September, Friday 30, 2011

DOW – 240 = 10,913
SPX – 28 = 1,131
NAS – 65 = 2,415
10 YR YLD = 1.92%

OIL – 3.39 = 78.75
DEC GOLD + 5.00 = 1622.30
DEC SILVER - .43 = 30.08

The third quarter is history, ugly history. Let’s go to the Score Board:

The MSCI All Country World Index is down 17% for the quarter.

Stoxx Europe 600 down 17% for the quarter.

The German, French and Spanish market indexes also recorded their biggest quarterly losses in nine years.

The Dow Jones Industrial Average lost 12% for the quarter, the biggest percentage decline since the first quarter of 2009.

The S&P 500 Index is down 14% for the quarter, and the month of September saw a 6% drop.

The Nasdaq Composite lost 13% for the quarter.

Some of the top performing sectors over the past 3 months include U.S. Pharmaceuticals – (This just makes too much sense; how many people have reached for the Zantax or Prilosec in the past 3 months? Wouldn’t you love to have the Pepto-Bismol franchise in lower Manhattan? )

New Zealand gained. Other sectors that posted positive results: Global healthcare, consumer staples, the Developed European countries (a little surprising maybe), Switzerland (although the past month has been down), Germany, Indonesia, Biotechnology, and US Consumer discretionary.

Losing sectors included Peru, also global timber, clean energy, US broker dealers, North American Technology & Multimedia, Silver, China Small Cap and Israeli Small Cap. The S&P GSCI, the Commodities Index dropped 11% in the third quarter, and it had been positive going into September.

Fixed Income saw strong returns in tax-free muni’s with California and New York leading the way – proving the fruit is out on the limb. The bull market in Treasuries continues for now.

The worst performing sector in the S&P 500 was the financial sector, down 23 % for the quarter. Morgan Stanley was the big loser among the financials in the S&P 500, today down 11% today and down 41% for the past three months. More on Morgan Stanley in a few minutes. Remind me to tell you a little more on MS.

Only utilities – up 0.78 per cent – have registered a positive return amongst the 10 main sectors of the S&P. The materials sector has dropped 14.7 per cent, energy is down 10.8 per cent and financials have fallen 10 per cent.

US investors pulled money out of the markets the past two months; equity fund outflows of $26bn in August, with an additional $11 billion pulled out in September.

The historical track record for the fourth quarter is pretty strong, with the S&P 500 positive 76% of the time since 1962, posting an average gain of 3.5%.

The market has historically risen 80% of the time in the 4^th quarter following a quarterly decline of 10% or more with the average gain at 5.5%. The sectors that have outperformed the most in the past in the fourth quarter are health care, up an average of 4.9% and rising almost 82% of the time; staples, up 4.3%, rising 75% of the time; and tech, up 4.2%, rising 65% of the time.

Here’s the problem – past performance is no guarantee of future results. Here’s another problem – it would be nearly impossible to avoid a bear market in stocks if we see another downturn in the economy.

The Economic Cycle Research Institute now predicts a new recession is unavoidable. The Economist magazine reports ECRI has never issued a "false alarm" on a recession call. The co-founder of the ECRI says, "The vicious cycle is starting where lower sales, lower production, lower employment and lower income [leads] back to lower sales," and he adds, "You haven't seen anything yet. It's going to get a lot worse."

And here’s another problem – Europe. It hasn’t gone away. Greece is still on the edge of default. Now, I’m not going to rehash everything about the European debt problem. We’ve done fairly extensive coverage over the past couple of weeks. You know that Greece will default sooner or later. You know that this will cause big problems for the Eurozone. You know that many big European banks have significant exposure to Greek debt. You know that there is a fairly good chance that one or more big French banks may get clobbered. And we’re not talking about French sovereign troubles, which are about to get worse with the country’s CDS once again at record highs and that means the country’s Triple-A rating is as good as gone. No: we’re talking about the French banks. I know what you’re thinking; you’re thinking I don’t have a mortgage with Societe Generale; I don’t use the ATM at Credit Agricole. Remember, the French banks are the entities that are completely locked out from the dollar funding market, and which will be toppled following a few major redemption requests in native USA Dollar requests – and that just might mean mayhem for your own money market fund. Remember that safe place to park your cash – it could actually break the buck; it could actually lose value; it could get a little difficult to redeem your dollars.

Which brings us to Morgan Stanley. Morgan Stanley‘s cross-border exposure to large European economies totaled roughly $96 billion with France accounting for about $45 billion at the end of 2010. Morgan Stanley has been trying to reduce it’s exposure to France. MS has sloughed off about $15 billion in French exposure, however. MS has a market cap of around 26 billion dollars. So, there isn’t much margin for error. Morgan Stanley also has about $5 billion in exposure to Greek bonds. So, now you have to wonder how much Morgan Stanley has in reserves, just in case there are some losses. And then you remember that Morgan Stanley has its roots in investment banking. They can’t just use depositors’ depositis to back up their gambling – that’s good. That also means they amy not be able to get any capital from the wholesale markets to back up their gambling – oops.

Morgan Stanley was the biggest recipient of emergency loans from the Federal Reserve during the financial crisis. While the price of Morgan Stanley's credit-default swaps is at the highest level since March 2009, it's nowhere near the peak reached in 2008. The spreads on Morgan Stanley Credit Default Swaps are actually wider than French bank CDS spreads, which seems a bit strange because the foremost concern seems to be exposure to French banks.

An update on Occupy Wall Street. It’s not real large, but it is getting bigger. There are probably quite a few people who will visit over the weekend. There are a bunch of celebrities scheduled to visit. There might be an Occupy Wall Street Protest that gets going in Los Angeles, maybe in Washington DC. This whole thing is starting to get some press coverage, but not too much. The protesters are keeping their camp fairly clean. It is non-violent. The police arrested more than 100 people, even pepper-sprayed a few, but for the most part there is a cordial relationship between the protesters and the police. The best part is that the protesters have made no formal demands. I hope they don’t make any demands – that would spoil it. New York Mayor Michael Bloomberg was interviewed on a NY radio station this morning. He said the protesters are targeting bankers who are struggling to make ends meet. He said the protesters were blaming the wrong people by blaming the banks. So, the best thing is for the protesters to NOT make formal demands – as soon as they do that, then those demands can be attacked and dissected and ridiculed and shredded and dismissed. Right now, the powers that be don’t know how to respond – and they’re starting to say stupid stuff – it ‘s kind of fun to watch and listen.

Bank of America is the latest bank to jump on the bandwagon to charge customers for using a debit card. BofA will start charging $5 per month if customers use debit cards for purchases. No charge if it is just for ATM use. The charge is in addition to another other fees the bank may charge. Add Bof A to a list of banks including: Suntrust ($5 a month) Regions Financial ($4 per month), Chase and Wells (they’re testing a $3 per month fee. I don’t know what testing means – Maybe they are waiting to see if customers will scream bloody murder)

You do know that banks have been charging fees for debit cards for a long time? Right?

It’s called swipe fees, a small charge collected from merchants for every debit card transaction. Actually, the merchant doesn’t pay; the merchant just passes the cost to you, the consumer. The debit charge swipe fee is about $19 billion dollars a year. The swipe fee or interchange fee, on credit cards is even higher; it works out to 2.5% of all credit card related sales – this typically represents the third highest expense for retailers. For unexplained reason, Visa and MasterCard only charge 0.3% interchange fees outside the Untied States. Actually there is an explanation – the Bankers lobbying dollars have a great ROI.

The credit card interchange fee averages around $45 billion per year, or more than $400 a year per American household. So, really between swipe fees on debit cards and interchange fees on credit cards, the typical household is paying around $600 dollars per year. And we’re not even talking about the basic fees for having an account, for getting a paper statement mailed to you, the overdraft fees, or the financing fees.

You want to throw a monkey wrench in the gears of the banks? Use cash.