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
2006.
 

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.