Spanish bonds yields are back at 5 month highs. The ten year yield crossed 6.0% before falling back to 5.91%.  The video below is of Fidelity’s international bond manager discussing Spain’s fiscal problems.

About a week ago, our friend at Sandler O’Neill, Marc Flaster, listed some of the reasons that a “great weight has been lifted from the shoulders of the bond market”.  We think this list applies to the equity market as well, and compliments our blog post from December 29, 2011.

Marc lists issues that have been resolved for better or worse:  1)Greece  2)Bank stress tests  3)Employment is improving  4)Retail/Auto sales are vibrant  5)Housing inventory in distressed markets is clearing.  There are wholesale buyers buying homes to be used for rentals.  6)Dodd/Frank…The banks will deal with it.  7)War:  We are bringing the boys and girls home.

While Marc also comments on the “Negatives yet to be resolved”, his conclusion, which we concur with, is that “the clearing in the forest is larger now than it was a year ago.”

Only four out of nineteen banks didn’t pass the latest round of stress tests.  Even the banks that didn’t pass still had excess capital.  The yield on the 10 year Treasury has risen to 2.18% this morning from 1.82% at the beginning of February.  I think that this is an indication that the market does not think that QE3 is likely now.  From the linked New York Times article:

On Tuesday, the central bank said that 15 of the 19 largest financial firms had enough capital to withstand a severe recession. The results, announced two days ahead of schedule, paved the way for JPMorgan Chase and other banks to bolster dividends and buy back shares.       

“When you put banks under the kind of dramatic scenarios that the Fed did — and they are still doing well — it tells you how well capitalized the majority of the banks are coming out of this downturn,” said Michael Scanlon, a senior equity analyst with Manulife Asset Management in Boston.       

Lehman has finally emerged from its bankruptcy declared 9/15/08.  The possibility of Bear Stearns going under was the early warning sign of the financial crisis, but it was the Lehman bankruptcy that sent the global financial system into free fall.  From the linked Reuters article:

Reuters) – Lehman Brothers Holdings Inc emerged from its record $639 billion
bankruptcy on Tuesday and said it will start paying back creditors on April
17.

The move puts an end to the bankruptcy proceeding that began on September 15,
2008, when Lehman collapsed and rocked the foundations of the global financial
markets, catalyzing the Great Recession.

Here is a post from 9/15/09 where I discussed the ongoing problem with “too big to fail”.

S&P has caught up to what everyone already knows: Greece is out of money.  Most of today’s commentary is concerned with the impact of the downgrade on the CDS market.  From the linked article:

The bigger question remains whether the bond swap or collective-action clauses
will trigger payments on credit-default swap contracts. The International Swaps
and Derivatives Association, or ISDA, which determines when CDS payments are
triggered, has said it would decide Wednesday on whether the debt swap
constitutes a default in its view and thus would trigger payments on CDS, which
essentially act as insurance against a bond default. Euro-zone officials have
worried that widespread CDS payments could ripple through the euro-zone
financial system and exacerbate the region-wide debt crisis of which Greece has
become emblematic.

Germany has approved a 130 billion euro bailout, and all Angela Merkel has to show for it is a viral video of beer being spilled down her back.

I contend that crony capitalism, where the government picks winners and losers, is a big part of our dissatisfaction right now. Thanks to Glenn Reynolds at Instapundit for the reminder about this clip.

Private holders of Greek debt have not been able to reach an agreement with the EU finance ministers on restructuring the terms of their Greek debt holdings.  They hold 60% of the outstanding debt, and they don’t want to accept a new rate less than 4% on those holdings.  The EU wants the private debt holders to voluntarily take about a 50% haircut.  From the linked WSJ article:

Austrian Finance Minister Maria Fekter said she’s “not pleased” with progress
so far. “We’re sending a very direct message to Greece that the community
expects more, also in terms of structural reform,” she told reporters. “We’re
not pleased and only when there’s a written message on the table in front of us,
can further assistance be discussed.”

Ms. Fekter said she wanted a written pledge from Greece’s political party
leaders that they were all committed to implement austerity plans.

Swedish Finance Minister Anders Borg also had tough remarks for Greece,
saying that “when it comes to structural and fiscal reform they have not
delivered.”

Greek Finance Minister Evangelos Venizelos acknowledged there have been
slippages in the implementation of austerity measures that Greece has agreed
with its euro-zone peers and the IMF as part of its original bailout program.

I love the term “slippages” in the paragraph above.  Greek politicians talk just like American politicians!

The Atlantic Magazine has a very interesting article that contains the most important graphs of 2011 as selected by a group of economists.

I think that this graph from the article best explains the volatility of 2011.

The December 10th edition of Barrons included an article entitled “The Great American Refinancing”.  It put forth an idea that has been embraced by both liberals and conservatives.  The basic idea is that any homeowner who is current on their mortgage would have the ability to refinance their payments at the lowest rates available today.  That rate is currently around 4%.  Whether the homeowner has equity in the home or not would have no impact on the ability to refinance.

This plan could have several positive and lasting effects:  1. It could act as a permanent tax cut as long as people stay in their homes  2.  It would steady home prices by slowing new delinquencies  3.  It could strengthen credit quality by focusing on responsible buyers/homeowners, and in doing so, minimize the cost to taxpayers.

Though interest rates are low, many homeowners are reluctant to refinance because of  the high fees, appraisals, income, and credit checks.  In addition, banks are imposing high underwriting standards on performing loans, in order to keep the higher- yielding loans on their books.

Barrons states that this type of program could add $80 billion annually for years to come.  If this process could be enacted in a timely and streamlined fashion, we, along with many others, believe it could be our way up and out of the real estate led crisis that started more than four years ago.