Structural shifts produce portfolio shift

Good-bye January, hello leap-year-February. Before you knew it, 1/12th of the trading year, 8.3333% (repeating), is gone for good.

We’re at new levels of absurdity.  March 20th is the vernal equinox and the day €14.5 billion in debt payments come due for Greece.  Note that I didn’t convert that figure into Dollars; who knows what that unstable number will really be by the time you read this. The long-term solution the so-called troika (ECB, EU Comisssion, IMF) has agreed on is to cut Greece’s debt from 160% of GDP to 120%. This is right about where another pillar of the global economy, Iceland, sits today.  And just to get this silly deal done about a baker’s dozen of political entities have to agree at the same time.  The pundits on CNBC are opining about the future electoral outcomes in Greece.  I’d love to do a survey to see how many of them know who their Congressperson or state representative is, let alone the political realities in a foreign land.

Maybe it’s appropriate that Europe keeps kicking the can; that was a pretty popular game during the Depression, which is where we could be headed if just a few mechanical things play out in the right order.  Like George Dubya Bush said, this sucker could go down.

And despite all this and a looming war with Iran over oil, the markets are up, year-to-date. Big.

After a brutal October-November-December some of the biggest blue chip hedge funds are notching gains of 5%.  For an institutional equity manager to pop that much on a hedged position in one month is absolutely nuts.  Enormous funds that were down in 2011, ones likes Third Point & Paulson, managing billions of dollars, have seen losing positions rebound tremendously.

So I’m taking stock of a market that is ripping in spite of large structural issues.  That’s not a market I want to get in the way of.  If we are back in 2009, when companies of all stripes saw their valuations rebound, I don’t want to be crushed by a serious move higher. Always, always, always respect the market, it is the ultimate arbiter of your fate, it is always ‘right’.

One of the best lessons I learned from my mentor Jim Cramer was that discipline trumps conviction.  So it’s with an eye to discipline that I sacrifice one of my shorts to the trading gods, namely Bank of New York.

Now nothing has changed in  this story.  BoNY is still one of the most central conduits of the bad behavior of the last decade.  Everything I said last October is still true:

Long story short, this company has supposedly certified that all those millions of mortgages in the MERS system that were never properly conveyed through the chain of title, were properly conveyed. That is, they told all those investors who are presently suing all those TBTF banks who packaged all those trillions of dollars of worthless mortgage securities and derivatives that everything was kosher.  And it appears that it wasn’t and that is now coming home to roost, as evidenced by all the billions of dollars of suits that are now flying around the industry.

So I’m not closing this short because of new information.  It’s because we have to keep an eye on the macro picture, which is telling us that this markets could really go up from here, and I need to trim some short-exposure to the financial sector.  From experience I’ll tell you that this is will be a binary outcome.  We are either headed for a collapse in BK’s price or a huge rally.  I’m either capitulating at the top like everyone else, or getting the hell out just before it rips.  And I’m comfortable with that tradeoff.

You can think of this as a hedge on financial stocks going higher. And besides we have plenty of upside in the other financial shorts in our portfolio, which I’ll continue to monitor for you.

Another big risk to staying short Bank of New York is the shift in regulatory tone & the issues around MERS, which, as you know, has a lot to do with short position in LPS.

Here’s what I know about Lender Processing Services; this thing was a no-brainer short that dropped like a rock, dropping more than 50% after we targeted it.  But it’s up around 30% so far in 2012.

Something is going on behind the scenes and I’m pretty sure someone knows something.

The signs are all there.  On Friday (02/03), New York’s sued the three biggest banks, J.P. Morgan Chase, BofA and Wells Fargo, for their use of MERS.  In the complaint New York State contends the actions of these banks  “haveresulted in the filing of improper New York foreclosure proceedings, undermined the integrity of the judicial process, created confusion and uncertainty concerning property ownership interests and potentially created clouds of title on properties throughout the state of New York”.

In a statement, NY AG Eric Schneiderman said : “The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages. Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions.”

Which is a realization about 6 years too late. Better late than never, even if it’s too late for all the people evicted from their houses because of incorrect paperwork.

{Just for laughs, here is MERS’s official response:

AG Schneiderman Claim #4: MERS and defendant servicers through their use of MERS have concealed important information from homeowners about their property and the role that MERS plays with respect to their mortgage.

FACT: MERS does not hide ownership or undermine the integrity of land records. Any mortgage holder registered in the MERS® System can easily access information related to their mortgage on our website or through a toll-free number. Federal law provides that consumers are notified for changes in investors or servicing status. In addition, county land records were not intended to identify the servicer of a mortgage or the current note holder; they are intended to provide notice to purchasers of property that there is a lien on the property and when that lien was perfected. }

Normally I’d welcome any legal actions against MERS, but the timing is crazy suspicious.  Yesterday (02/06) was the deadline for the states, and most importantly the enormous holdouts of California & New York, to join a multibillion dollar settlement against the banks for mortgage fraud.  The biggest holders of mortgage paper, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, have worked out a deal to the tune of $19 billion in exchange for no more civil actions or investigations.  Even if California & New York don’t join we’re looking at settlement in the area of $19 billion, $25 billion if they do.

Seems like a nice outcome right? Wrong, it’s a quiet way to save the banks from a legal headache that should have reached into the hundreds-of-billions of dollars.  In other words, another bailout.  More transferring of wealth from savers to spenders.

So the New York action against MERS looks to me like a negotiating tool more than anything else, a subtle sign of sweeping the problem under the rug.  We don’t actually know what’s going on in the smoke-filled rooms but it’s not a stretch to be cynical over whom our legal institutions actually look out for.  With the revelations that FHA is near bankrupt and that Freddie & Fannie were shorting the mortgages of distressed borrowers instead of working on workouts, one has to think that there are other things going on here.  Saying you’re taking on MERS while settling a lawsuit over the paper that it enabled to exist, while keeping the trillions of GSE mortgages on your balance sheet is a helluva a juggling act for the Feds to be undertaking.  I wouldn’t bet on their competency, I’d bet on them “resolving” one part of the problem to say they solved another.  I’m definitely staying short LPS here but this is all the more reason to close the more tangential-MERS play, Bank of New York.