Monday, December 19, 2011

December, Monday 19, 2011

DOW – 100 = 11,766
SPX –14 = 1205
NAS – 32 = 2523
10 YR YLD -.04 = 1.81%
OIL +.47 = 94.00
GOLD – 5.30 = 1594.90
SILV -.94 = 28.90
PLAT –9.00 = 1413.00

The ratings agencies have been busy over the past few days – better late than never, I suppose. Fitch put Belgium, Spain, Slovenia, Italy, Ireland, and Cyprus on its negative watch list. Moody’s cut Belgium’s credit rating by two levels. Standard & Poors is expected to cut France’s credit rating this week. Fitch says a solution to the Eurozone crisis is “technically and politically beyond reach.”

And credit downgrades make a solution fall even further out of reach. For any borrower – corporation or country – the worse the credit rating, the higher the interest on a loan is likely to be.
For many Eurozone countries, they are having a hard time paying their debt right now; if interest rates move higher, it just increases the probability of default. It is a vicious cycle;
deteriorating credit leads to higher interest rates and additional costs, which over time further damage the country’s credit rating.

Another potential problem area is interbank lending might freeze up.
Banks constantly have to borrow money from each other for a day or two because the balance between loans and money on hand is constantly shifting. But when banks begin to worry about possible losses on Eurozone bonds at other institutions, they may refuse to lend money overnight. Short-term money gets frozen in place. The European Central Bank can lend euros when nobody else will, and the US Federal Reserve has also done some short-term lending to the Eurozone.  The bigger problem here is one of confidence. If banks don’t trust one another, why should depositors trust banks? The simple answer is they shouldn’t.

When ratings agencies downgrade countries, it pushes private investors to sell their Eurobonds, and government institutions soak up the surplus. Actually, what that means is taxpayers soak up the surplus. The ECB probably owes the German Bundesbank more than a half trillion dollars because of accumulated short-term loans. We know the Federal Reserve is backstopping the ECB, we just don’t know the price tag. One way or another, taxpayers in Europe and the US are likely to end up holding the bag.

Speaking of holding the bag, European countries, which is to say European taxpayers have just authorized payout of almost $200 billion dollars to the IMF to support Euro bond markets. It is not enough to resolve the Euro.  It seems like they’re kicking the can down the road but it might more accurately be described as kicking a snowball down a mountain.

Speaking of holding the bag:
An update on the MF Global collapse; a substantial portion of MF Global’s commodity clients cleared their transactions through the Chicago Mercantile Exchange and Comex, owned by the CME Group – this is a publicly traded company with the ticker symbol CME.

When MF Global went bankrupt, many accounts were hit with margin calls and many accounts closed out open trades at whatever the current market price was at the time. Still other accounts were frozen and if prices dropped, the clients could not close out the open positions. The question now looming over CME's stock is whether the company will be liable for customer losses. CME, which also owns the Chicago Board of Trade and Chicago Board Options Exchange, runs markets for futures contracts and options on futures, interest rates, stock indexes, foreign exchange and actual commodities.

CME has set aside a $550 million reserve for MF Global customers, and it has cash balances of more than $1.1 billion that it could tap, if needed. But CME said last week that CME wouldn't guarantee the funds that remain missing from customer accounts at MF Global after the bankruptcy trustee reimburses them. Such a move would be "unwise" and the CME has a "fiduciary responsibility" to its shareholders – apparently they have no fiduciary responsibility to their customers.

Scary huh? Well it gets worse. It's one thing for $1.2 billion to vanish into thin air through a series of complex trades; it's something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%. The trustee overseeing the liquidation of MF Global has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold "warehouse receipts" to prove it—they'll have to forfeit 28% of the value – even though they have a warehouse receipt that says they own 100% of a specific, numbered bar of silver or gold.

So, the CME thinks they can provide benefit to their shareholders by screwing their customers. Someday they’ll study this in business schools.

Later this week, the Federal Reserve is expected to release a proposal that would create a global requirement for banks to increase their capital, and might require the largest banks to hold large capital buffers or “contingent capital,” a special kind of capital that would act like a bond in good times but convert automatically into common equity in a crisis. The form of capital is also known as “bail-in capital” because it would force the institution to give itself an injection of common equity in a crisis, thereby avoiding the need for a taxpayer funded capital infusion.
BAC -.21 = 4.99
MS -.82 = 14.16
JPM –1.19 = 30.70
For years, the average worker in the United States earned 63% of the national income, but as of last year that shrunk to just 58% of national income – that means that about $740 billion more was going to bosses and shareholders, and not to the average workers. Financial Times says the $740 billion dollar pay gap is a threat to US recovery. If the post-war figures were back at 63%, the average worker would have an additional $5,000 and unlike their rich counterparts, the average worker would spend the money, which would boost an economic recovery.

America's CEOs enjoyed pay hikes of up to 40% last year - with one chief executive earning $145m 

 America's top bosses enjoyed pay hikes of between 27 and 40% last year.  America's highest paid executive took home more than $145.2m, and as stock prices recovered across the board, the median value of bosses' profits on stock options rose 70% in 2010, from $950,400 to $1.3m.
Three of this year's top 10 earners come from the healthcare industry. Top earner John Hammergren at McKesson, the world's largest healthcare firm, made $145 million last year - most of it from stock options.

So, what do you have to do to make the really big bucks? The formula seems to be make a mess of things and get fired. 2010 was a great year to lose your job as a CEO. Four of the 10 highest paid CEOs were retired or departing executives. Ronald Williams, former head of Aetna, a health insurer, exercised 2.4m options for a profit of $50.4m. Aetna's stock price declined by 70% from when Williams assumed the role of CEO in February 2006 until his retirement. At pharmacy chain CVS, Thomas Ryan made a $28m profit on his options. During Ryan's 13-year tenure as CEO, CVS Caremark's stock price decreased almost 54%. Omnicare's Joel Gemunder retired last August and received cash severance of $16m, part of a final-year pay package worth $98.28m.

Each year, an associate librarian at Yale University releases a list of the most notable quotes of the year. Here are this year’s top 10 quotes:

The list:
10. “Instead of receiving the help that she had hoped for, Mr. Cain instead decided to provide her with his idea of a stimulus package.” — Lawyer Gloria Allred on Nov. 7 discussing Herman Cain’s alleged sexual harassment of her client.

9. “I can’t say with certitude.” — Then-U.S. Rep. Anthony Weiner on June 1 when he was asked whether a lewd photograph was in fact him.

8. “Oh wow. Oh wow. Oh wow.” — Apple co-founder Steve Jobs’ last words on Oct. 5, as reported by his sister Mona Simpson in her eulogy.

7. “I am on a drug. It’s called ‘Charlie Sheen.’ It’s not available because if you try it once, you will die. Your face will melt off and your children will weep over your exploded body.” — Actor Charlie Sheen in a February interview with ABC News.

6. “When they ask me, ‘Who is the president of Ubeki-beki-beki-beki-stan-stan?’ I’m going to say, ‘You know, I don’t know. Do you know?’” — Then-presidential candidate Herman Cain in an interview by Christian Broadcasting Network on Oct. 7.

5. “Oops.” — Presidential candidate Rick Perry after unsuccessfully attempting to remember the third federal agency he would eliminate during a Nov. 9 debate.

4. “I believe in evolution and trust scientists on global warming. Call me crazy.” — Presidential candidate Jon Huntsman in an Aug. 18 tweet.
3. “My friends and I have been coddled long enough by a billionaire-friendly Congress.” — Billionaire Warren Buffett, in a New York Times op-ed on Aug. 15.

2. “There is nobody in this country who got rich on his own. Nobody. You built a factory out there — good for you! But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for.” — U.S. Sen. candidate Elizabeth Warren, speaking in Andover, Mass., in August.

1. “We are the 99 percent.” — slogan of Occupy movement.

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