January, Friday 20, 2012

DOW +96 = 12,720
SPX +1 = 1315
NAS -1 = 2786
10 YR YLD +.06 = 2.03%
OIL -2.19 = 98.19
GOLD + 10.30 = 1668.00
SILV +1.56 = 32.30
PLAT +11.00 = 1541.00

Today, Wall Street was just muddling along. GE and Google posted weak earnings. The Dow advanced and the broader market were flat. Still, stocks have posted three weeks of gains to start the New Year on weak volume. Nobody wants to believe the rally; maybe they've decided it's safer to sit it out. Stocks may muddle higher but it is difficult to sustain gains on light volume and it leaves the market vulnerable to selling pressure.

Nihil sub sole novum. That's Latin for nothing new under the sun. It seems to prove the point when you say it in a dead language. And so, we go from archaic to the contemporary medium for information sharing, the internet. If you think the internet is only about sharing new, original, unique, and innovative information the you really need to move into the 20^th century (for starters). There are many things that are inequitable about current copyright and patent laws, but even if we gloss over that discussion, the idea that legislators wanted to make it illegal to share information over the internet was remarkably stupid.

It seems several legislators just lined up to do the bidding of their corporate paymasters, without regard to the consequences. The SOPA and PIPA legislation was bipartisan stupidity. The bills were championed by former democratic Senator Chris Dodd, who is now working as a lobbyist for the movie industry. PIPA co-sponsor Florida republican Sen. Marco Rubio pulled his name from the bill Wednesday, and SOPA co-sponsor Arizona republican Rep. Ben Quayle pulled his name Tuesday. Texas Representative Lamar Smith closed his website for maintenance after it was noted he had stock photography without attribution or payment to the photographer. In other words, he was in violation of the law he was co-sponsoring.

Both the Stop Online Piracy Act, or SOPA and the Protect Intellectual Property Act or PIPA are now indefinitely postponed. Two days ago, Wikipedia blacked-out  its site; several other sites supported the protest. It worked. It was a pretty remarkable process in several ways. First, it was remarkable that Congress failed to recognize that censorship is bad. We witnessed the power of  the old media in the halls of Congress, again. It isn't surprising but it continues to disappoint when Congress lines up with corporate interests in direct opposition to the rights of citizens.  It really shouldn't be so easy for politicians to embrace censorship for a fistful of dollars. It is both surprising and disgusting when reporters embrace censorship to appease their paymasters.

We also saw the strength of the internet. The legislation crashed once details surfaced – on the internet. We are most likely experiencing an internet revolution or perhaps an internet reformation, a movement that might actually usher in fundamental changes, just as the Gutenberg printing press helped usher in the Reformation and the Age of Enlightenment. This week we saw how an internet blackout can shine a light on bad legislation.

An interesting sidebar to this is that the US government shut down a foreign file server website called MegUpLoad, which apparently was a site where you could download films and music, and where some of the downloads were allegedly illegitimate. So apparently, these newly proposed laws were extraneous to existing laws, which are already on the books and are already being enforced without the need for censorship. And then in what looks like a horrendous case of bad timing, Anonymous hacked and shut down the sites of the main corporate copyright enforcers, including the Motion picture Association of America, the Recording Industry Association of America, Universal Music, EMI, the US Copyright Office, the Department of Justice,the FBI, and the French copyright agency.

And that brings us to another point; the internet may be big and important and may change the world, but our politicians don't have a clue how it works.

Protesters are occupying courthouses in more than 100 cities  to protest the second anniversary of the landmark Supreme Court decision “Citizens United v. FEC” that removed most limits on corporate and labor spending in federal elections. The protests are part of larger demands to overturn the decision, and amend the Constitution to state the obvious - that corporations are not people and money is not speech.

I also want to look at another important item from Wednesday; the World Bank issued a rather unique report that revised GDP growth estimates for 2012 downward very sharply, warned that Europe could be on the verge of a devastating financial crisis, and declared that the rest of the world better “prepare for the worst.” This is not the kind of language that you would normally expect to hear from the stuffed suits at the World Bank. Obviously things have gotten bad enough that nobody is even really trying to deny it anymore.

The report claims: “An escalation of the crisis would spare no-one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09.”  The report concludes the “importance of contingency planning cannot be stressed enough.”

So are you ready?

The economy could fall into a gigantic, gaping abyss but if it doesn't, things are looking better. Spain and Italy had fairly successful debt auctions this week. There were some concerns  about the large amounts of debt Italy and Spain were scheduled to sell in the first month or two of this year. The European Central Bank conveniently broadened its collateral rules so that banks could gobble up the new Spanish and Italian issuance, take it to the ECB as collateral, and take care of their financing needs. It's a pretty neat little operation, when it comes down to it. Italian banks are estimated to have taken care of about 90% of their financing needs for 2012. Their rush to solve their own money problems helped the Italian government through a tight spot. Based on the way these activities have played out so far, the ECB's LTRO looks like a big success.

Can you spot the problem? Demand was pushed forward and that means demand for sovereign debt will likely dry up soon and yields will start rising again and soon. A lot of the liquidity directed to the banks has been parked back at the ECB as reserves, and that means the banks are playing it safe by cutting loans to the private sector. While that's the case, the euro-zone economy will continue to contract, and they won't grow their way out of the crisis, and a long-term solution to the crisis will prove elusive. But the rates in Spain and Italy are still a bit too high; Portugal and Greece are basket cases, and there's no indication Europe has turned the corner to success.

Meanwhile, the US labor market has been quietly improving. New filings for state unemployment benefits dropped 50,000 last week, in the biggest weekly drop since September 2005. Yes, there are still 13 million unemployed workers, and another 10 million underemployed or discouraged workers, and there are probably many more who have dropped off the radar screen. And unemployment expectations are a leading indicator for jobless claims – and the expectation is that there will be fewer layoffs in the coming weeks. And the optimistic among us think we may be entering the sweet spot for jobs, the virtuous-cycle stage of recovery: Better demand is generating more jobs that add more income to finance more demand.

Here's the problem: in the US and in Europe we're still just muddling along and that means we remain vulnerable.