November, Friday 11, 2011

DOW = 259=12153
SPX + 24 = 1263
NAS = 53 = 2678
10 YR YLD bond market closed
OIL + 1.44 = 99.22
GOLD + 30.50 = 1789.50
SILV + .63 = 34.76
PLAT + 19.00 = 1649.00

Today is November 11, 2011, the only day like it ever. 11-11-11 if you were born on June 10, 1981 you would be 11,111 days old. Is there some special numerical significance to this date?  I don’t know but I can bet there will be some people going to the casinos tonight.

Of course today is a special day for a very important reason:

On the 11th hour of the 11th day of the 11th month of 1918 an armistice between Germany and the Allied nations came into effect. On November 11, 1919, Armistice Day was commemorated for the first time. In 1919, President Wilson proclaimed the day should be "filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory".  There is a very simple formula to remember – without veterans there would be no America. So, to all veterans – thank you. On this Veterans Day and every day, let us remember the service of our veterans, especially those in active duty, and let us renew our national promise to fulfill our sacred obligations to our veterans and their families who have sacrificed so much so that we can live free.

93 years after Armistice Day and Europe is still a mess. The events unfolding in Europe continue to dominate this market. Stock index futures prices are higher due to a better tone to the financial situation the euro area. Futures firmed when Italian bond yields receded and when Greece named a new prime minister, Lucas Papademos. Italy's Senate approved austerity measures demanded by the European Union that will now go to the lower house, where they are expected to be passed on Saturday. That vote will trigger the resignation of Prime Minister Silvio Berlusconi.

That’s fine. You still have to consider that European sovereign debt has passed the point of no return. Of course, the Central Banks are going to do their very best to prop up the Euro-economy; maybe they’ll be successful but I doubt it. I think that eventually there will be a breakdown. Breakdowns occur in three ways: slowly, quickly, or catastrophically (such as a war).

Back in October, I told you that I thought the market would move higher, in large part due to the substantial intervention to prop up Europe, but it was risky; the markets could implode at almost any moment. Goldman Sachs says the emergency of the new governments helps reduce “near- term political uncertainty” and suggests “that euro-zone fiscal tensions could continue to decline, at least for a period of time,” so they are Bullish on the Euro. Morgan Stanley says: “Political uncertainties” and Italian bond yields that remain above 6 percent leave the firm “fundamentally bearish” on the euro “as Italy runs the risk of being too big to save.”

For the longer-term investor, this might be a good time to reduce exposure but for the short-term trader, these are great markets. The moves are substantial.

Remember over the summer when we had that big commotion about the debt ceiling, and the USSA lost its Triple-A credit rating. And the politicians raised the debt ceiling at the last minute, and part of the deal was for a Supercommitee of 12 legislators to find a way to reduce the deficit, or there would be automatic spending cuts and automatic tax increases? Remember that the end of July was a nasty little downturn in the stock market? Well, the deadline for the Dirty Dozen to come up with a new deficit deal is Nov. 23^rd, and since they need to run the numbers past the Congressional Budgetary Office, they really need to reach a deal by Monday the 21^st.

Let’s go to the mailbag:

Sinclair,

It appears we have a bifurcated bond and stock market with the bond market

forecasting a contractionary environment while the equity markets consistently

rebound from any short term downward moves, due to strong corporate earnings.

How long can this disparity between the bond and equity markets last and which

market has the greater predictive value?

The stock market is influenced by many factors. Two of the most important are the direction of inflation and interest rates. As a general rule of thumb, high interest rates are bearish for stocks; low interest rates are bullish. We also have to look at timing. Are rates in the process of rising or falling?

##(– The idea is that the cost of money is cheaper. Put another way, a rising bond market is generally bullish for stocks. Conversely, a falling bond market is generally bearish for stocks. It can also be shown that bonds often act as a leading indicator of stocks. There are also other considerations, such as the strength or weakness of the dollar; with a weak dollar generally considered bearish because that tends to result in higher prices for commodities.)##

We can see this in the basic models used by the Federal Reserve; when the economy is strong, and stocks are moving higher and corporations are generating profits, the Fed might raise interest rates to slow down the economy and avoid inflation. When the economy slows down and contracts, the idea is to lower interest rates thereby lowering the cost of debt and pushing more money into the economy.

A rise in bond buying will cause the bond prices to rise and interest rates to fall. This allows for further expansion and consumption in business and a bull market for stocks. Due to this relationship, bond prices and stock prices should move in tandem in the long-term, with mild interruptions in the relationship at turning points. These divergences might be used as an indication of probable turns in the equities market.

##( The correlation coeffcitient measures how often stocks move in tandem with bonds. Readings of 1 indicate prices are moving together, while zero shows no link and minus 1 means they are going in opposite directions. Negative readings tend to be bearish and positive readings tend to be bullish; but, these are just tendencies. You may remember back in September 2008, stocks fell and bond yields also fell, it was all very dramatic, and the correlation was positive because they were both moving in the same direction. During October 2008, normally non-correlated assets began moving in lockstep. As the psychology of the crisis shifted from denial to panic, stocks, bonds, commodities all moved together.) ##

And please understand that I’m talking in generalities here. I’m not sure how to use the correlation coefficient as a market-timing tool. Maybe there are some traders who do know, and there are probably some who have back-tested this relationship. In reality, stock and bond markets can be considered claims on cash flows across different parts of the economy. The information is available to both markets at the same time. The bond traders are not necessarily smarter than the stock traders. If one market were always predicting the other market, we would all jump on the bandwagon and off the dim-witted traders in the slower market. But the markets don’t work this way. Any little advantage in arbitrage doesn’t last for long and we end up with a reversion to the mean.

Dear Sinclair:

Could you discuss this MF Global thing?  It seems like the worst case of fraud, failure to regulate, lying by the CME  that has the potential to totally undermine faith in our financial system.  It is unclear if this is prosecutable.  Clearly the law is written for the financial system to screw us all.

It is shocking but it has little press.  The implications are huge. I feel like putting all my money under my mattress!   Am I overreacting about this issue?

Today, MF Global’s entire workforce of over 1,000 people were fired. The doors are shuttered. How did this happen?

Here’s a quick recap:

MF  Global made really big bets in European sovereign debt, such as Italy and Spain and some of the other shaky countries, and when that debt was downgraded, MF Global was hit with margin calls. So, MF global was over-concentrated on one specific bet, and they lost.

Further, MF Global bet too big, they bet about $6.3 billion and they leveraged the bet, and when the bet went bad – they didn’t have enough cash to remain flush.

According to the CFTC, MF Global held $7.3 billion of customer segregated assets as of Aug. 31. Segregated accounts are supposed to protect customers in the event the broker files for bankruptcy protection.

The CME conducted an audit of segregated funds on October 24. The review was completed that same day. At that time, the CME says, “MF Global was in compliance with its segregation requirements.”

Oct. 25, MF reported big quarterly losses, and the firm was downgraded, and on Oct. 31 the firm filed for bankruptcy.

It appears MF Global might have transferred money from customer accounts to try to prop up the house accounts, which were collapsing. One possibility is that MF used client funds as collateral for a loan from a big investor, maybe an offshore hedge fund – but nobody knows for certain. There is still about $600 million in customers’ funds missing and not accounted for. More than 150,000 customer accounts were frozen Oct. 31, with $5.45 billion affected.

All of the statements made on the record by those in a position to know point to assets taken out of the firm and now gone for good.

The FBI, the Securities and Exchange Commission and the Commodities Futures Trading Commission are all investigating whether the firm improperly dipped into client funds to prop itself up near the end. I believe the MF Global situation is probably illegal, most likely a situation of fraudulent activity. With any luck, time will tell the story.

What we do know is that there was an almost incestuous relationship between MF Global, regulators, exchanges, and auditors. Between 2000 and early 2011, the CFTC sanctioned MF Global for six alleged violations, involving lax supervision and recordkeeping, and levied penalties totaling more than $12 million, but that was a slap on the wrist, not enough to change the bad behavior.  Corzine, a former New Jersey governor and former Goldman Sachs chairman, has not been accused of any wrongdoing, but he played a central role in convincing the CFTC to hold off implementing regulations that might have prevented the company's collapse. While regulators were pressing to limit the ability of financial firms to essentially borrow money from their own customers, Corzine led the charge against the proposed rule, using his prolific list of contacts in Washington. In the end, CFTC chairman Gary Gensler, who had worked for Corzine at Goldman Sachs, delayed the vote on the new rule until the fall.

Sure, three years after the collapse of Lehman, and we still haven’t come up with any rules to prevent a repeat; and the very financial institution that got bailed out are the loudest, most powerful opponents to any reform. In many ways, the situation has been getting worse.

Yea, yea, MF Global is much smaller than Lehman. What’s the big deal? Well, don’t think the “too big to fail” retail bankers are any different than MF.  Remember that Bank of America is trying to dump its risky derivatives on retail customers; $53 trillion dollars worth fo funny paper. You remember Bank of America has lost more than half its market value this year, the investment banking side got hit with a credit rating downgrade; they are highly leveraged in derivatives, and if those derivatives were to go bad, they would not have enough cash to cover the losses. The credit downgrade means they need to put up an additional $4.9 billion to cover their positions, but they don’t want to do that, So they want to put the retail bank at risk to cover losses, after all the retail side is flush with $1 trillion in customers deposits backed by the FDIC insurance. Regulators may still step in to protect customers, but they haven’t been quick to stop this move. Clearly, Bank of America is more sophisticated than MF Global, but the intentions are the same – screw the customer.

So, the question was: I feel like putting my money in a mattress; Am I overreacting?

Yes, you are overreacting: putting your money in a mattress is a bad idea – you need to put it in a fireproof safe.

By the way, there is a new article from Matt Taibbi in Rolling Stone. The title is “Finally a Judge Stands up to Wall Street”. It’s about a judge in New york named Jed Rakoff..

More than 49 million Americans, or 16% of the population, were living in poverty in 2010, the government reported this week.

Rising poverty is a national tragedy and a brewing humanitarian crisis in America... the U.S. Census Bureau adjusted the way in which it calculates poverty, this new measure looks at how much families spend on food, shelter, clothing and utilities. You know, life's basic necessities.

Most groups saw their poverty rates increase using the new calculations, including married couples, whites, Asians, immigrants, homeowners with mortgages, those with private health insurance and the elderly. Poverty rates among those over 65 rose to 15.9% from the previously reported 9%. Poverty rates did, however, drop for Americans under the age of 18, African Americans, renters and people living in rural areas.

Famous Veterans Day Quote #1 

This nation will remain the land of the free only so long as it is the home of the brave. 

Elmer Davis 

John F. Kennedy
Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty.

Famous Veterans Day Quote #2 

In war, there are no unwounded soldiers. 

Jose Narosky 

Famous Veterans Day Quote #3 

A hero is someone who has given his or her life to something bigger than oneself. 

Joseph Campbell 

Famous Veterans Day Quote #4 

Freedom is never free. 

Author Unknown 

Famous Veterans Day Quote #6 

It is easy to take liberty for granted, when you have never had it taken from you. 

Author Unknown 

Famous Veterans Day Quote #7 

Lord, bid war's trumpet cease; Fold the whole earth in peace. 

Oliver Wendell Holmes 

Famous Veterans Day Quote #9 

We often take for granted the very things that most deserve our gratitude. 

Cynthia Ozick 

Famous Veterans Day Quote #10 

The more we sweat in peace the less we bleed in war. 

Vijaya Lakshmi Pandit 

Famous Veterans Day Quote #11 

I think there is one higher office than president and I would call that patriot. 

Gary Hart 

Famous Veterans Day Quote #12 

Courage is almost a contradiction in terms. It means a strong desire to live taking the form of readiness to die. 

G.K. Chesterton 

Famous Veterans Day Quote #14 

As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them. 

John F. Kennedy 

Famous Veterans Day Quote #15 

Valor is stability, not of legs and arms, but of courage and the soul. 

Michel de Montaigne Famous 

Veterans Day Quote #16 

When our perils are past, shall our gratitude sleep?