“Increasingly cities and states are building their own direct commercial relationships with Chinese entities, sometimes directly contrasting the overall US human rights, trade, currency, and geopolitical agenda,” says Ron D’Vari, CEO and Co-Founder of NewOak Capital Advisors.

“Given the importance of new investments and jobs, US local governments are aggressively pursuing their own strategies to develop direct commercial channels with China attracting capital and promoting trade. The general perception is that China is stealing jobs away from Americans and people from other developed countries. However, the internal growth of the second largest world economy has been driving demand for agricultural products (corn, beef), commodities, transportation, and luxury goods. Recent visible examples of that are Apple iPhone and iPads.”

“Furthermore, given a strong Yuan, Chinese companies are making direct US investments and creating jobs. Chinese billionaires have also invested in areas US investors have begun to shy away from, such as Hollywood movies and US media companies. Yet on the other hand, many US firms and conglomerates have increasingly established a local presence in China, such as GE, Citigroup and US auto companies.”

“While on the surface the US-China trade deficit is still growing, the actual US export to China itself is flourishing. This is due to growing overall volume of trades. As long as that is the case, states and cities will continue to expand their ties, and rightly so.”

Greece’s Decision: The Lesser of Two Evils?

“Rioting spread across central Athens as Parliament prepared to vote on a debt deal that would prevent a bankruptcy,” says James Frischling, President & Co-Founder of NewOak Capital. “The rally is against the dramatic austerity cuts in return for a bailout of about $172 billion.”

“With the Greek economy in its fifth year of recession and unemployment above 20%, there are many who feel that Greece can’t accept any additional cuts. Yet not accepting the additional austerity measures would result in a far worse scenario for Greece and its leaders need to impress and convince the naysayers this is truly the case. It’s a tough sell: take more pain today or far greater pain tomorrow.”

“Defaulting on its debt and exiting the Euro is the counter-argument. Defaulting is historically the strategy by countries combating an economic crisis of this magnitude. The cheaper drachma would be a windfall for Greek exporters and would allow the country to expand and grow. However most economists argue that exiting the Euro would throw Greece’s banking system into chaos, and the freeze-up in credit could result in a depression. The fact that this scenario would also be far worse for the rest of Europe hopefully gives Greece at least a little negotiating power left, but with its back against the wall, more cuts is the better of the two horrific choices remaining.

“Friday’s strong jobs report was well received by the markets and helped the Dow log its highest close since May 2008,” says James Frischling, President & Co-Founder of NewOak Capital.

“The 243,000 new jobs beat expectations and the unemployment rate dropped to 8.3%. Market bulls took the report to heart as it marked five consecutive months of declining unemployment. With such a strong number and with the most jobs creation since April 2011, why are so many skeptical?”

“The number was positive, yet the headwinds facing the US economy remain significant and include households still under pressure to de-lever, and a US housing market that remains in disarray.

“Jobs are being added and that’s important, but Congress needs to get fully onboard and get itself out of gridlock. Thus far, Congress hasn’t been able to pass more than just two months worth of clarity on payroll taxes and of course we still face the fiscal deficit issues that remain a real threat to the US economy.”

“The jobs report is a clear sign the US economy is recovering, but far greater leadership and clarity are needed to take this momentum further. Heading into an election year, there are many who feel coming together to solve the biggest issues to boost the economy and create jobs isn’t in the cards. Let’s hope they’re wrong.”

Emerging Markets - Is Consumer and SME Credit Market the Next Big Opportunity?

“As emerging markets continue growing, they tend to lag in proper infrastructure and capital to support commensurate demand for credit by consumers and small-to-medium enterprises,” says Ron D’Vari, CEO and Co-Founder of NewOak Capital Advisors.

“Naturally this creates attractive expansion opportunities for non-bank finance companies to establish an early foot in the door and lock in a first-mover advantage. Citigroup’s new venture, motivated by this idea, is becoming the first non-Chinese entity to issue cards under its own brand. Many private equity firms are quietly evaluating non-bank finance opportunities in the fastest growing regions suh as China, Brazil, India, Korea, and Indonesia.

“The biggest challenge in the developing markets is typically the lack of adequate retail channels, credit history, payment system and collection protocol. While the western finance companies have the necessary operational and technological know-how, the lack of adequate local infrastructure hampers their growth. The key to success seems to be well informed plans, first-mover advantage, local partners, scale, discipline and perseverance.”

“In today’s age of financial technology, customer money shouldn’t disappear and fall between cracks,” says Ron D’Vari, CEO and Co-Founder of NewOak Capital Advisors.

“It is expected that a sizable broker, such as MF Global, should be fully equipped to provide exact information on thousands of accounts, trade-by-trade, cent-by -cent and day-by-day, if not minute-by-minute. So it is mind bugling that officials after several months of examining MF Global books have not yet identified where $1.2 billion of customer money had gone and are losing hope to do so. Despite great advances in the financial technology, MF Global case provides ample reasons that a full re-examination may be needed for the legacy reporting infrastructure of the larger brokers. A well designed transparency, risk reporting, trade capture, asset/fund transfer, and full performance attribution should be part of the routine functionality. Perhaps that should be on the list of regulators examination by independent consultants.”

California: The 800 Lb Gorilla Blocking Foreclosure Settlements?

“California Attorney General Harris once again rejected the latest proposal from the nation’s biggest banks that would overhaul foreclosure and mortgage servicing practices,” says James Frischling, President & Co-Founder of NewOak Capital. “The latest settlement proposal was deemed inadequate by California as a result of the insufficient relief going to the most distressed homeowners and over the issue of a lack of accountability. With about one out of every five of the nation’s foreclosures being in California, the value of any settlement without the inclusion of the Golden State may not be of interest to the banks. The liabilities they face would still be massive, so California is the 800 pound gorilla in the room that must be part of any settlement.”

“A recovery in housing is critical for the economy to continue digging itself out from the financial crisis, but the gridlock that’s been created by the moratoria and process reviews on foreclosures will leave things vastly unchanged for 2012. The biggest component of the settlement proposal has been a $17 billion principal reduction program that would hopefully allow banks to reduce unnecessary foreclosures by writing down the principal of homeowners underwater. This is the same issue that’s being debated by the FHFA and the administration as a strategy to reduce losses at the GSEs. With both the private sector and public sector debating settlements, and a strategy to move forward, it’s safe to say that the foreclosure crisis will continue to drag on longer than anyone expected.”

“In an effort to protect existing homeowners who are underwater on their mortgages, democrats are pushing the FHFA to make principal reductions for borrowers,” says James Frischling, President & Co-Founder of NewOak Capital.

“Yet the regulator is pushing back fearing the cost to the taxpayer will exceed $100 billion, and that allowing the borrowers to default will be a more cost effective strategy. The current level of homes with negative equity is about 22%.The cost benefit analysis suggests that this strategy will erode the value of the GSE’s assets and cause them to take on additional and sizable losses.”

“Pitting the GSEs, owned by the US taxpayer, against the borrowers whose loans are owned by the GSEs, creates a dangerous and circular argument: is the intention to save the borrowers who are underwater on their homes from defaulting on their mortgages and have the taxpayers essentially foot the bill for the losses created as a result of the write-downs? The risk of moral hazard appears significant as borrowers currently paying their mortgages will be encouraged to at least consider no longer making timely payments. Despite the challenges facing the mortgage market, the vast majority of borrowers continue to do what they can to stay current. Don’t incentivize those struggling to keep-up to feel there are rewards and benefits for going delinquent.”

RMBS; Who is the servicer? (And Does it Matter)

“There are no national mortgage servicing standards,” says Ron D’Vari, CEO and Co-Founder of NewOak Capital Advisors.

“Score cards based on actual observed performance indicate servicing standards matters substantially. In the case of RMBS servicing data doesn’t lie.”

“Performance varies dramatically along various measures such as modification, short sale, balance reduction, foreclosure procedures & time lines, stop advancing, and REO liquidation strategy and recovery rates. They all affect magnitude and timing of cash flows that flow through RMBS waterfall.”

“The servicing industry is going through another wave of consolidation for non-agency sector. This creates variations in trends in even pools post transfer, not to mention servicing interruption impact.”

“Servicers’ incentives and economics are critical to the loss mitigation, default management process, hence recovery performance. Under current model (fixed-fee), servicers don’t have much incentives to dedicate optimal resources as their fees are limited. The performance is also affected by volume of troubled loans and corporate strength. The legacy servicing fee model is being questioned by regulators and investors for future securitizations and is expected to change.”

“There are several proposals to create an alignment of interest and better servicing incentives. Until then investors need to take that into account security by security and servicer by servicer.”

“The rise and fall in gold in the last six months have been highly correlated to the European commercial banks’ needs to raise US dollars,” says Ron D’Vari, CEO and Co-founder of NewOak Capital Advisors.

“After falling from a high of US$1900 in September 2011 to US$1530 per ounce in December, gold has bounced back to US$ 1660 as of Jan 27 , 2012. The yield for lending gold and borrowing US dollars had fallen to below zero in December, meaning the US dollar was on special demand, primarily by European commercial banks having problems to get US funding. This is in direct contrast when the world was concerned with the US budget impasse, debt ceiling, and temporary default in summer of 2011.”

“Pressure on the European banks has temporarily come off due to the EFSF 3-year free loans and hence lessened the need for US dollar by the banks. Given that the Eurozone woes are not over yet, we anticipate continued volatility and further weakening of Euro, gold and continued strengthening of the US dollar. This is supported by the current improving US economy and tell tale signs of an end to worsening US job markets. However, this all could change on a dime with a possible break-up of Euro.”

Tough Start for Banks?

“Last week it was JP Morgan that missed Wall Street’s revenue expectations and this week it’s Citigroup that disappointed,” says James Frischling, President & Co-Founder of NewOak Capital. “As a result, the earnings season for banks is off to a tough start. It poses a threat to the rally in financials that we’ve seen since the start of the New Year.”

“Citi CEO Pandit put a great deal of blame on the macro environment and its impact on the bank’s capital markets division. This was similar to the issues JP Morgan faced with big drops in its investment banking activity and in the areas of debt underwriting and fixed income trading. On the positive side, Wells Fargo turned in results that beat Wall Street’s expectations with commercial lending leading the way. It’s clear that Well’s de-emphasis on trading relative to Citi and JP Morgan proved helpful.”

“While it’s still early in the earnings season, one conclusion to reach on the financial sector on back of these releases is that the banks with large investment banking and trading businesses are facing far more trouble than the banks focused more on Main Street business and lending. The current environment seems to be rewarding banks acting as banks and punishing banks acting as securities firms. Meaningful lending is critical for the recovery to gain any momentum. Wells Fargo’s ability to beat expectations by growing its loan book may set the stage for others to follow.”

“The December jobs report beat market expectations by adding 200,000 jobs,” says James Frischling, President & Co-Founder of NewOak Capital. “And the unemployment rate dropped to nearly a three year low at 8.5%. The report was welcomed as yet another sign that the US recovery is well underway and gaining momentum. However, the devil is always in the details and while the headline number was better than expected, celebrating this report (or spiking the football since this is now the NFL playoffs) may prove to be short-lived.”

“First, much of the increase appears to be very seasonally driven as hiring in the transportation and warehouse sectors rose sharply. Companies like FedEx increased its staff to handle the volume of shipments and are now expected to back off on those positions. You also have the nearly 350,000 people that dropped out of the labor force in November which contributed to the improving unemployment rate. Seasonal hiring and a downward trending workforce may provide for attractive headlines, but it really doesn’t bode well for the over 13 million people that are still unemployed.”

“Slow growth and de-leveraging will remain the big themes for 2012. Positive economic data including jobs creation of over 100,000 for six months in a row support the story of an improving US economy, but there are no quick fixes and even a surprising report like the December jobs number should quickly be put into perspective.”

Volatility in 2012: Will It Linger Longer?

“While European woes have led to investors’ fears and market volatility, a host of other hazards pose potential dangers,” says Ron D’Vari, CEO of NewOak Capital Advisors. “Despite the US markets recent positive trends in GDP and employment, key uncertainties remain: housing market, foreclosures, budgetary political impasse, tougher regulations and legacy mortgage litigations. We should not forget that several trillion in planned budget cuts are still ahead. The impact of the slowdown in BRICs, jointly due to the European crisis and their own natural economic evolution, may not be compensated by the US economy and emerging markets.”

“The potential in rapidly expanding BRICs’ credit markets, particularly in China, should be watched. As an example, the first domestic AAA default in China had the potential to send shockwaves through the Chinese economy but was cured by the bond guarantor. The Arab Spring, Egypt’s election, and potential Iranian blockade of Strait of Hormuse are still looming.”

“One effective investment strategy time and again has been to invest in most fear-driven sectors at the bottom of the market cycle,” says Ron D’Vari, CEO and Co-founder of NewOak Capital Advisors. “If you are a believer, ride on that — but it’s not for the faint of heart. The US financial sector just finished one of its most volatile years in 2011. The driving factors for under-performance and volatility of the sector have been fears about further stalling of the US economy, continued asset write-down and uncertainties associated with pending mortgage litigations, US fiscal policy, Eurozone collapse, and tougher capital rules and regulations. While these uncertainties continue to prevail, US financials valuation will look historically cheap in terms of book value discount and trailing earnings multiple. Cheap valuation shows investors’ lack of confidence in how banks are writing down their bad assets and quality of their future earnings.”

“If the recent positive US economic trend continues to hold and the EU manages to keep it together somehow, the picture can change quickly and investors will rush in. Additionally, as US banks improve their balance sheet they will have a unique opportunity to buy cheap European assets as the EU banks delever. In any event, the US financial sector will continue leading the broader markets and could become either the best or the worst investment idea in 2012.”

Recovery in the Housing Market? Maybe

“2011 closed with the economic release that pending home sales increased 7.3% in November reaching its highest level since April 2010, feeding the view that there is a recovery going on in the housing market,” says James Frischling, President & Co-Founder of NewOak Capital. “This was an unexpected jump-up, with every region showing gains including a 15% increase out west which has been the hardest hit area since the housing bubble burst. However, with a cancellation rate running at over 30%, realtors warn it may be premature to conclude that a housing recovery is underway based on the strong pending sales report.”

“The overarching question is whether there are a sufficient number of buyers to absorb the supply of homes hitting the market. The foreclosure pipeline remains very full, and there are still over 6 million borrowers behind on their mortgage payments. Both will add to the amount of inventory of homes available for sale, and will continue to put downward pressure on home prices which remains a significant threat to a housing recovery. Yet with the rental market on fire, an improving jobs picture, and with interest rates being so low, the spike in contracts signed was a welcomed way to finish the year. The follow-through on these pending home sales will tell whether the positive factors facing the housing market outweigh the negative and if this market has finally turned the corner.”

“Lawsuits continue to be filed in connection with the financial crisis,” says James Frischling, President & Co-Founder of NewOak Capital. The circular nature of the suits could leave many scratching their heads in the search for accountability. “The regulators just filed lawsuits against the former CEOs at both Fannie and Freddie. The GSEs have filed lawsuits against many of the banks that sold the agencies mortgage products. The banks have sued the insurers who have not made good on their claims, while the insurers have sued the banks over the products they insured. Last but of course not least, investors have filed suits against all of these key market participants mentioned above.”

“A crisis of this magnitude requires answers with respect to its cause and for accountability. The SEC, Congress and others have tried to get to the bottom of it, but the interwoven nature of the market participants makes this a daunting task. Senator Carl Levin led an effort in 2010 to investigate the origins of the financial crisis, but not a great deal has happened since the report was made public. Rather than looking to the government, it may very well be in the lawsuits that we find some answers. The saying goes that the wheels of justice move slowly, so while it will be a long slow process, the courts may very well be the place where accountability is found.”

China Home Prices Cooling Off: Is It a Blessing?

“The latest home prices data in China confirms the broad-based falling trend for home prices in China,” says Ron D’Vari, CEO and co-founder of NewOak Capital in Manhattan. “New home prices dropped from the previous month in 49 of the cities monitored by the government, according to the Chinese national statistics bureau. The dampening of home sales and falling prices is a natural outcome of government real-estate industry curbs. Despite the European crisis and other easing measures, the government has reiterated its tightening property policy and intensified the restrictive measures this year by raising down payment and mortgage requirements, and have imposed further home purchase restrictions in key cities. Analysts expect the real-estate policies are targeting home prices to fall by as much as 20% from their peaks in 2011.”

“The government’s main goal is to reduce speculation in the sector and avoid a drastic credit bubble burst induced by real estate. The restrictive measures seems to be working gradually and are expected to further cool off Chinese property markets throughout 2012. The controlled and gradual falling of Chinese home prices may prove to be a blessing and not cause for concern. In retrospect, it would have been wise if the US government had followed a similar path and imposed more restrictive mortgage lending measures starting in 2004 to prevent the precipitous and uncontrolled home price fall in 2007.”

“MF Global clients’ unaccounted segregated funds case indicates that re-hypothecation can be potentially used as a loophole” says Ron D’Vari, CEO and co-founder of NewOak Capital Advisors.

“The international rules for movements of cash and collateral accounts for brokerage firms are complex. With the off-balance-sheet accounting for sale-and-repurchase agreement (”repo”), it is usually hard for the regulators to get a really transparent picture of the capital adequacy and liquidity of larger broker dealers.”

“Depending on each account’s permission settings, brokerage firms may be able to purchase U.S. treasuries, and in some cases non-U.S. sovereign bonds in their own name using the unencumbered clients’ segregated funds and re-hypothecate them to back their own trades.”

“The U.S. re-hypothecation rules are much stricter than the UK rules. Hence many prime brokers’ agreement terms allow for a U.S. client’s collateral to be transferred to the prime broker’s UK subsidiaries under a Global Master Securities Lending. This typically shows up under ‘Consent to Loan or Pledge’ provision.”

“The Dodd-Frank Act attempts to bring in more transparency to the middle and back office operations involving the mechanics of the clearing and settlement of cash and derivative trades, the movement of cash and collateral, and risk management. It remains to be seen if the new rules avoid re-hypothecation loopholes.”

“It is clear that collateral management rules will remain complex, however, the jury is still out if they would be less flawed.”

US Markets: Can They Decouple from Europe?

“The EU leaders agreed to a framework for a union with greater fiscal discipline by allowing for a central budget authority and sanctions for those who do not balance their budgets,” says James Frischling, President & Co-Founder at NewOak Capital.

“Will this news be enough to enable investors to shift their attention away from Europe and focus on the improving US economy? While all eyes were on Europe, recent positive US economic data includes jobless claims at their lowest level since the beginning of the year, a rise in consumer sentiment, and early indications that retail sales are strong and that consumers are willing to spend. Confidence among consumers suggests they are less concerned about losing their jobs and are now feeling better about the economy.”

“Nothing would make President Obama happier than to see the unemployment rate continue to grind lower. The unemployment rate hasn’t been at 8% since he took office in January 2009 and heading into an election year, the stated unemployment will be a key focal point of both parties.”

“The headwinds and risks remain significant both abroad and at home. Stabilizing the situation in Europe will remain a challenge, while domestically we have Congressional discussions on the extension of the payroll tax holiday. However, the recent US economic data has been positive and that should push the US stock market higher.”

“Former Head of MF Global Jon Corzine was subpoenaed last week to testify in front of Congress,” says James Frischling, President & Co-Founder of NewOak Capital.

“The most important issue right now isn’t the blame game, but the need to find the money. $1.2 billion of customer funds are missing, leading to tremendous speculation that these funds were taken by MF to cover margin calls on bets made on European debt gone wrong. Clearly investment firms are barred from mingling their clients’ money with the firm’s proprietary investments. So to the extent these accusations are true, the MF Global story will look far more like a Madoff story than a Lehman story.”

“Leverage makes good times better and bad time worse.” Investments in volatile markets such as the current European debt market carry the associated high risks and high returns. Add to that leverage of what is understood to have been 40-to-1 and this was a recipe for either a dramatic homerun or a big-time strikeout. Highly levered $6.8 billion investments are reserved for elite traders at elite firms. While everyone wants to know what Mr. Corzine’s role in this all was, the need to track down and understand where the missing client money has gone is far more important. The Congressional hearing may make for great TV or sound bites, but all efforts right now should be on the forensic work needed to follow the money.”

Real Price of Volatility: Slower Global Growth, Higher Inflation?

“Volatility is not going away anytime soon,” says Ron D’Vari, CEO and Co-founder of NewOak Capital Advisors,” as companies and markets weigh the global economic prospects for 2012 and beyond.”

“Most players’ focus have turned to the shorter term performance of their investments and are delaying much needed longer term investments. The persistent volatility is making it harder to anticipate what the economy is going to look like, and thus more challenging to commit capital to longer term priorities.”

“This will dampen investments in infrastructure, alternative resources, energy efficiency projects, education, health care, and other necessities with growing demand.

While short term growth and inflation has been both mute, longer term, there will be inflationary pressure on commodities due to the shear growth in developing economies.”

“All early signs point to the failing of Durban environmental talks to produce a truly binding treaty by December 7th, 2011. The fundamental differences between europe, US, and the largest polluters, e.g. China and India, seem to be irreconcilable given the state of global economy.”

“The less restrained the consumption of energy and the more constrained the investment atmosphere in the critical clean technology, the higher the probability of the longer term inflation pressures. Outside of the EU system breakup, this ranks high in factors dampening the long term growth prospects.”