Thursday, February 2, 2012

February, Thursday 02, 2012

DOW – 11 = 12,705
SPX + 1 = 1325
NAS + 11 = 2859
10 YR YLD - .02 = 1.83%
OIL – 1.25 = 96.36
GOLD + 15.40 = 1759.40
SILV +.65 = 34.46
PLAT + 11.00 = 1635.00

Tomorrow is the big monthly jobs report. We all want to know the condition of the economy and jobs are the key to the other elements of a healthy economy such as: consumption, profits, credit, debt, deficit reduction, tax revenues, and the financial markets. The jobs report can move the markets and yet the jobs report tomorrow won't really provide as much information as we want and need.

The jobs report is based on a survey sample and there are errors in the sampling rate and the response rate. Then the report will be revised over the next two months. Then the report will be benchmarked against state reports. And we're still dealing with guesstimates for job creation, and those guesses for job losses tended to lag as the economy turned down, and the best guess is that the guesstimates for job creation are lagging as the economy turns up. And then 8 months from now, we'll get a number that shows how many “net” jobs were added to the economy, largely based on tax rolls. We know that jobs are being lost. We rarely hear that the economy is creating about 7 million jobs per quarter.

The long-running decline in the proportion of Americans still tied to the labor force relative to the nation’s total population has been vexing economists and government officials for some time. They worry the sharp decline in what is called the labor-force-participation rate is a sign overall economic conditions have become so unfavorable many people are simply dropping out of looking for formal work altogether.

Today, the Federal Reserve Bank of Chicago came out with a research paper, which basically said, the labor pool is shrinking because the baby boomers are retiring. Of course, there are too many people who have dropped out of the job market, and they weren't all voluntary retirements. And if all these baby boomers are retiring, then we need to do something to get them off their rocking chairs and doing something, anything.

The reality is that we are seeing improvement; you can look at the U3, U4, U5, U6 numbers and they all seem to show that the unemployment rate is declining. And as difficult as the jobs market has been, there is some solace that we have been adding jobs for the past 24 months – granted we haven't been adding enough jobs, but addition is better than subtraction. And I know there are problems with the methodology but I do believe the economy is adding jobs. And if the economy continues to add jobs, then we can start to pay attention to the quality of jobs.

The euro also received a boost after France sold 7.96 billion euros of 6, 8, and 10-year debt at the top of its planned range while Spain sold 4.56 billion euros of bonds maturing between 2015-17, just above its maximum target of 4.50 billion euros. This will lower borrowing costs despite the recent credit rating downgrades.

Greece appears close to a deal with private sector creditors that would avert a chaotic default. It is still default, it is just orderly and quasi-voluntary, in as much as 30 cents on the dollar is a satisfying recovery. A deal on Greek debt is expected within days. Of course, you may recall that there was a deal that was a mere hours away, and that was back in November. What happened? The problem is, at least in part, that if Greece defaults on its bonds, there are Credit Default Swaps, or CDS, that may or may not pay off. The size of the Greek CDS market is a great mystery. And then there is the question of whether to take 30 cents on the dollar or try to collect on the CDS insurance. Credit default swaps aren't really insurance, they're more like bets. You don't need insurable interest, and the people who write the swaps aren't required to have reserves to pay off claims in the event of a default, so trying to collect can be an interesting exercise. The way that CDS is similar to insurance is that both involve collecting premiums and denying claims. And then there's the argument that if the CDS insurance can be cancelled by fiat, deemed non-valid, then it raises even more questions. Who can you sue? If the CDS never pays off, why is it there in the first place and how can it last in the long run? We're getting very near to the come-to-Jesus moment for the Credit Default Swap market. They may be able to kick the can for a few more days, but not much longer.

China's Prime Minister Wen Jiabao says China will consider working with the IMF to help shore up Europe's finances. It wasn't an actual loan, not even a pledge; and there will surely be some wort of concessions required. China had $3.18 trillion in foreign exchange reserves at the end of December, dwarfing the reserves of every other country and potentially giving it the financial firepower to make a significant contribution.

Fed Chairman Bernanke is speaking before the House Committee on the Budget and it doesn’t look like he has anything fresh. Repeating last week's assessments, Bernanke expects the pace of growth in the US economy to increase modestly while facing challenges, but Europe could pop open like a contagious pinata and infect the rest of the world, and then there are still problems with the US housing market. The Fed is busy pumping stimulus into the housing. Bernanke says we face the possibility of a sudden fiscal crisis unless Washington can call an armistice to political infighting and come to grips with the deficit.

Here's the quote: “Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.”

Allow me to translate from Fedspeak to standard English: We are screwed. The Republicans and Democrats couldn't even get through a meeting with the Fed chief without widely divergent ideas on the fed's mandates of employment and price stability. On one side of the aisle the argument is that inflation could be a problem; on the other side of the aisle is the argument that we need to have more jobs even if a side effect is inflation.

We're starting to learn more about the proposed settlement to resolve the mortgage abuses by the Big 5 Banksters. States will apparently have authority to punish firms that mistreat borrowers in the future. Under the settlement, which states are currently reviewing to decide whether they will join, the states and a separate "monitoring committee" will have the authority to go to court to enforce the terms and seek penalties of up to $5 million per violation.

A strong enforcement mechanism could help the states and the Obama administration sell the deal to the public. So far,  the negotiations have looked like a sweetheart deal for the banks. Negotiations between state and federal officials to resolve allegations of misconduct in servicing home loans have stretched into their second year. The delay is partly due to some states trying to extract a bigger settlement from the banks and to reserve their ability to file more mortgage-related suits in the future. Yesterday, Oregon joined in on a settlement. If California jumps on the bandwagon, then a deal is almost certain.

In exchange for up to $25 billion, much in the form of cutting mortgage debt for distressed homeowners, the banks will resolve state and federal lawsuits about servicing misconduct and faulty foreclosures, and some lawsuits about how they made the loans. So the banks made bad loans, fraudulent loans, predatory loans, and now they need to go in and clean up the mess by offering coupons for reasonable mortgage loans. It seems like a very lenient deal to me. I mean, what's the difference between a predator on the schoolyard and a predator in your back yard?  Laws were broken. Now the only question is whether we have the fortitude to enforce the law. And if we don’t have the fortitutde to enforce laws that were broken why should we believe we will have fortitude in the future.

Have you been paying attention to the price of oil? It has moved slightly below $100. Maybe you thought it would go up because of all the concern about Iran and the threats of sanctions against Iranian oil, and the threats by Iran to shut down the Strait of Hormuz. And, yes, it could still turn ugly but for the moment there is only a small chance of significant supply disruptions this summer. The oil market should be very well supplied this summer – even better than now. Volumes from Iraq should be up significantly, Libya is doing very well and Saudi Arabia will increase production to compensate for some of the lost Iranian barrels. At least one million barrels per day could be entering the markets from these three producers alone, possibly double the volume of Iranian exports lost. This doesn't mean prices can't go up from here, but it means there is a low probability of sharp price spikes.

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