Wednesday, November 30, 2011

November, Wednesday 30, 2011

DOW + 490 = 12045
SPX +51 = 1246
NAS + 104 = 2620
10 YR YLD +.07 = 2.07%
OIL +.71 = 100.50
GOLD +34.00 = 1750.40
SILV + .91 = 32.93
PLAT + 21.00 = 1566.00

Who wants some free money? Anybody who wants some free money raise your hand and get in line.

The Federal Reserve has teamed up with the European Central bank, the Bank of Japan, the Bank of Canada, the Bank of England, and the Swiss National Bank and they are handing out cash. Unfortunately, you probably won’t be getting any of this free cash, but Wall Street loves the idea of free money.

Today’s announcement from the Central Banks actually involves lowering the cost of emergency U.S. dollar funding for banks and expanding currency swap lines between countries. So, the cash will go to the banks; the moves will reduce funding costs and improve liquidity. It’s not completely free money – it’s just a half off sale. The dollar market had been drying up; today’s move might help prevent a credit freeze. Maybe, maybe not.

There is still a big problem of solvency. Many European countries still have unsustainable levels of debt. Many European banks have government assets on their books. There used to be an assumption that those assets were “riskless”; the idea was that Greek bonds or Spanish or Portuguese or Italian bonds were safe – backed by the European Union. Well.., it turns out they weren’t safe. And so the cash needed for day to day operations started to dry up. American money market funds cut their investments in European banks by more than 40%. The retreat from France was particularly severe, with funds cutting their exposure by 69 percent. So now the banks have to build up their reserves, build up their capital ratios.

That means the banks need to raise some new money, and there are just a few ways to do that – they can issue new debt of equity, but that is really difficult right now – nobody wants to invest in the banks because they don’t know what they have on their books. The other option is a defensive move; the banks hold tight to their cash- they stop lending – credit freezes; governments can’t sell bonds; businesses and households can’t get credit; the economy slows even more.

So, what changed today? Not much really. The European governments still have unsustainable debt. The banks still have very risky government assets on their books. Nobody wants to invest in new bank debt or equities. The same problems we had yesterday, we still have today. Italy still has unsustainable debt. Portugal and Greece are still busted. There will be another general strike in Greece tomorrow and the country will shut down. More than 2 million people are on strike in the UK. France will likely be downgraded by the credit agencies. European countries, even Germany, can’t find investors to buy their bonds. Economists now understand that the PIIGS are well past the point of no return, with 130% or so of debt-to-GDP. The European Central Bank will be expanded, like other central banks, to print more euros, but still the system is going to face more debt problems. The ratio of debt-to-GDP in Europe, the US, and elsewhere (which is projected to only increase from here) will lead to the sort of problems historically associated banana republics. While this is not being adequately discussed in the mainstream, the debt of the supposedly advanced countries is projected to explode beyond the levels that are already tormenting the PIIGS. Put another way, in the decade just ahead, I expect the advanced countries to undergo the same pain we are already seeing in the weak countries.

What’s the difference as of today’s announcement? The central bankers now step up and give a signal that they will backstop the banks; they’re not actually backstopping anything at this moment, but they are signaling that they will – if they have to.

Woohoo! Free money for the bankers.

Does any of this sound familiar? It should. Three years ago, the Federal Reserve started handing out money to the banks; they bailed out banks that were too big to fail; they bailed out banks that were ready to collapse; they bailed out banks that claimed they didn’t need a bailout; they bailed out hedge funds; they bailed out wealthy individuals; they bailed out foreign banks; they bailed out banks run by terrorists; they bailed out everybody but Main Street. And today, they signaled that they are standing by to do it again.

As unsavory as bailouts are – they will happen. There are some very bright boys and girls who are working to avert a global financial meltdown. Their blueprint is the response to the collapse of Lehman brothers three years ago. Will the action plan work on Europe?
Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis.  The Federal Reserve and their central bank buddies are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis created by excessive debt and gambling on excessive debt and creating money out of thin air. 

Well, the bright boys and girls didn’t solve the underlying problems 3 years ago, but they did avert a complete collapse. History doesn’t repeat but it does rhyme.

Woohoo! Free money. Just not for you and me.

What else is going on?

The Federal Reserve released it Beige Book today: Economic activity increased at a slow to moderate pace. Nothing new there.

ADP, the payroll processing firm, reported that private businesses added 206,000 jobs from October to November. The Bureau of Labor Stats will issue its monthly jobs report on Friday.

Now that AMR, the parent of American Airlines has filed for bankruptcy, don’t be surprised to see USAirways make a play for American.

Los Angeles has evicted occupy L.A. protesters. There are varying reports that the eviction was peaceful or possibly that police were beating a few protesters – probably a bit of both. 200 protesters were arrested. The Occupy movement is far from gone – it is now a global movement, stretching across 6 continents, more than 60 countries and more than 2,600 demonstrations.

A 490-point gain ain’t what it used to be. The S&P 500 has climbed 3 percent or more in a day 36 times in the three years since Lehman’s collapse, or about once a month. That compares with 27 times for the nine years before, or about once every 4 months. The Dow’s intraday move has exceeded 100 points every day in November except one, Nov. 18.

Tuesday, November 29, 2011

November, Tuesday 29, 2011

DOW + 32 = 11,555
SPX + 2 = 1195
NAS – 11 = 2515
10 YR YLD +.04 = 2.00%
OIL + 1.29 = 99.50
GOLD +5.50 = 1716.40
SILV -.14 = 32.02
PLAT – 4.00 = 1540.00

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so like the present period that comparisons would seem inevitable.

In the eight decades before the recent depression, there was never a period when as much as 9 percent of American gross domestic product went to companies in the form of after-tax profits. Now the figure is over 10 percent.

During the same period, there never was a quarter when wage and salary income amounted to less than 45 percent of the economy. Now the figure is below 44 percent.

Corporate profits after taxes were estimated to be $1.56 trillion, or 10.3 percent of the size of the economy – the highest ever. Wage and salary income was only 43.7 percent of G.D.P., the lowest number for any period going back to 1929.

Corporations have a higher share of cash on their balance sheets than at any time in nearly half a century. The Federal Reserve reports that nonfinancial companies held more than $2 trillion in cash and other liquid assets at the end of June, up more than $88 billion from the end of March. Cash accounted for 7.1% of all company assets, everything from buildings to bonds, the highest level since 1963.

For most of the last century, the basic bargain at the heart of the American economy was that employers paid their workers enough to buy what American employers were selling. That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages.
Corporate profits are up right now largely because pay is down and companies aren’t hiring. This is not a sustainable business model. When the economy becomes too lopsided – disproportionately benefiting corporate owners and top executives rather than average workers – it tips over.

Bloomberg News recently won a court battle against the Federal Reserve and a group of the biggest banks called the Clearing House Association LLC, We are now seeing a more accurate picture of the size of the bailout. The amount of money the central bank parceled out dwarfed the Treasury Department's better-known $700 billion Troubled Asset Relief Program, or TARP. Few people were aware of this, partly because bankers didn't disclose the extent of their borrowing.

The Fed didn't tell anyone which banks were in trouble so deep they
required emergency loans of a combined $1.2 trillion on Dec. 5, 2008,
their single neediest day. Bankers didn't mention that they took tens of billions of dollars at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed's below-market interest rates.

The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt. Morgan Stanley was the top borrower with a peak of $107 billion on Sept. 29, 2009. That was eight days after then-CEO John Mack said the firm was "in the strongest possible position."

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told shareholders in March 2010 that his bank used the Fed's Term Auction Facility "at the request of the Federal Reserve to help motivate others to use the system." He didn't say that the bank's total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion came more than a year after the program's creation.
On Nov. 26, 2008, Bank of America's then-CEO Kenneth Lewis wrote to shareholders that he headed "one of the strongest and most stable major banks in the world." He didn't say that Bank of America owed the Fed $86 billion that day. Bank of America's borrowing peaked at $91 billion in February 2009.

At the same time as these banks were desperate for federal money to stay afloat, their CEOs were writing cheery letters to shareholders claiming that all is right with the world.  This would seem to be a clear cut violation of SEC disclosure requirements and Generally Accepted Accounting principles.

I’m reminded of Martha Stewart, who seven years ago was convicted of lying to investigators. What a sap! If only she had owned a bank, she could have spewed lies with impunity. Where is the SEC? The Justice Dept? The Comptroller of the Currency? Why are there not major investigations of what amounts to securities fraud?  Is it time for the pitchforks and torches? I ask these questions because there are still people talking about the illegality of protesters squatting in public parks. Why don’t we send a few cops to pepper spray CEOs for deliberate and clearly illegal acts? Surely there is as much a need for honesty in the high temples of the moneychangers as the need for probity in the park.

With the help of the Fed's secret loans, America's largest financial firms got bigger during the crisis. Part of the boost came from a hidden subsidy - the Fed's below-market interest rates. The subsidy can be estimated using a figure banks call "net interest margin."
It's the difference between what they earn on loans and investments and their borrowing cost. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during the time they took emergency loans.
The 190 firms would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported. Citigroup would have taken in the most, with $1.8 billion.
Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in
The big six - JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs Group and Morgan Stanley - took 63 percent of the Fed's emergency-loan money as measured by peak daily borrowing. Combined, the six spent $29.4 million on lobbying in 2010, a 33 percent increase from 2006. This explains quite clearly why the banks got rescued and the rest of the population did not. Maybe that is unfair. The lawmakers didn’t know what the Federal Reserve was doing. The politicians were clearly bribed, and more than that, they were clueless.

But time marches on. It was just 3 short years ago that Ben Bernanke was named Man of the Year; it was just 3 years ago that he saw the “green shoots” that signaled the spring of hope.  Unfortunately the financial sector captured the regulatory process and we missed the chance to cap the size of the banks in order to reduce the danger of systemic risk and the too-big-to-fail excuse for bailing out banks.

And when the Financial Review continues we will look at the current situation in Europe, where the lessons learned or not learned 3 years ago are now being repeated.

European banks are dumping government debt, deposits are draining from south European banks, bond vigilantes are demanding central banks to bail them out. Just over one month ago Italy sold 3-year bonds with a yield of 4.93%; today Italy was forced to offer a record 7.89% - and that wasn’t enough; the bond vigilantes pushed rates over 8%.

French newspapers report that ratings agency Standard & Poor's would lower its outlook on France's AAA credit rating to negative within 10 days. Moody’s Investors Service, raised the possibility of mass downgrades of European government debt if a forceful resolution to the escalating crisis was not found.

The OECD, the Organization for Economic Cooperation and Development,  lowered its economic outlook for Europe and the rest of the world. They forecast the U.S. economy would grow at 2% rate next year, down from earlier estimates of 3.1% growth, and they warn a credit contraction would exacerbate the slowdown. The OECD said it expects the euro zone's economy to contract by 1% at an annualized rate in the last quarter of this year and by 0.4% in the first three months of 2012. For 2012, the OECD said the 17-country bloc's economy will only grow by 0.2%. This is far too optimistic. The European economy is about to fall over a cliff and if it falls, maybe when it falls, it will drag the U.S. economy with it. For now, the European leaders play a game of extend and pretend; they fiddle while Rome burns, but it can’t last much longer.

Central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009. The IMF is rumored to preparing an aid package for Italy, and maybe Hungary and Austria. Spain is thinking about playing tough. France and Germany say they planned to break the downward spiral by outlining a new push towards a fiscal union, with stricter rules against budget “sinners”. Liquidity is a key issue at the moment in the euro zone banking system.   Investors have begun to treat Europe’s big banks as the weak link in the global financial chain because of their huge holdings of bonds issued by debt-laden governments like Italy and Spain.
American money market funds have been closing the spigot of money they lend to European banks, forcing them to tighten lending standards and, in some cases, even withdraw financing from longtime customers.
 Eurozone banks are deleveraging and they are cutting lending, and that in turn feeds slower growth, and that in turn drags down sovereign economies.

And here in the USSA, it is widely expected the Federal Reserve will have to provide more stimulus, in the form of Quantitative Easing Part 3.  Fed Governor Janet Yellen, said while the “Fed continues to provide highly accommodative monetary conditions to foster a stronger economic recovery in a context of price stability,” she said “the scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer term financial assets.” Fed members pick their words very carefully and she wouldn’t be saying this unless they were prepared to act. The only real question is whether the Fed will act as the backstop for the ECB.

Meanwhile, S&P just cut the ratings on 37 banks including:
BAC -.17 = 5.08
GS –1.62 = 88.81
MS - .49 = 13.31
C +.19 = 25.24
WFC -.07 = 24.08

As the money gets tighter and tighter, we see AMR, the parent corporation for American Airlines filed for Chapter 11 bankruptcy protection.

The Conference Board’s consumer confidence index jumped 15 points to 56 in November from 40.9 in October.

The S&P/Case-Shiller index of home prices dropped 0.6% in September and the year-on-year decline was 3.6%. Atlanta, Las Vegas, and Phoenix registered new lows. Here in the Valley of the Eternal Sun, home prices dropped 6.5% from one year ago; we now stand at levels last seen in January 2000.

Monday, November 28, 2011

November, Monday 28, 2011

DOW +291 = 11523
SPX + 33 = 1192
NAS +85 = 2527
10 YR YLD -.01 = 1.96%
OIL +.98 = 97.75
GOLD +29.60 = 1710.90
SILV + 1.08 = 32.16
PLAT + 15.00 = 1549.00

Europe was totally copasetic, at least for today; I’ll get to the details in a moment. Here in the USSA, we spent the weekend doing what we do best, overeating and over-shopping. I want to start today with a news item that did not move the markets, but it is worth noting. A US District Judge in Manhattan actually stood up to Wall Street and refused to let the SEC sweep yet another case of high-level criminal malfeasance under the rug; the judge refused to let a major bank walk away with a slap on the wrist. There is a chance we could see actual justice, and the odds of that happening are so rare, the probabilities so astronomical – you are more likely to see a team of pink unicorns and Haley’s Comet.

The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the Abacus Case  involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.  
This case was similar, but worse. Here, the SEC accused Citi of selling a $1 billion mortgage linked CDO right ast the housing market was collapsing and then betting against it.  Citi told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.
This whole transaction actually combined a number of Goldman-style misdeeds, since the bank both lied to investors and also bet against its own product and its own customers. In the deal, Citi made a $160 million profit, while its customers lost $700 million.
In this worse case, the SEC was trying to settle with Citi for just $285 million. Judge Rakoff balked at the settlement and particularly balked at the SEC’s decision to allow Citi off without any admission of wrongdoing. He also mocked the SEC’s decision to describe the crime as “negligence” instead of intentional fraud, taking the entirely rational position that there’s no way a bank making $160 million ripping off its customers can conceivably be described as an accident.
Judge Jed Rakoff in Manhattan said the Securities and Exchange Commission appeared uninterested in actually learning what Citigroup did wrong, and erred by asking him to ignore the interests of the public.
Rakoff wrote that: "An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous."
The judge added that it was difficult to discern "from the limited information before the court what the SEC is getting from this settlement other than a quick headline."
He said the proposed settlement was "neither reasonable, nor fair, nor adequate, nor in the public interest."
Rakoff called the Citigroup accord too lenient, noting that the bank was charged only with negligence, neither admitted nor denied wrongdoing, and could avoid reimbursing investors for more than $700 million of losses. Private investors cannot bring securities claims based on negligence.
"If the allegations of the complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business," the judge wrote.
The settlement would have required Citi to give up $160 million of alleged ill-gotten profit, plus $30 million of interest. It also would have imposed a $95 million fine for the bank's alleged negligence, less than one-fifth what Goldman Sachs Group Inc paid last year in a $550 million SEC settlement over the Abacus case.
Rakoff called the $95 million fine "pocket change" for Citigroup and said investors were being "short-changed."
Rakoff wrote: “Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” And this: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”
Rakoff of course is right – the settlement is nuts. Over the last decade, Citi has repeatedly been caught committing a variety of offenses, and time after time the bank has been dragged into court and slapped with injunctions demanding that they refrain from ever engaging the same practices ever again. Over and over again, they’ve completely blown off the injunctions, with no consequences from the state – which does nothing except issue new (soon-to-be-ignored-again) injunctions.
In this current case, this particular unit at Citi had already been slapped with two different SEC cease-and-desist orders barring it from violating certain securities laws.
 One of those orders came in a 2005 settlement, the other in a 2006 case. The SEC’s complaint last month didn’t mention either order, as if the entire agency suffered from amnesia.
The SEC’s latest allegations also could have triggered a violation of a court injunction that Citigroup agreed to in 2003, as part of a $400 million settlement over allegedly fraudulent analyst research reports. Injunctions are more serious than SEC orders, because violations can lead to contempt-of-court charges.

 But the SEC avoided the issue of the 2003 injunction by charging Citi with a different type of fraud.

 And what does the SEC do? It doesn’t even bring up Citi’s history of ignoring the SEC’s own order, slaps the bank with a fractional fine, refuses to target any individuals, allows the bank to walk away without an admission of wrongdoing, and puts a cherry on the top by describing the $160 million heist not as a crime, but as unintentional negligence.

Imagine a predator who preys on young children, and he is trying to lure a young child off the playground and into his van, and the kid gets in the van and a cop sees this and stops the predator. The predator tells the cop it’s a misunderstanding and the cop lets him drive away. Then two years later, same predator, same van , same playground, and a different kid. And again, the cops buy the story and send him home without a charge.
And this is not an isolated example. Apparently the predator has been doing this in other playgrounds, and other kids. Of course Citi is not a predator preying on little kids in the schoolyard. That kind of predator only hurts one child at a time. Citi’s actions screwed  hundreds of investors and whole families.
 In the latest Citi case, the $700 million fraud was just one of many dicey CDOs marketed by that unit of Citi. But the SEC chose to address just that one case in its settlement.
A few years ago, judge
 Rakoff rejected an SEC settlement with Bank of America, which was accused of misleading shareholders about the size of the bonuses paid out by Merrill Lynch, the investment bank BofA was in the process of acquiring. Rakoff dismissed the original $33 million fine as “half-baked justice,” although he eventually approved a $150 million fine.
Here’s the real problem with these settlements that allow a big bank or corporation like Citi to reach a settlement without
admitting or denying guilt – it is not equal justice. It is a special privilege reserved for mega corporations. You can’t get that kind of justice – you would go to jail. And if we are not equal in the eyes of the law, then there is no justice. When will other judges grow a spine? What Judge Rakoff has done is rare – and that may be the scariest part of this story.

 Moody’s Investor Services, the ratings agency, warned that the Euroland debt problems could lead multiple countries to default on their debts or exit the euro, which would threaten the credit standing of all 17 countries in the currency union.
Despite the gloomy predictions, stock indexes rose sharply in Europe and Asia, and were surging in Wall Street trading, and the euro strengthened, on hopes that European leaders were working on a new approach to resolve the crisis.

Virtually everyone in Europe, if not the world, agrees. At their many conferences and summits throughout the two-year debt crisis, Europe's leaders have routinely insisted that further coordination is the best solution. Today, President Obama hosted a US – European Union summit in Washington and he said the United States is willing to do its part to help resolve the European debt crisis. Obama said the European crisis is a "huge issue" for the U.S. economy and that the United States has a stake in its successful conclusion. So, how much is this going to cost us?

Well, last Thursday, the Federal Reserve injected $88 billion into a cash account; the cash account was labeled “other” and reported under the H.4.1 Factors Affecting Reserve balances – which is the technical way of saying the money could have ended up almost anywhere – maybe the IMF (the International Monetary Fund), or the World Bank, or the European Central bank, or the European Stabilization Fund; the money might have been used for emergency foreign currency exchange intervention – nobody knows and the Federal Reserve isn’t talking. But the markets were talking today. And we’ll see what happens later this week, when Italy, Spain, and France have bond auctions.

White House spokesman Jay Carney said Obama's message behind closed doors was that "Europe needs to take decisive action, conclusive action to handle this problem, and that it has the capacity to do so."
In Brussels, finance ministers of the 17-nation currency area meet tomorrow to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets.
Black Friday gave way to small business Saturday and now we’ve moved on to Cyber Monday. And there have been some screaming deals for people willing to be trampled an pepper sprayed to purchase really cheap bric-a-brac and geegaws. Retail sales over Thanksgiving weekend totaled $52.4 billion, a 16.4% increase from 2010. Shoppers spent an average of $398.62 over the holiday weekend, a 9.1% increase from last year and the biggest gain since 2006. The numbers and statistics from Black Friday sales will be tweaked and revised as the shopping season gathers steam. Consumers and retailers shouldn't necessarily dismiss the numbers being reported, but it's too early to assume that retail spending can continue at its current pace. Retailers don’t necessarily make big profits from promotional deals. And the buying is not necessarily an indication of a strong economy.

It’s been about a month since MF Global began spiraling towards bankruptcy and still there’s no clarity about what happened to the missing customer money that was supposed to be kept in untouchable, segregated accounts. It’s not even clear how much money is missing.

Holdings in exchange-traded products backed by gold reached a record 2,350.8 metric tons on Nov. 23, now valued at $127.6 billion.