hillary was given the authority to start a task force for healthcare reform. The problem was, her vision was unbelievable. The costs upon business were oppressive so much so that not even the Democrats could support her. When asked how was a small business mom and pop going to pay for healthcare she said “if they could not afford it they should not be in business.” From that moment on, my respect for her collapsed. She revealed herself as a real Marxist. Now, that she can taste the power of Washington, and I dare say she will not be a yes person as Obama and Bush seem to be, therein lies the real danger. Giving her the power of dictator, which is the power of executive orders, I think I have to leave the USA just to be safe. Hillary has stated when she ran the White House before regarding her idea of healthcare, “We can’t afford to have that money go to the private sector. The money has to go to the federal government because the federal government will spend that money better than the private sector will spend it.” When has that ever happened?

Hillary believes in government at the expense of the people. I do not say this lightly, because here she goes again. She just appeared at a Boston rally for Democrat gubernatorial candidate Martha Coakley on Friday. She was off the hook and amazingly told the crowd gathered at the Park Plaza Hotel not to listen to anybody who says that “businesses create jobs.” “Don’t let anybody tell you it’s corporations and businesses that create jobs,” Clinton said. “You know that old theory, ‘trickle-down economics,’” she continued. “That has been tried, that has failed. It has failed rather spectacularly.” “You know, one of the things my husband says when people say ‘Well, what did you bring to Washington,’ he said, ‘Well, I brought arithmetic,” Hillary said.

I wrote an Op-Ed for the Wall Street Journal on Clinton’s Balanced Budget. It was smoke and mirrors. Long-term interest rates were sharply higher than short-term. Clinton shifted the national debt to save interest expenditures. He also inherited a up-cycle in the economy that always produces more taxes. Yet she sees no problem with the math of perpetually borrowing. Perhaps she would get to the point of being unable to sell debt and just confiscate all wealth since government knows better. 

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Here’s a shocker or is it? Take the quiz and then check your answers at the bottom. Then take action!!!

And, no, the answers to these questions aren’t all “Barack Obama”!

1) “We’re going to take things away from you on behalf
of the common good.”
A. Karl Marx
B. Adolph Hitler
C. Joseph Stalin

D. Barack Obama
E. None of the above

2) “It’s time for a new beginning, for an end to government
of the few, by the few, and for the few…… And to replace it
with shared responsibility, for shared prosperity.”
A. Lenin
B. Mussolini
C. Idi Amin
D. Barack Obama

E. None of the above

3) “(We)…..can’t just let business as usual go on, and that
means something has to be taken away from some people.”
A. Nikita Khrushchev
B. Joseph Goebbels
C. Boris Yeltsin

D. Barack Obama
E. None of the above

4) “We have to build a political consensus and that requires
people to give up a little bit of their own … in order to create
this common ground.”
A. Mao Tse Tung
B. Hugo Chavez
C. Kim Jong II

D. Barack Obama
E. None of the above

5) “I certainly think the free-market has failed.”
A. Karl Marx
B. Lenin
C. Molotov
D. Barack Obama

E. None of the above

6) “I think it’s time to send a clear message to what
has become the most profitable sector in (the) entire
economy that they are being watched.”
A. Pinochet
B. Milosevic
C. Saddam Hussein

D. Barack Obama
E. None of the above

and the answers are ~~~~~~~~~~~~~

(1) E. None of the above. Statement was made by Hillary Clinton 6/29/2004
(2) E. None of the above. Statement was made by Hillary Clinton 5/29/2007
(3) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(4) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(5) E. None of the above. Statement was made by Hillary Clinton 6/4/2007
(6) E. None of the above. Statement was made by Hillary Clinton 9/2/2005

Want to know something scary? She may be the next POTUS.

https://i0.wp.com/glossynews.com/wp-content/uploads/2013/01/clintonAP1712_468x5921.jpg

8 Major Reasons Why The Current Low Oil Price Is Not Here To Stay

https://i1.wp.com/media-cache-ak0.pinimg.com/736x/6b/92/8f/6b928fc7417ebd67ee2f64b26be053af.jpg

by Nathan’s Bulletin

Summary:

  • The slump in the oil price is primarily a result of extreme short positioning, a headline-driven anxiety and overblown fears about the global economy.
  • This is a temporary dip and the oil markets will recover significantly by H1 2015.
  • Now is the time to pick the gold nuggets out of the ashes and wait to see them shine again.
  • Nevertheless, the sky is not blue for several energy companies and the drop of the oil price will spell serious trouble for the heavily indebted oil producers.

Introduction:

It has been a very tough market out there over the last weeks. And the energy stocks have been hit the hardest over the last five months, given that most of them have returned back to their H2 2013 levels while many have dropped even lower down to their H1 2013 levels.

But one of my favorite quotes is Napoleon’s definition of a military genius: “The man who can do the average thing when all those around him are going crazy.” To me, you don’t have to be a genius to do well in investing. You just have to not go crazy when everyone else is.

In my view, this slump of the energy stocks is a deja-vu situation, that reminded me of the natural gas frenzy back in early 2014, when some fellow newsletter editors and opinion makers with appearances on the media (i.e. CNBC, Bloomberg) were calling for $8 and $10 per MMbtu, trapping many investors on the wrong side of the trade. In contrast, I wrote a heavily bearish article on natural gas in February 2014, when it was at $6.2/MMbtu, presenting twelve reasons why that sky high price was a temporary anomaly and would plunge very soon. I also put my money where my mouth was and bought both bearish ETFs (NYSEARCA:DGAZ) and (NYSEARCA:KOLD), as shown in the disclosure of that bearish article. Thanks to these ETFs, my profits from shorting the natural gas were quick and significant.

This slump of the energy stocks also reminded me of those analysts and investors who were calling for $120/bbl and $150/bbl in H1 2014. Even T. Boone Pickens, founder of BP Capital Management, told CNBC in June 2014 that if Iraq’s oil supply goes offline, crude prices could hit $150-$200 a barrel.

But people often go to the extremes because this is the human nature. But shrewd investors must exploit this inherent weakness of human nature to make easy money, because factory work has never been easy.

Let The Charts And The Facts Speak For Themselves

The chart for the bullish ETF (NYSEARCA:BNO) that tracks Brent is illustrated below:

And the charts for the bullish ETFs (NYSEARCA:USO), (NYSEARCA:DBO) and (NYSEARCA:OIL) that track WTI are below:

and below:

and below:

For the risky investors, there is the leveraged bullish ETF (NYSEARCA:UCO), as illustrated below:

It is clear that these ETFs have returned back to their early 2011 levels amid fears for oversupply and global economy worries. Nevertheless, the recent growth data from the major global economies do not look bad at all.

In China, things look really good. The Chinese economy grew 7.3% in Q3 2014, which is way far from a hard-landing scenario that some analysts had predicted, and more importantly the Chinese authorities seem to be ready to step in with major stimulus measures such as interest rate cuts, if needed. Let’s see some more details about the Chinese economy:

1) Exports rose 15.3% in September from a year earlier, beating a median forecast in a Reuters poll for a rise of 11.8% and quickening from August’s 9.4% rise.

2) Imports rose 7% in terms of value, compared with a Reuters estimate for a 2.7% fall.

3) Iron ore imports rebounded to the second highest this year and monthly crude oil imports rose to the second highest on record.

4) China posted a trade surplus of $31.0 billion in September, down from $49.8 billion in August.

Beyond the encouraging growth data coming from China (the second largest oil consumer worldwide), the US economy grew at a surprising 4.6% rate in Q2 2014, which is the fastest pace in more than two years.

Meanwhile, the Indian economy picked up steam and rebounded to a 5.7% rate in Q2 2014 from 4.6% in Q1, led by a sharp recovery in industrial growth and gradual improvement in services. And after overtaking Japan as the world’s third-biggest crude oil importer in 2013, India will also become the world’s largest oil importer by 2020, according to the US Energy Information Administration (EIA).

The weakness in Europe remains, but this is nothing new over the last years. And there is a good chance Europe will announce new economic policies to boost the economy over the next months. For instance and based on the latest news, the European Central Bank is considering buying corporate bonds, which is seen as helping banks free up more of their balance sheets for lending.

All in all, and considering the recent growth data from the three biggest oil consumers worldwide, I get the impression that the global economy is in a better shape than it was in early 2011. On top of that, EIA forecasts that WTI and Brent will average $94.58 and $101.67 respectively in 2015, and obviously I do not have any substantial reasons to disagree with this estimate.

The Reasons To Be Bullish On Oil Now

When it comes to investing, timing matters. In other words, a lucrative investment results from a great entry price. And based on the current price, I am bullish on oil for the following reasons:

1) Expiration of the oil contracts: They expired last Thursday and the shorts closed their bearish positions and locked their profits.

2) Restrictions on US oil exports: Over the past three years, the average price of WTI oil has been $13 per barrel cheaper than the international benchmark, Brent crude. That gives large consumers of oil such as refiners and chemical companies a big cost advantage over foreign rivals and has helped the U.S. become the world’s top exporter of refined oil products.

Given that the restrictions on US oil exports do not seem to be lifted anytime soon, the shale oil produced in the US will not be exported to impact the international supply/demand and lower Brent price in the short-to-medium term.

3) The weakening of the U.S. dollar: The U.S. dollar rose significantly against the Euro over the last months because of a potential interest rate hike.

However, U.S. retail sales declined in September 2014 and prices paid by businesses also fell. Another report showed that both ISM indices weakened in September 2014, although the overall economic growth remained very strong in Q3 2014.

The ISM manufacturing survey showed that the reading fell back from 59.0 in August 2014 to 56.6 in September 2014. The composite non-manufacturing index dropped back as well, moving down from 59.6 in August 2014 to 58.6 in September 2014.

(click to enlarge)

Source: Pictet Bank website

These reports coupled with a weak growth in Europe and a potential slowdown in China could hurt U.S. exports, which could in turn put some pressure on the U.S. economy.

These are reasons for caution and will most likely deepen concerns at the U.S. Federal Reserve. A rate hike too soon could cause problems to the fragile U.S. economy which is gradually recovering. “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” the U.S. central bank’s vice chairman, Stanley Fischer, said.

That being said, the US Federal Reserve will most likely defer to hike the interest rate planned to begin in H1 2015. A delay in expected interest rate hikes will soften the dollar over the next months, which will lift pressure off the oil price and will push Brent higher.

4) OPEC’s decision to cut supply in November 2014: Many OPEC members need the price of oil to rise significantly from the current levels to keep their house in fiscal order. If Brent remains at $85-$90, these countries will either be forced to borrow more to cover the shortfall in oil tax revenues or cut their promises to their citizens. However, tapping bond markets for financing is very expensive for the vast majority of the OPEC members, given their high geopolitical risk. As such, a cut on promises and social welfare programs is not out of the question, which will likely result in protests, social unrest and a new “Arab Spring-like” revolution in some of these countries.

This is why both Iran and Venezuela are calling for an urgent OPEC meeting, given that Venezuela needs a price of $121/bbl, according to Deutsche Bank, making it one of the highest break-even prices in OPEC. Venezuela is suffering rampant inflation which is currently around 50%, and the government currency controls have created a booming black currency market, leading to severe shortages in the shops.

Bahrain, Oman and Nigeria have not called for an urgent OPEC meeting yet, although they need between $100/bbl and $136/bbl to meet their budgeted levels. Qatar and UAE also belong to this group, although hydrocarbon revenues in Qatar and UAE account for close to 60% of the total revenues of the countries, while in Kuwait, the figure is close to 93%.

The Gulf producers such as the UAE, Qatar and Kuwait are more resilient than Venezuela or Iran to the drop of the oil price because they have amassed considerable foreign currency reserves, which means that they could run deficits for a few years, if necessary. However, other OPEC members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room to maneuver to fund their budgets.

And now let’s see what is going on with Saudi Arabia. Saudi Arabia is too reliant on oil, with oil accounting for 80% of export revenue and 90% of the country’s budget revenue. Obviously, Saudi Arabia is not a well-diversified economy to withstand low Brent prices for many months, although the country’s existing sovereign wealth fund, SAMA Foreign Holdings, run by the country’s central bank, consisting mainly of oil surpluses, is the world’s third-largest, with assets totaling 737.6 billion US dollars.

This is why Prince Alwaleed bin Talal, billionaire investor and chairman of Kingdom Holding, said back in 2013: “It’s dangerous that our income is 92% dependent on oil revenue alone. If the price of oil decline was to decline to $78 a barrel there will be a gap in our budget and we will either have to borrow or tap our reserves. Saudi Arabia has SAR2.5 trillion in external reserves and unfortunately the return on this is 1 to 1.5%. We are still a nation that depends on the oil and this is wrong and dangerous. Saudi Arabia’s economic dependence on oil and lack of a diverse revenue stream makes the country vulnerable to oil shocks.”

And here are some additional key factors that the oil investors need to know about Saudi Arabia to place their bets accordingly:

a) Saudi Arabia’s most high-profile billionaire and foreign investor, Prince Alwaleed bin Talal, has launched an extraordinary attack on the country’s oil minister for allowing prices to fall. In a recent letter in Arabic addressed to ministers and posted on his website, Prince Alwaleed described the idea of the kingdom tolerating lower prices below $100 per barrel as potentially “catastrophic” for the economy of the desert kingdom. The letter is a significant attack on Saudi’s highly respected 79-year-old oil minister Ali bin Ibrahim Al-Naimi who has the most powerful voice within the OPEC.

b) Back in June 2014, Saudi Arabia was preparing to launch its first sovereign wealth fund to manage budget surpluses from a rise in crude prices estimated at hundreds of billions of dollars. The fund would be tasked with investing state reserves to “assure the kingdom’s financial stability,” Shura Council financial affairs committee Saad Mareq told Saudi daily Asharq Al-Awsat back then. The newspaper said the fund would start with capital representing 30% of budgetary surpluses accumulated over the years in the kingdom. The thing is that Saudi Arabia is not going to have any surpluses if Brent remains below $90/bbl for months.

c) Saudi Arabia took immediate action in late 2011 and early 2012, under the fear of contagion and the destabilisation of Gulf monarchies. Saudi Arabia funded those emergency measures, thanks to Brent which was much higher than $100/bbl back then. It would be difficult for Saudi Arabia to fund these billion dollar initiatives if Brent remained at $85-$90 for long.

d) Saudi Arabia and the US currently have a common enemy which is called ISIS. Moreover, the American presence in the kingdom’s oil production has been dominant for decades, given that U.S. petroleum engineers and geologists developed the kingdom’s oil industry throughout the 1940s, 1950s and 1960s.

From a political perspective, the U.S. has had a discreet military presence since 1950s and the two countries were close allies throughout the Cold War in order to prevent the communists from expanding to the Middle East. The two countries were also allies throughout the Iran-Iraq war and the Gulf War.

5) Geopolitical Risk: Right now, Brent price carries a zero risk premium. Nevertheless, the geopolitical risk in the major OPEC exporters (i.e. Nigeria, Algeria, Libya, South Sudan, Iraq, Iran) is highly volatile, and several things can change overnight, leading to an elevated level of geopolitical risk anytime.

For instance, the Levant has a new bogeyman. ISIS, the Islamic State of Iraq, emerged from the chaos of the Syrian civil war and has swept across Iraq, making huge territorial gains. Abu Bakr al-Baghdadi, the group’s figurehead, has claimed that its goal is to establish a Caliphate across the whole of the Levant and that Jordan is next in line.

At least 435 people have been killed in Iraq in car and suicide bombings since the beginning of the month, with an uptick in the number of these attacks since the beginning of September 2014, according to Iraq Body Count, a monitoring group tracking civilian deaths. Most of those attacks occurred in Baghdad and are the work of Islamic State militants. According to the latest news, ISIS fighters are now encamped on the outskirts of Baghdad, and appear to be able to target important installations with relative ease.

Furthermore, Libya is on the brink of a new civil war and finding a peaceful solution to the ongoing Libyan crisis will not be easy. According to the latest news, Sudan and Egypt agreed to coordinate efforts to achieve stability in Libya through supporting state institutions, primarily the military who is fighting against Islamic militants. It remains to be see how effective these actions will be.

On top of that, the social unrest in Nigeria is going on. Nigeria’s army and Boko Haram militants have engaged in a fierce gun battle in the north-eastern Borno state, reportedly leaving scores dead on either side. Several thousand people have been killed since Boko Haram launched its insurgency in 2009, seeking to create an Islamic state in the mainly Muslim north of Nigeria.

6) Seasonality And Production Disruptions: Given that winter is coming in the Northern Hemisphere, the global oil demand will most likely rise effective November 2014.

Also, U.S. refineries enter planned seasonal maintenance from September to October every year as the federal government requires different mixtures in the summer and winter to minimize environmental damage. They transition to winter-grade fuel from summer-grade fuels. U.S. crude oil refinery inputs averaged 15.2 million bopd during the week ending October 17. Input levels were 113,000 bopd less than the previous week’s average. Actually, the week ending October 17 was the eighth week in a row of declines in crude oil runs, and these rates were the lowest since March 2014. After all and given that the refineries demand less crude during this period of the year, the price of WTI remains depressed.

On top of that, the production disruptions primarily in the North Sea and the Gulf of Mexico are not out of the question during the winter months. Even Saudi Arabia currently faces production disruptions. For instance, production was halted just a few days ago for environmental reasons at the Saudi-Kuwait Khafji oilfield, which has output of 280,000 to 300,000 bopd.

7) Sentiment: To me, the recent sell off in BNO is overdone and mostly speculative. To me, the recent sell-off is primarily a result of a headline-fueled anxiety and bearish sentiment.

8) Jobs versus Russia: According to Olga Kryshtanovskaya, a sociologist studying the country’s elite at the Russian Academy of Sciences in Moscow, top Kremlin officials said after the annexation of Crimea that they expected the U.S. to artificially push oil prices down in collaboration with Saudi Arabia in order to damage Russia.

And Russia is stuck with being a resource-based economy and the cheap oil chokes the Russian economy, putting pressure on Vladimir Putin’s regime, which is overwhelmingly reliant on energy, with oil and gas accounting for 70% of its revenues. This is an indisputable fact.

The current oil price is less than the $104/bbl on average written into the 2014 Russian budget. As linked above, the Russian budget will fall into deficit next year if Brent is less than $104/bbl, according to the Russian investment bank Sberbank CIB. At $90/bbl, Russia will have a shortfall of 1.2% of gross domestic product. Against a backdrop of falling revenue, finance minister Anton Siluanov warned last week that the country’s ambitious plans to raise defense spending had become unaffordable.

Meanwhile, a low oil price is also helping U.S. consumers in the short term. However, WTI has always been priced in relation to Brent, so the current low price of WTI is actually putting pressure on the US consumers in the midterm, given that the number one Job Creating industry in the US (shale oil) will collapse and many companies will lay off thousands of people over the next few months. The producers will cut back their growth plans significantly, and the explorers cannot fund the development of their discoveries. This is another indisputable fact too.

For instance, sliding global oil prices put projects under heavy pressure, executives at Chevron (NYSE:CVX) and Statoil (NYSE:STO) told an oil industry conference in Venezuela. Statoil Venezuela official Luisa Cipollitti said at the conference that mega-projects globally are under threat, and estimates that more than half the world’s biggest 163 oil projects require a $120 Brent price for crude.

Actually, even before the recent fall of the oil price, the oil companies had been cutting back on significant spending, in a move towards capital discipline. And they had been making changes that improve the economies of shale, like drilling multiple wells from a single pad and drilling longer horizontal wells, because the “fracking party” was very expensive. Therefore, the drop of the oil price just made things much worse, because:

a) Shale Oil: Back in July 2014, Goldman Sachs estimated that U.S. shale producers needed $85/bbl to break even.

b) Offshore Oil Discoveries: Aside Petr’s (NYSE: PBR) pre-salt discoveries in Brazil, Kosmos Energy’s (NYSE: KOS) Jubilee oilfield in Ghana and Jonas Sverdrup oilfield in Norway, there have not been any oil discoveries offshore that move the needle over the last decade, while depleting North Sea fields have resulted in rising costs and falling production.

The pre-salt hype offshore Namibia and offshore Angola has faded after multiple dry or sub-commercial wells in the area, while several major players have failed to unlock new big oil resources in the Arctic Ocean. For instance, Shell abandoned its plans in the offshore Alaskan Arctic, and Statoil is preparing to drill a final exploration well in the Barents Sea this year after disappointing results in its efforts to unlock Arctic resources.

Meanwhile, the average breakeven cost for the Top 400 offshore projects currently is approximately $80/bbl (Brent), as illustrated below:

(click to enlarge)

Source: Kosmos Energy website

c) Oil sands: The Canadian oil sands have an average breakeven cost that ranges between $65/bbl (old projects) and $100/bbl (new projects).

In fact, the Canadian Energy Research Institute forecasts that new mined bitumen projects requires US$100 per barrel to breakeven, whereas new SAGD projects need US$85 per barrel. And only one in four new Canadian oil projects could be vulnerable if oil prices fall below US$80 per barrel for an extended period of time, according to the International Energy Agency.

“Given that the low-bearing fruit have already been developed, the next wave of oil sands project are coming from areas where geology might not be as uniform,” said Dinara Millington, senior vice president at the Canadian Energy Research Institute.

So it is not surprising that Suncor Energy (NYSE:SU) announced a billion-dollar cut for the rest of the year even though the company raised its oil price forecast. Also, Suncor took a $718-million charge related to a decision to shelve the Joslyn oilsands mine, which would have been operated by the Canadian unit of France’s Total (NYSE:TOT). The partners decided the project would not be economically feasible in today’s environment.

As linked above, others such as Athabasca Oil (OTCPK: ATHOF), PennWest Exploration (NYSE: PWE), Talisman Energy (NYSE: TLM) and Sunshine Oil Sands (OTC: SUNYF) are also cutting back due to a mix of internal corporate issues and project uncertainty. Cenovus Energy (NYSE:CVE) is also facing cost pressures at its Foster Creek oil sands facility.

And as linked above: “Oil sands are economically challenging in terms of returns,” said Jeff Lyons, a partner at Deloitte Canada. “Cost escalation is causing oil sands participants to rethink the economics of projects. That’s why you’re not seeing a lot of new capital flowing into oil sands.”

After all, helping the US consumer spend more on cute clothes today does not make any sense, when he does not have a job tomorrow. Helping the US consumer drive down the street and spend more at a fancy restaurant today does not make any sense, if he is unemployed tomorrow.

Moreover, Putin managed to avoid mass unemployment during the 2008 financial crisis, when the price of oil dropped further and faster than currently. If Russia faces an extended slump now, Putin’s handling of the last crisis could serve as a template.

In short, I believe that the U.S. will not let everything collapse that easily just because the Saudis woke up one day and do not want to pump less. I believe that the U.S. economy has more things to lose (i.e. jobs) than to win (i.e. hurt Russia or help the US consumer in the short term), in case the current low WTI price remains for months.

My Takeaway

I am not saying that an investor can take the plunge lightly, given that the weaker oil prices squeeze profitability. Also, I am not saying that Brent will return back to $110/bbl overnight. I am just saying that the slump of the oil price is primarily a result from extreme short positioning and overblown fears about the global economy.

To me, this is a temporary dip and I believe that oil markets will recover significantly by the first half of 2015. This is why, I bought BNO at an average price of $33.15 last Thursday, and I will add if BNO drops down to $30. My investment horizon is 6-8 months.

Nevertheless, all fingers are not the same. All energy companies are not the same either. The rising tide lifted many of the leveraged duds over the last two years. Some will regain quickly their lost ground, some will keep falling and some will cover only half of the lost ground.

I am saying this because the drop of the oil price will spell serious trouble for a lot of oil producers, many of whom are laden with debt. I do believe that too much credit has been extended too fast amid America’s shale boom, and a wave of bankruptcy that spreads across the oil patch will not surprise me. On the debt front, here is some indicative data according to Bloomberg:

1) Speculative-grade bond deals from energy companies have made up at least 16% of total junk issuance in the U.S. the past two years as the firms piled on debt to fund exploration projects. Typically the average since 2002 has been 11%.

2) Junk bonds issued by energy companies, which have made up a record 17% of the $294 billion of high-yield debt sold in the U.S. this year, have on average lost more than 4% of their market value since issuance.

3) Hercules Offshore’s (NASDAQ:HERO) $300 million of 6.75% notes due in 2022 plunged to 57 cents a few days ago after being issued at par, with the yield climbing to 17.2%.

4) In July 2014, Aubrey McClendon’s American Energy Partners LP tapped the market for unsecured debt to fund exploration projects in the Permian Basin. Moody’s Investors Service graded the bonds Caa1, which is a level seven steps below investment-grade and indicative of “very high credit risk.” The yield on the company’s $650 million of 7.125% notes maturing in November 2020 reached 11.4% a couple of days ago, as the price plunged to 81.5 cents on the dollar, according to Trace, the Financial Industry Regulatory Authority’s bond-price reporting system.

Due to this debt pile, I have been very bearish on several energy companies like Halcon Resources (NYSE:HK), Goodrich Petroleum (NYSE:GDP), Vantage Drilling (NYSEMKT: VTG), Midstates Petroleum (NYSE: MPO), SandRidge Energy (NYSE:SD), Quicksilver Resources (NYSE: KWK) and Magnum Hunter Resources (NYSE:MHR). All these companies have returned back to their H1 2013 levels or even lower, as shown at their charts.

But thanks also to this correction of the market, a shrewd investor can separate the wheat from the chaff and pick only the winners. The shrewd investor currently has the unique opportunity to back up the truck on the best energy stocks in town. This is the time to pick the gold nuggets out of the ashes and wait to see them shine again. On that front, I recommended Petroamerica Oil (OTCPK: PTAXF) which currently is the cheapest oil-weighted producer worldwide with a pristine balance sheet.

Last but not least, I am watching closely the situation in Russia. With economic growth slipping close to zero, Russia is reeling from sanctions by the U.S. and the European Union. The sanctions are having an across-the-board impact, resulting in a worsening investment climate, rising capital flight and a slide in the ruble which is at a record low. And things in Russia have deteriorated lately due to the slump of the oil price.

Obviously, this is the perfect storm and the current situation in Russia reminds me of the situation in Egypt back in 2013. Those investors who bought the bullish ETF (NYSEARCA: EGPT) at approximately $40 in late 2013, have been rewarded handsomely over the last twelve months because EGPT currently lies at $66. Therefore, I will be watching closely both the fluctuations of the oil price and several other moving parts that I am not going to disclose now, in order to find the best entry price for the Russian ETFs (NYSEARCA: RSX) and (NYSEARCA:RUSL) over the next months.

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The Boom-and-bust Fed’s Rental Society

https://farm6.staticflickr.com/5477/10625414354_3f92ab4979.jpg

by Reuven Brenner

Now, as during World War II and up to 1951, the US Federal Reserve practiced what is now called quantitative easing (QE). Then, as now, nominal interest rates were low and the real ones negative: The Fed’s policy did not so much induce investments as it allowed the government to accumulate debts, and prevent default.

Marriner Eccles, the Fed chairman during the 1940s, stated explicitly that “we agreed with the Treasury at the time of the war [that the low rates were] the basis upon which the Federal Reserve would assure the Government financing” – the Fed thus carrying out fiscal policy. Real wages stagnated then as now, and global savings poured into the US.

With the centrally controlled war economy, there was no sacrifice buying Treasuries. Extensive price controls, whose administration was gradually dismantled after 1948 only, did not induce investments. Citizens backed this war, and consumer oriented production was not a priority. Black markets thrived, and the real inflation was significantly higher than the official one computed from the controlled prices.

Still, even the official cumulative rate of inflation was 70% between 1940-7. Yet interest rates during those years hovered around 0.5% for three-months Treasuries and 2.5% for the 30-year ones – similar to today’s.

When the Allies won the War, there were many unknowns, among them the future of Europe, Russia, Asia, and there was much uncertainty about domestic policies in the US too: how fast the US’s centralized “war economy” would be dismantled being one of them. As noted, the dismantling started in 1948, but the Fed gained independence and ceased carrying out fiscal policy in 1951 only.

Mark Twain said history rhymes but does not repeat itself. Though now the West is not fighting wars on the scale of World War II, there is uncertainty again in Southeast Asia and the Middle East, in Europe, in Russia and in Latin America. Savings continue to pour in the US, into Treasuries in particular, much criticism of US fiscal and monetary policies notwithstanding.

In the land of the blind, the one-eyed person – the US – committing fewer mistakes and expected to correct them faster than other countries, can still do reasonably. And although domestically, the US is not as much subject to wage and price controls as it was during and after World War II, large sectors, such as education and health, among others, are subject to direct and indirect controls by an ever more complex bureaucracy, the regulatory and fiscal environment, both domestic and international is uncertain, whether linked to climate, corporate taxes, what differential tax rates would be labeled “state aid”, and others.

Many societies are in the midst of unprecedented experiments, with no model of society being perceived as clearly worth emulation.

In such uncertain worlds, the best thing investors can do is be prepared for mobility – be nimble and able to become “liquid” on moments’ notice. This means investing in deeper bond and stock markets, but even in them for shorter periods of time – “renting” them, rather than buying into the businesses underlying them, and less so in immobile assets. Among the consequence of such actions are low velocity of money (with less confidence, money flows more slowly) and less capital spending, in “immobile assets” in particular.

As to in- and outflows to gold, its price fluctuations post-crisis suggest that its main feature is being a global reserve currency, a substitute to the dollar. As the euro’s and the yen’s credibility to be reserve currencies first weakened since 2008, and the yuan, a communist party-ruled country’s currency is not fit to play such role, by 2011 the dollar’s dominant status as reserve currency even strengthened.

First the price of gold rose steadily from US$600 per ounce in 2005 to $1,900 in 2011, dropping to $1,200 these days. And much sound and fury notwithstanding, the exchange rate between the dollar, euro and yen are now exactly where they were in 2005, with the price of an ounce of gold doubling since.

The stagnant real wages in Main Street’s immobile sectors are consistent with the rising stock prices and low interest rates. Not only are investors less willing to deploy capital in relatively illiquid assets, but also that critical mass of talented people, I often call the “vital few”, has been moving toward the occupations of the “mobile” sector, such as technology, finance and media.

Such moves put caps on wages within the immobile sectors. Just as “stars” quitting a talented team in sports lower the compensation of teammates left behind, so is the case when “stars” in business or technology make their moves away from the “immobile” sectors. Add to these the impact due to heightened competition of tens of millions of “ordinary talents” from around the world, and the stagnant wages in the US’s immobile sectors are not surprising.

This is one respect in which our world differs from the one of post-World War II, when talent poured into the US’s “immobile” sectors, freed from the constraints of the war economy. It differs too in terms of rising inequality of wealth. The Western populations were young then, hungry to restore normalcy, and able to do that in the dozen Western countries only, the rest of the world having closed behind dictatorial curtains.

This is not the case now: the West’s aging boomers and its poorer segments saw the evaporation of equities in homes and increased uncertainty about their pensions in 2008. They went into capital preservation mode with Treasuries, not stocks. At the age of 50-55 and above, people cannot risk their capital, as they do not have time and opportunities to recoup.

However, those for whom losing more would not significantly alter their standards of living did put the money back in stock markets after the crisis. As markets recovered after 2008, wealth disparities increased. This did not happen after World War II; even though stock markets did well, they were in their infancy then. Even in 1952, only 6.5 million Americans owned common stock (about 4% of the US population then). The hoarding during the war did not find its outlet after its end in stock markets, as happened since 2008 for the relatively well to do.

The parallels in terms of monetary and fiscal policies between World War II and today, and the non-parallels in terms of demography and global trade, shed light on the major trends since the crisis: there are no “conundrums.” This does not mean that solutions are straightforward or can be done unilaterally. The post -World War II world needed Bretton-Woods, and today agreement to stabilize currencies is needed too.

This has not been done. Instead central banks have improvised, though there is no proof that central banks can do well much more than keep an eye on stable prices. The recent improvised venturing into undefined “financial stability”, undefined “cooperation” and “coordination”, and the Fed carrying out, as during World War II, fiscal rather than monetary policy, add to fiscal, regulatory and foreign policy uncertainties, all punish long-term investments and drive money into liquid ones, and society becoming a “rental”, one, with shortened horizons.

Jumps in stock prices with each announcement that the Fed will continue with its present policies and favor devaluation (as Stan Fisher, vice chairman of the Fed just advocated) – does not suggest that things are on the right track, but quite the opposite, that the Fed has not solved any problem, and neither has Washington dealt with fundamentals. Instead, with devaluations, they have avoided domestic fiscal and regulatory adjustments – and hope for the resulting increased exports, that is, relying on other countries making policy adjustments.

Reuven Brenner holds the Repap Chair at McGill University’s Desautels Faculty of Management. The article draws on his Force of Finance (2002).

(Copyright 2014 Reuven Brenner)

 

Record Number of Americans Not in Labor Force in June

Source: CNSNews.com – The number of Americans 16 and older who did not participate in the labor force climbed to a record high of 92,120,000 in June, according to data from the Bureau of Labor Statistics (BLS).

This means that there were 92,120,000 Americans 16 and older who not only did not have a job, but did not actively seek one in the last four weeks.

That is up 111,000 from the 92,009,000 Americans who were not participating in the labor force in April.

In June, according to BLS, the labor force participation rate for Americans was 62.8 percent, matching a 36-year low. The participation rate is the percentage of the population that either has a job or actively sought one in the last four weeks.

In December, April, May, and now June, the labor force participation rate has been 62.8 percent.

Before December, the last time the labor force participation rate sank as low as 62.8 percent was in February 1978, when it was also 62.8 percent. At that time, Jimmy Carter was president.

At no time during the presidencies of Ronald Reagan, George H.W. Bush, Bill Clinton or George W. Bush, did such a small percentage of the civilian non-institutional population either hold a job or at least actively seek one.

While the number of Americans not in the labor force increased, the unemployment rate dropped — from 6.3 percent in April to 6.1 percent in June.

Unemployment May Be Shrinking But So Is The Labor Force

The US unemployment rate plunged last month from 6.7 percent to 6.3 percent, the lowest it has been since September 2008 when it was 6.1 percent. Economists had generally expected the rate to only decline from 6.7 percent to 6.6 percent.

On its face, it appears this report is indicative of a booming US economy. But, as they say, the devil is in the details and, in this case, the details are simply bad news. The sharp drop occurred because the number of people working or seeking work fell. The Bureau of Labor Statistics does not count people not looking for a job as unemployed.

The U.S. labor-force participation rate sank to 62.8 percent in April from 63.2 percent in March to match a 35-year low. Some 806,000 people dropped out of the labor force.

Despite the unemployment rate plummeting, more than 92 million Americans remain out of the labor force. The amount of Americans (not seasonally adjusted) not in the labor force in April rose to 92,594,000, almost 1 million more than the previous month. In March, 91,630,000 Americans were not in the labor force.

Within that overall number, the number of women, 16 and older, not in the labor force climbed to a record high of 55,116,000 in April. This means there were 55,116,000 women, 16 and older, who were in the civilian, non-institutional population who not only did not have a job, they did not actively seek one in the last four weeks. That is up 428,000 from the 54,688,000 women who were not in the labor force in March.
A number of economists look past the “main” unemployment rate to a different figure the Bureau of Labor Statistics calls “U-6,” which it defines as “total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.”

In other words, the unemployed, the underemployed and the discouraged. The U-6 rate in April was 12.3 percent, a rate that remains high.

The jobs numbers weren’t the only statistic that fell short of expectations today. The Commerce Department reported this morning that new orders for manufactured goods increased 1.1 percent in March. A consensus of economists had forecast new orders received by factories advancing 1.4 percent. In other words, the actual numbers fell significantly short of expectations. Moreover, February’s orders were revised downward to show a 1.5 percent rise instead of the previously reported 1.6 percent gain.

Source: Swiss America