Friday, March 30, 2012

March, Friday 30, 2012

DOW + 66 = 13,212
SPX + 5 = 1408
NAS – 3 = 3091
10 YR YLD +.06 = 2.22%
OIL +.15 = 102.93
GOLD + 7.30 = 1669.70
SILV +.02 = 32.38
PLAT + 11.00 = 1645.00

The S&P 500 gained 11.6 percent in the first quarter, its best start of the year since 1998 and the best overall quarter since the third quarter of 2009. The Nasdaq Composite gained 18.7%. The Dow Industrial average gained nearly 1,000 points, up 8.1% - the best first quarter point gain for the Dow - ever. Apple's share price increased 48%. Bank of America's share price increased 70%, if you had the stomach for it. Elsewhere Germany's Dax gained 17%; the Nikkei was up more than 19%; crude oil futures were up 4.2% and gold gained 6.7%. Pretty good, really.

If there's no real bad news and the Fed is pushing money into the economy, markets tend to go higher. For now, the economic news is pretty good. Consumer sentiment rebounded to its highest level in more than a year in March as optimism about jobs and income overcame higher prices at the gasoline pump. Meanwhile, personal spending jumped 0.8% in February as personal income edged up 0.2%; that might qualify as semi-good economic news. An increase in spending, 4 times greater than income growth, doesn't pencil out on an individual level but it is a positive for the broader economy, consumer spending accounts for about 70% of economic activity; higher spending tends to result in more and better business activity which can result in more jobs and more investment in businesses, leading to more jobs and more spending; a righteous circle of growth. The problem is incomes aren't keeping up. The personal savings rate dropped to 3.7%. If we can't get past that gap in incomes and spending, we'll have problems. An increase in inflation or higher energy prices could derail growth. The price index for personal consumption expenditures climbed 0.3%, marking the biggest increase in six months; and you know what's happening with the price at the pump. This economic growth is fragile and the righteous circle could be broken, but for now – the news is good.

Just a reminder – we have the monthly jobs report next Friday, and another reminder – the old market advice - “Get out in May and stay away. This is the idea that the best six months are November to May and the worst six months are May through October – and it has been an incredibly simple and powerful timing tool for years and years – not perfect but very good. So, I think this is another way of saying, I hope you were invested in the first quarter and I hope you're satisfied. I hope that you listened last October when I said I was cautiously bullish on the market and you concurred and acted. One good quarter is not a guarantee that the next quarter will be impressive. Markets don't typically race higher this fast. I'm not saying markets will collapse from here; they probably will not but there are any number of things that could go very bad very fast. Volatility will likely increase. I don't think the markets will keep this rapid pace. There will be people who will take money off the table because you can't take a loss by taking a profit – and that makes sense to me. And that's where I stand at the end of the quarter.

Euro-zone finance ministers agreed to increase the Euro-zone's bailout lending limit to $930 billion dollars. And while $930 billion may sound like a fair chunk of change, it is not the mother of all firewalls requested earlier in the week, and the banks are already saying it won't be enough to prevent further Euro-turmoil. Yields on Italian and Spanish debt have been rising recently and the effects of huge infusions of cheap money are already starting to wane. Greek technocrat prime minister Papademos says Greece might need another bailout. Europe has lent banks a trillion euros, which should provide a backstop over the next several quarters. That has taken a certain amount of systemic risk off the table, at least for now. There is still a risk. Today, the Spanish government announce a $36 billion dollar deficit reduction plan. There is a nationwide strike and protests. One million people took part in a rally in Madrid. That is huge.

Dilma Rousseff, Brazil's president, says western countries are causing a "monetary tsunami" by adopting aggressive expansionist policies such as low interest rates, which are making emerging economies less competitive globally.

Speaking at an emerging nations summit in New Delhi, Ms Rousseff said the developed countries have monetary policies that are helping the US and European economies at the cost of causing greater global trade imbalances.

"This (economic) crisis started in the developed world," Ms Rousseff said. "It will not be overcome simply through measures of austerity, fiscal consolidations and depreciation of the labour force, let alone through quantitative easing policies that have triggered what can only be described as a monetary tsunami, have led to a currency war and have introduced new and perverse forms of protectionism in the world."

Heads of state from the Brics, Brazil, Russia, India, China and South Africa, issued a post summit joint declaration which said: “Excessive liquidity from the aggressive policy actions taken by central banks to stabilise their domestic economies have been spilling over into emerging market economies, fostering excessive volatility in capital flows and commodity prices."

The group of five countries, which represent about 45 per cent of the world's population and, at $13.5 trillion, a quarter of the global economy, set up a working group to formally consider creating a common development bank for the grouping.

The first version of this story that ran in the Financial Times had the headline: Rouseff attacks west's crisis response. They later updated the headline to read: Brics nations threaten IMF funding.

Forbes has a pretty good analysis of the MF Global scandal. It's a tragedy in three parts. Part one. There was the conscious transferring of customer assets to meet a margin call by JP Morgan in London in what was intended to be an 'over the weekend' transaction with the funds replaced on Monday. Edith O'Brien is at the center of this, although it is almost inconceivable that she acted alone.

Part two. In part the failure of MF Global was caused by the refusal of certain parties to honor requests for wire transfers of legitimate funds. These parties almost certainly had insider knowledge of MF Global's finances, and may have even had a financial interest in MF Global's failure.

Part three. In hiding funds seized at the last hour from MF Global, and using influence to steer the bankruptcy to Chapter 11 versus the much more appropriate Chapter 7, certain parties, which may include some regulators most likely at the SEC and CFTC, and the hiding of the funds from investigators and the customers, it is quite possible that there was a conspiracy to obstruct justice.

And as in all scandals such as this, it is the obstruction of justice that can become the real giant killer. Everybody has the right to plead the Fifth Amendment, and we are all innocent and proven guilty. It's just strange to hear exceptionally well compensated professionals invoking plausible deniability. And this is why corporate America hates Sarbanes-Oxley, because it strikes to the heart of that plausible deniability, and says, 'you should know.' I'm afraid they probably do know and just don't care or think they're above the rules and the law. And this is why the system needs reforms and without the reforms it will be impossible to say we have a true recovery because we still have systemic rot.

There are some people, and I'm not naming names but you've probably run across someone in your lifetime, someone who was financially successful but was just a jerk. And maybe you thought that if your were every blessed with exceptional good fortune you would approach your circumstances and those around you with a certain humility and gratitude. Now I've seen some hard times in my life and you probably have as well, and I've tried to turn lemons into lemonade and in truth I could have done better but I could have done worse; and I've tried to bear my burdens with grace and a modicum of dignity. Now I would like to see if I am worthy of bearing great good fortune with a deserving demeanor. And it was in this light that last night, as I was driving home, I stopped to buy a MegaMillions ticket. Actually I bought 4 tickets. Buying 4 tickets didn't increase the odds by much, just scooched it up to one in 175-million-990-thousand -996. My chances are not 4 times greater. And when I arrived at my humble abode, I discovered my wife had purchased 5 tickets. You are about 176 times more likely to be struck by lightning in your lifetime. You are about 3.7 times more likely to be killed by fireworks this year. You are almost 9 times more likely to die from a TV falling on your head this year. But none of that stuff is nearly as much fun as winning the biggest lottery jackpot ever.

Annuity option: Provides annual payments over a 26-year period. For every $1,000,000 in the jackpot, you will receive approximately $38,500 per year before taxes, or around $15 mil per year. Cash option: A one-time, lump-sum payment that is equal to all the cash in the Mega Millions jackpot prize pool." Based on a $540 million jackpot, with the cash option being $389 million. Assuming a winner pays 35 percent of income tax, that comes to $252,850,000. Putting 3 percent of that jackpot into a super conservative portfolio—without touching the principal—would generate a princely $7,585,500 per year.

OK, those numbers were based on yesterday's estimate of a $540 million dollar jackpot. The jackpot has grown to $640 million. The lump sum option could be as high as $460 million or more.

So, what would you do with a $640 million dollar jackpot?

Good luck,
Sinclair Noe

Thursday, March 29, 2012

March, Thursday 29, 2012

DOW + 19 = 13,145
SPX – 2 = 1403
NAS – 9 = 3095
10 YR YLD -.04 = 2.16%
OIL +.52 =103.30
GOLD - .70 = 1662.40
SILV + .22 = 32.36
PLAT – 11.00 = 1631.00

Let's talk about your retirement. The numbers that are selected with the highest frequency are: 48, 36, 53, 12, 27, 31, 51, and 52 – that's for the first selection on the MegaMillions lottery ticket. The most common numbers for the Mega ball are 36, 9,7, 35, and 2. You're scrambling for a pencil. You can always wait about an hour and we'll post the audio archives of today's show at Of course, even if you pick those numbers, your probability of winning the lottery are beyond astronomical, and the crazy part is that for many people, even with the ridiculous odds, this is their best chance at retirement, or getting out of debt. The estimate is that the jackpot for tomorrow's drawing is up to about $550 million, so it's interesting, it's fun to fantasize. There is some entertainment value. I'm just suggesting that it might be a good idea to have a Plan B.

You know, personal discipline, a savings plan, an investment plan, solid information – it's not that difficult, just keep it tuned to MoneyRadio. It's not as fast as the lottery, but the odds are much better.

While winning the lottery would be sweet, there are some people who seem to have won the legal lottery. They collected get out of jail free cards and they get to keep their booty. Take for example the crew at MF Global.

While you might suspect that stealing $1.6 billion dollars from client accounts would result in legal difficulties for someone – no – you would be mistaken. Billions of dollars can be vaporized with impunity, and MF Global is the example du jour. Apparently, these get out of jail free cards have been passed out like candy.

The idea that forging signatures, that notarizing very important legal documents really improperly in thousands of cases -- maybe millions -- the idea that that is somehow is going to be allowed to go on with just sort of a penalty of some kind or a fine, the cost of doing business, and not prosecuted in the criminal courts. How the hell do they get away with it?

You have many small people, small fry mortgage fraudsters who are in jail. I mean we are talking about the people who were straw buyers for homes who defrauded banks. They are in jail for a reason: because they perpetrated a fraud. These banks whose employees were forging signatures should also have been prosecuted with vigor and they were not. They were simply allowed to negotiate their way out of trouble and negotiate their way with shareholders money. They are not paying it out of their own executives' pockets; they are paying it out of the shareholders' pockets. There really is no accountability here whatsoever.

There were 1,100 criminal referrals in the S&L crisis and there were 839 convictions. Who is in jail for the thefts of the past 4 years?

The multi-state mortgage settlement allows the banks to continue with their pattern of foreclosure fraud. The servicing standards are supposed to make the banks clean up their acts but they are worthless if they are unenforceable. One thing the mortgage settlement did was to give the banks a get out of jail free card for years of fraud. The settlement includes liability releases covering fraudulent conduct up through February 8, 2012 – after that the bankers could be sued for all the fraud they're committing now and will win the future – at least that's the story in theory. Don't hold you're breath waiting for the prosecutions.

And the reason this remains relevant is because we had it shoved in our face as part of Ben Bernanke's Federal Reserve Propaganda Lecture Series Part 3. Bernanke claims that the Federal Reserve averted a second Great Depression by bailing out the big Wall Street banks during the financial crisis. (say hallelujah and praise be to central banking) and he says that if a similar financial crisis comes along that the correct “policy response” will be to do the exact same thing again.

We're seeing it play out in Europe. The issue which dominates the European debate says that choking discretionary net public spending combined with vigorous “structural reforms” such as ransacking wages and working conditions will promote growth. Call it the Best Buy recovery program. Let's see how that works out. Cutting waste is one thing but I'm not sure how closing stores increases sales.

Anyway, Part 4 of the lecture series wrapped up today. Bernanke claimed that in the period after World War II, "many central banks began to view financial stability as kind of a junior partner to monetary policy—it was not as important," Mr. Bernanke said. "It's now clear that maintaining financial stability is just as important a responsibility as monetary and economic stability, and indeed this is very much a return to where the Fed came from in the beginning." Yep, monetary stability. Since 1913, the Fed has managed to destroy 97% of the value of a dollar. The only thing stable has been the decline.

Now, in case you forgot, the policy response, which is currently being repeated in Europe and might be repeated domestically – the great plan was to bailout the big banks. Not all the banks. The little banks could fail, and hundreds were allowed to fail, but the big, “systemically  important financial institutions” got bailed out. And so now we have systemically important financial institutions that are bigger than ever, and represent an even bigger threat if they face failure. Back in 1970, the 5 biggest U.S. banks held 17 percent of all U.S. banking industry assets. Today, the 5 biggest U.S. banks hold 52 percent of all U.S. banking industry assets.

And according to the Comptroller of the Currency, the mega banks are more dangerous than ever. JPMorgan Chase has more than $70 trillion in exposure to derivatives, Citibank has more than $52 trillion in exposure, and Bank of America has more than $50 trillion in derivatives exposure. Of course, they've hedged these trades, so it's not like those 3 banks could really lose $172 trillion dollars. It's probably not even 2 or 3 percent that could actually be lost, probably less than 1 percent, because of the hedges, which are held by the other mega-banks. But, hey, the odds that something could go dramatically wrong are probably like 100-million to one. I mean the odds are almost as bad as your chances of winning the lottery, which are 176-million to one. Here is the crazy part – someone is going to win the lottery, maybe not this week, maybe not next week, but somebody is going to win the lottery.

For the vast majority of Americans, we'll be left holding worthless paper. The mega-banks are doing fine but the American people are not in better financial condition. National debt has increased from 10 trillion to more than $15 trillion dollars. State and local governments are facing massive debt. The American people aren't better off. The bankers are doing fine. Bernanke can create money out of thin air and loan it to his friends and that money can buy get out of jail free cards. And so buy a lottery ticket. Good luck

And don't worry, everything is under control. The global financial system probably won't meltdown, again.

There was a very good article by ChrisMartenson yesterday. Let me quote, because there's a great line. The article is titled “Gold is Manipulated but that's Okay.”

The price of gold is being actively managed by central planners and their proxies. The main culprit here appears to be the US authorities, as the manipulation is most apparent in the US open gold market. For the most part, this 'management' has resulted in letting the price of gold rise, but not too much, or too quickly.

The price of gold has always been an object of interest for governments and central bankers. The reason is simple enough to understand: Gold is an objective measure of the degree to which fiat money is being managed well or managed poorly.
As such, whenever paper money is being governed poorly, the price of gold becomes an important barometer. And this is why the actual price of gold is a strong candidate to be 'managed.' Or 'influenced'. Or 'manipulated'. Whichever word you prefer, they all convey the same intent.”
The thank you is because it provides a cheap entry point to pick up physical metals.

The U.S. economy grew at an annual rate of 3 percent in the final three months of 2011, the best pace in a year and a half. Growth has probably slowed to 2 percent or less in the current January-March quarter. Inventory building was a key driver of growth in the October-December quarter. Even though businesses are still replenishing their shelves, the pace has likely slowed. That has likely slowed growth this quarter. Businesses are also investing less in machinery and equipment this year after a tax credit expired at the end of last year. One bright spot for the economy is that hiring has picked up. The economy has added an average of 245,000 jobs per month from December through February. The Labor Department said that the number of people seeking unemployment benefits fell to 359,000 last week, its lowest level in four years.

The communication breakdown that blocked trading on parts of the BATS exchange for more than an hour has been seen in at least 110 instances across the nation’s 13 stock exchanges over the last year. That number has gone up every year since 2007. In one instance in January, BATS said it was unable to trade with the New York Stock Exchange for nearly 30 minutes. Meanwhile, exchanges have halted trading in company shares after sudden spikes or falls, as happened Friday with Apple, at least 265 times over the last year — more than one for every day of trading. These circuit breakers kick in after stocks experience 10 percent swings in a short period of time and can be caused by a technical error or waves of electronic trading on news developments.

If you haven’t followed it, Credit Suisse issued this exchange-traded note called TVIX that was a 2x levered bet on the VIX. They suspended new issuance about a month ago due to position limits, and people were just so damn excited to own the thing that its price crept up to 189% of its fair value, where “fair value” is a reasonably easily measurable thing based on the formula in the TVIX prospectus. Then last week Credit Suisse announced that they would be creating more units, and the price plummeted to and then through fair value, which is what you’d expect to happen. Except that it started plummeting a few hours before that announcement, which is a little suspicious. Some of these ETFs are getting somewhat esoteric, and it is real easy to think it is doing one thing, when it really isn't. I'm just saying, tread carefully. Or don't worry about volatility, just buy a lottery ticket.

Sinclair Noe

Wednesday, March 28, 2012

March, Wednesday 28, 2012

DOW – 71 = 13,126
SPX – 6 = 1405
NAS – 15 = 3104
10 YR YLD + .01 = 2.20%
OIL +.13 = 105.54
GOLD – 18.50 = 1663.10
SILV - .55 = 32.14
PLAT – 16.00 = 1640.00

Oil prices fell. The United States, France and Britain are in talks about possibly releasing strategic petroleum reserves. The problem is not a lack of supply. Not now anyway. Maybe tomorrow, maybe next week, maybe this summer; not today.

The economy faces multiple risks: the Greeks might vote the technocrats out of office and tell the ECB to go to hell; Spain might default next and it would require a firewall that is bigger than the mother of all firewalls to avoid a cascading default; the Euro-banks hold twice as much toxic waste as their American counterparts, and their American counterparts still have extremely significant exposure to the Euro-trash; Japan's debt to GDP makes the southern European countries look fiscally conservative – oh yeah the country is radioactive; China might slow down and the slowdown might be worse than expected. And then there are a few problems here in the US: unemployment at 8.3% (or is that inflation?), unemployment around 18% if you count all the invisible people that nobody wants to count, and the banks are still behaving badly and with impunity. I get the feeling that something is going to break. I don't know what, but something is just going to stop working. Maybe it will be a breakdown in the electric grid, maybe the cyber-hackers will decide they want to close the virtual world for a while, maybe a big bank will fold and there will be a run on the bank – didn't Bernanke tell us that the modern banking system was like something out of the movie It's a Wonderful Life. How about a spike in oil prices?

I'm hearing that this might be the most serious global risk of the moment, but I'm not sure I believe it. The price of Brent crude recently peaked at $125 a barrel; the nationwide average for a gallon of gas is approaching $4. The reason is fear. The last 3 global recessions – looking prior to the small “d” depression of 2008 – the recessions started with a shock in the Middle East that led to a sharp spike in oil prices. (1973 Yom Kippur War, 1979 Iranian Revolution, 1990 Iraq invasion of Kuwait). And even in the summer of 2008 we saw oil peak out at $145 a barrel.

Israel seems to be ready to bomb Iran. The US would like to hold off, at least until after the election, but there's an election in Israel, and there's an election this year in Iran. If the Strait of Hormuz is shut down for 2 days, the price of oil would likely jump by $40 to $50 dollars. Anything more than 2 days and we'll see $200 or even $250 a barrel, and it will be quick. And then everything will stop.

And that's not the worst case scenario but it's pretty close. If the drums of war grow louder this summer, prices will rise and that will impede economic progress. And for Iran, the way to compensate for sanctions is with higher prices; they can sell less be for a higher price. It turns out that saber rattling is good for the bottom line.

And the basic question you have to ask is why we are still so dependent on foreign oil? Why do we allow our economy to be based on a commodity that is largely controlled by Iranian Ayatollahs? Are we incredibly stupid? Or is someone making money off this deal at our expense?

There is way too much speculation in the oil business. The mere possibility of $200 dollar oil puts an unnatural price on the market. It distorts the market. It doesn't reflect risk, it creates risk. So, I'm not really buying into the whole idea of a risk of war pushing prices. Iran is not completely stupid, in fact they are quite a bit smarter than most Americans would care to admit. But for the oil traders, and the oil companies, and the speculators – fear means money.

You buy a gallon of gas, you burn it up and you come back the next day. It would make too much sense to go to a green economy. The problem is that you would take the oil companies, and the oil traders, and the speculators, and the Iranians, and all these other interests – you would take them out of the picture. And that's not going to happen, not anytime soon, and the reason – well just follow the money.

Yep, I keep having this feeling that something is going to break down; we never really fixed the systemic problems that sprang forth in 2008, and so there is a nagging feeling that something is just going to stop; but until then, what we've seen and continue to see is that the economy is clawing back.

I can give you a list of companies that just hit fresh highs: Apple, IBM, Fortune Brands, JB Hunt Transport, Starbucks. Looking for a good dividend; check out JNJ or Microsoft or ADP. There is money to be made, but it isn't easy. It requires you to take a chance. It requires that you buy something. There are lots of people selling fear.

- Sinclair Noe

March, Tuesday 27, 2012

DOW – 43 = 13, 197
SPX – 3 = 1412
NAS – 2 = 3120
10 YR YLD -.06 = 2.19%
OIL - .52 = 106.81
GOLD – 9.30 = 1681.60
SILV -.25 = 32.69
PLAT + 6.00 = 1656.00

A flat trading day on Wall Street; weakness in financials compared to a little strength in tech; the weakness carried the day.

The Standard & Poor's/Case-Shiller index of 20 American cities fell 0.8% from December to January and 3.8% from January 2011. Sixteen cities tracked by the index posted declines. Eight cities saw average home prices hit new lows. Home values fell for the fifth-straight month and prices dropped to their lowest levels since 2003. In January, Washington, Miami and Phoenix were the only metro areas that posted monthly gains. Robert Shiller, a professor of economics at Yale University and co-creator of the Standard & Poor's/Case-Shiller Index, says the market has "a chance" of rebounding even though the downward momentum in the real estate market has accelerated in the past five years. Shiller says the problems facing mortgage giants Fannie Mae and Freddie Mac must be resolved before housing can bottom. There is speculation that Fannie and Freddie could sell bundles of foreclosed homes to hedge funds; both Fannie and Freddie are reportedly leaning toward principal mortgage write-downs and loan forgiveness, but don't hold your breath on that.

Of course you don't make your home buying decisions based on national averages. All real estate is local. There have been several calls of a housing bottom in the past few weeks. Maybe, maybe not; part of that is local. There is a better chance of a bottom in Phoenix than in Atlanta. A market bottoming out never feels like a buying opportunity, not unless you like the feeling of having your stomach twisted in knows, and certainly not with 28% of all mortgaged homes underwater, and certainly not with the prospect of rising foreclosures. Still, everybody has to live somewhere.

The nationwide average for a gallon of gas is $3.99, lots more in some places, like the gas station where you just filled up. And when you watch the numbers spinning at the pump, how does it make you feel? The Conference Board's monthly consumer confidence index slipped to 70.2 from 71.6 in February, mainly because of the rising gas prices. With more of their money spilling into their gas tanks, consumers may be less likely to spend.

The head of the Organization for Economic Cooperation and Development says the Euro-zone is not out of the woods despite signs of steadiness in the financial markets, and keeping the Euro-zone financially stable will require a bailout fund of at least $1.3 trillion -- "the mother of all firewalls". At least it will be the mother of all firewalls until the flames lap over the top. OECD Secretary-General Angel Gurria says the  current $664-billion commitments to the buffer funds won’t do the trick. Debt levels in Europe remain high, banks are vulnerable, austerity programs are difficult to implement and are likely to reduce economic output, add in high unemployment and weak consumer and investor confidence. Some nations' risk spreads are at unsustainable levels and "have showed signs of creeping up in the last few days." Gurria says a bigger bailout fund would give governments the breathing room to focus on jump-starting growth and competitiveness. So far, the proposals from the World Bank, the IMF, and the OECD haven't been so great at jump-starting anything.

Spain will present a new budget on Friday; the prime minister promises it will be very very austere. Spain is facing soaring unemployment and rising borrowing costs, and the prospect of a lost decade of growth. Spain has public debt at almost 70 percent of gross domestic product and one of the highest levels of private debt in the euro zone. The economy is more than twice the size of Ireland Greece and Portugal combined, and is seen as too large for the euro zone to let it fail. Spanish government borrowing costs have fallen from 14-year highs reached last year but with economic fears resurfacing the risk premium over German bonds has started to rise again.

Meanwhile, the Spanish private sector is deleveraging at the same time the government is pushing austerity. If someone thinks Spain is going to grow its way out of the economic problems, I'm not seeing how that can happen. There is a risk that eventually Spain will need to seek a bailout to borrow at reasonable rates of interest. And so, the mother of all firewalls might not be enough.

The Federal Trade Commission is calling for a new law that would allow people to review the vast amounts of information being collected about them as the Internet, smartphones and other technology make it easier to create digital dossiers of just about anyone's life.

The proposal comes a month after the Obama administration issued a proposed "Consumer Privacy Bill of Rights" and urged technology companies, consumer groups and others to work together on developing more safeguards.
The FTC said Congress needs to impose more controls over "data brokers" that profit from the collection and sale of files containing sensitive information that can affect people's ability to get a job or find a place to live. These data brokers range from publicly traded companies to a hodgepodge of small, regional services that may only have two or three employees.

An investigation by The Associated Press last year found that data brokers often store incorrect or outdated information, including criminal records. In some cases, people are denied jobs because data brokers incorrectly report them as convicted felons. Widespread complaints about inaccurate records triggered a class-action lawsuit that culminated in one database company, HireRight Solutions, to settle the case for $28.4 million last year.

The FTC is pushing for a law that would let consumers see their files and dispute personal data held by information brokers. It would be similar to current federal laws that guarantee consumers free access to their credit reports once a year.

Monday, March 26, 2012

March, Monday 26, 2012

DOW + 160 = 13,241
SPX + 19 = 1416
NAS + 54 = 3122
10 YR YLD +.01 = 2.24%
OIL + .08 = 107.11
GOLD + 27.10 = 1690.90
SILV +.60 = 32.94
PLAT + 1.36 = 22.00

Last week was the worst week of 2012 for the S&P 500. No big collapse last week, just a down week. The S&P 500 is still up 25% since the end of September. We have a nice bull market, likely a cyclical bull underway, and with good reason. We've seen some improvement in the economy; the unemployment rate has been moving lower; economic activity has picked up in the manufacturing and services sectors; central banks have been shoveling money out of helicopters from Athens to Rome to New York. C'est si bon! Let the good times roll.

Of course, you probably remember the almost total collapse and meltdown of the global financial system a few years back and you might be wondering what was done to correct the malinvestment; and the answer is nothing. Everything is still as screwed up as ever; nothing was fixed. And then you remember that even though we have this nice cyclical bull market, we are still in a secular bear, at least for now; and that means the recovery is perilous at best.

Fed chairman Ben Bernanke gave a speech today and he basically said we're not out of the woods just yet. Bernanke said he’s encouraged by the unemployment rate’s decline to 8.3 percent, continued accommodative monetary policy will be needed to make further progress. The drop in unemployment may reflect “a reversal of the unusually large layoffs that occurred” in 2008 and 2009, and this process may now be over.“A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed. Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force. ”  Reducing the jobless rate further will probably require a quicker expansion of business production and consumer demand, which “can be supported by continued accommodative policies.”

Now, let's look back to this cyclical bull market that has been pushing stocks higher since the end of September. Remember what happened back then? The Federal Reserve was announcing Operation Twist, which was really just another name for Quantitative Easing Part 3, and over in Europe the European Central Bank announced the LTRO, the Long Term Refinance Operations, which were at least partly backed by the Federal Reserve dollar swaps, which was really just another name for Quantitative Easing Part 3 with subtitles.

When we look in the Federal Reserve's toolbox we see that they have interest rates at zero, so they can't do much there – and that leaves Quantitative Easing. Notice that Bernanke said business production and consumer demand “can be supported by continued accommodative policies.”  Continued accommodative policies; this has been going on for quite some time. This is not a surprise..., and still, the markets just love to hear that the Fed is passing out free money.

The Federal Reserve faces a multi-year deleveraging process and the tools available to them are not up to the challenge. So, part of what they're doing is policy experimentation. For example, the housing market remains a mess and there is little structural improvement. Just a few years ago, we went through a process of easy credit and leverage of debt. People borrowed beyond their incomes, banks loaned without concern, and many companies got in on the credit entitlement gravy train.

Three years ago, the Fed intervened in the markets to try to avoid a disorderly implosion; which they accomplished in a fashion. They did not prevent the beginning of a deleveraging depression but they managed to put lipstick on the pig. They did this by putting their own balance sheet into the system to compensate for deleveraging. The result is that the Fed's balance sheet is now contaminated and they are now forced to continue QE or else the toxic assets on their own balance sheet are likely to implode.

What does this mean to you?
Well, let's do the math. The Dow Industrials have basically doubled in the past 3 years; the S&P 500 is up 25% since the end of September. Treasuries have seen a little slump in prices and the yield on the 10 year note popped to a little over 2.3% but the Fed will likely work to prevent yields moving to 2.5% - so flat, to slightly lower yields moving forward. The range is 1.9% to 2.5% on the ten year. Gold has doubled in the past 3 years and it is still in one of the nicest long term uptrends you will find. So, a trend in place is more likely to continue than it is to reverse.

Until it reverses.

Yes, there is fruit on the tree, ready to be plucked, but it is out on the limb. The structural problems have not been corrected. The failure to allow deleveraging in 2009 means that pressure has built up. The global financial system is as perilous as ever. The cyclical bull market could flop in a heartbeat. As always, in a deleveraging situation, there will be opportunities.

Europe’s banking sector holds 2½ times as many assets as the U.S. banking sector. It’s huge. And it’s in big trouble. Europe’s banking sector needs cash — mountains of cash. As a result, it will have to sell more than $1.8 trillion of assets, which will likely take a decade to work through. For perspective, it sold only $97 billion from 2003–10.

Banks can’t really hold bad debts for long. As soon as they report a big bad debt on a quarterly financial statement, some annoying things happen. It means they have to put aside more capital for this particular loan, which they hate to do, as it lowers profitability and requires a lot of paperwork. It can raise the attention of regulators, which banks hate. It can raise shareholder suspicions about lending practices, which banks hate. So the usual way to deal with bad debts is to clear ’em out as fast as possible. (Unless you’re swamped with bad debts in a full-blown crisis, in which case you try to bleed them out and buy time to earn your way out, and/or patch them up as best you can to keep up appearances while you pray for a miracle — or a bailout.)

What else do we know? Well, we know that the Fed is terrible when it comes to forecasting the economy, which is why they are now pushing on a string with their Zero Interest Rate Policy; the Fed was buying toxic assets when prices were still high, and now their balance sheet is contaminated with the garbage. They will push the markets higher, but you need to remain nimble.

Two weeks ago, the government disclosed that it is looking into bringing criminal cases against traders and banks that manipulated a key bank lending rate, called LIBOR. A source close to the case says the government's "may" will be dropped soon. Both Barclays and Deutsche Bank have disclosed that they have been the focus of investigations. Banks have suspended dozens of traders. Today, Credit Suisse announced that it was cooperating with regulators on the case. Traders at UBS reportedly are already working with the government on its investigation.

Consider what went on here. Banks took a rate that they artificially set themselves, and then went out and convinced municipalities and pension funds and others to bet against them on the rate. LIBOR rates were supposed to be set by bank treasurers reflecting what it cost them to borrow from other banks. But reportedly a number of bank treasurers consulted traders when deciding what rate to report to the organization in London that collected and posted the rates.

What's more, traders at a number of banks were given access to the systems that bank officials used to enter the rate so they could overwrite the rates with ones that would better suit them. When the rate went the way Wall Street traders programed it to do, the banks cashed in millions.

The LIBOR rate also affects what many of us pay on our adjustable mortgage, home equity loans, car loans and others. But that is a little bit of an aside. The real, clear damage is in the contracts that banks set up with municipalities and others to bet on their own manipulated rates. Baltimore was sold as much as $300 million in LIBOR contracts. The city is the lead plaintiff in the class action against the banks. The suits say the LIBOR market is as large as $90 trillion. Though some have put the market of things the rates affects as much as $350 trillion in loans and derivatives. The suit says on average over the period it was manipulated the banks artificially held the LIBOR rate down by 0.87%. Go with the smaller figure and by back of the envelope math, you get that the banks could have made as much as $750 billion on their scheme, but it probably wasn't that much since banks were probably asked to long and short on the rate.

The case apparently doesn't involve Goldman Sachs but it is clear that we are all Muppets now.

Securities regulators accused Wells Fargo  of repeatedly ignoring its subpoenas for documents in connection with a probe into the bank's $60 billion sale of mortgage-backed securities. The Securities and Exchange Commission's filing in a San Francisco federal court seeks to compel the Wells Fargo to hand over documents. The SEC said it has issued several subpoenas since September.
The SEC is looking into whether Wells Fargo made "material misrepresentations or omitted material facts" in offerings it made to investors from September 2006 through early 2008.  The SEC charges that a due diligence review of a sampling of the securitized loans was done, and some of those loans would be dropped because they failed to meet the bank's underwriting standards. But the regulator said it "does not appear that Wells Fargo took any steps to address similar deficiencies in the remainder of the loans in the pool, which were securitized and sold to investors."
According to the SEC's Friday filing against Wells Fargo, the agency has issued six subpoenas to Wells Fargo since September 30.  Among the types of documents the SEC is seeking are loan underwriting guidelines, due diligence reports, drafts of prospectus supplements, staff training materials, preliminary loan data and 1,365 emails.
Just in case you're wondering why we still have structural and systemic problems with the economy. This is it.

The Center for Public Integrity, a Washington based nonprofit has ranked New Jersey as the state with the lowest corruption risk in the country. Apparently there is a fine but discernible line between “corruption risk” and “actual corruption”. When asked how New Jersey won the top ranking, an official from the Center said, “They made us an offer we couldn't refuse.” I'm not quite sure which metrics were used to determine corruption risk but I think it says something really, really bad about the other 49 states.

Friday, March 23, 2012

March, Friday 23, 2012

DOW + 34 = 13,080
SPX + 4 = 1397
NAS + 4 = 3067
10 YR YLD -.04 = 2.24%
OIL + 1.40 = 106.75
GOLD + 17.90 = 1663.80
SILV +.65 = 32.34
PLAT + 4.00 = 1630.00

Bloomberg News is reporting that Jon Corzine, the former CEO of MF Global gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in one of the brokerage's accounts with JPMorgan Chase in London. Back in December, Corzine testified that he never intended to misuse customer funds, he didn't know where the money went, and (quote) “I did not instruct anyone to lend customer funds to anyone.”  Now, investigators have an email from the firm's treasurer, three days before the company collapsed, and it says the transfer of funds was “Per JC's direct instructions.” Somebody is going to have to re-hypothecate their testimony.

Federal Reserve Chairman Ben Bernanke says the economy is operating below its level prior to the financial crisis. Bernanke said: “Consumer spending is not recovered, it's still quite weak relative to where it was before the crisis. In terms of debt and consumption and so on we're still way low relative to the patterns before.” I think what Bernanke is saying is: go shopping; go into debt if you don't have money but just buy something.

The US changed in the early 1980s from a model where rising worker wages were seen as the driver to growth and hence a focus of policy, to one where rising consumer debt levels and asset appreciation were used to substitute for stagnant incomes.

Profit margins for U.S. Corporations are at a record high 10.9%. The strange part is that record high profit margins are coming during the weakest economic recovery in post-war history. I'm trying to figure out what this implies. Low interest rates and peak earnings have been driving stock buybacks. When rates go up and earnings come down the stock market would likely take a hit. Still, I don't think the record high profit margins have been reflected in the stock market yet – there is likely a lag. Are record profit margins likely to result in an increase in hiring? Wouldn't an increase in hiring result in a decline in profit margins? Eventually we will see a decline in profit margins; what we need to watch is whether there is a corresponding increase in hiring or a decline in business activity.

A follow up to yesterday's letter from Dallas Federal Reserve President Fisher, talking about the need to break up the Too Big To Fail megabanks. I think Fisher is right; the big banks are dangerous; and the biggest and most dangerous is the Federal Reserve itself. Good advice Mr. Fisher.

The Federal Reserve Bank of Cleveland has developed an index of financial stress, the Cleveland Financial Stress Index, to track distress in the financial system as it is building. The CFSI will monitor the state of financial markets on a real time basis, and take appropriate regulatory or supervisory action to promote stability as necessary. Apparently the idea is to identify the risk of the correlated default of financial institutions. A correlated default could impair the availability of capital and liquidity in the financial system and result in a meltdown or something else that is ugly. Now, there is more than a little debate about what constitutes financial stress. I think it might be more than a little arrogant for the Cleveland Fed to think they can accurately monitor systemic financial stress in real time, much less correct a potential default on the fly. If you know that gambling can lead to a meltdown of the global financial system wouldn't it be smarter to just say the banks need to stop gambling?

St. Louis Fed President James Bullard says the recent pause in ultra-easy monetary policy is a good time to take stock of whether it is at a "turning point."  Bullard claims inflation has risen despite less-than-stellar economic growth, suggesting that the Fed may not have as much leeway to ease without sparking unwanted price rises as many may think. Of course, part of Bullard's assumption is that there has been a meaningful pause in the Fed's policy of ultra-easy money.  Bullard went on to say: "The hard-learned lesson of the 1970s was that if the inflation genie is let out of the bottle, it can be extremely difficult to get it back into the bottle."

When do we start worrying about inflation? The Federal Reserve keeps printing money. Won't that eventually create inflation and cause all kinds of problems? Won't inflation eventually crush the stock market? Actually, over the past 50 years, stocks do well in an inflationary environment – up to a point. And that point is 5%. When  inflation reaches 5% in the U.S., stocks fall. Why 5%? I don't know but maybe it's because the Federal Reserve feels compelled to slam on the brakes at 5%; maybe it's because politicians start wearing buttons that say Whip Inflation Now.  

The Commerce Department says new home sales fell 1.6% from January to February; still; the numbers are up 11.4% from February a year ago. The median sales price of new homes sold last month rose more than 8 percent to $233,700 — the highest mark in eight months. The average sales price was $267,000. The $64k question for the US economy is determining what’s been real and what’s been due to unusual weather in terms of generating economic activity over the past few months.

In 1950, 4.6% of the American economy was devoted to health care. Today that number stands at 17.9%, or $2.6 trillion dollars. The Affordable Care Act, also known as ObamaCare, turns two years old today. Two years ago, a consensus of surveys found 50.4% of Americans opposed the Act; as of today, 50.5% of American oppose the Act. Happy Birthday. Implementation hasn't really happened yet. The Act includes 45 reforms and for now, most are voluntary, although they might soon become mandatory. Next week the Supreme Court will begin to hear arguments on the constitutionality of the individual mandate, which is just one part of the Act.  And in case you're wondering, one possibility is that the Supreme Court could strike down the individual mandate which requires all Americans to purchase insurance coverage but they could leave the rest of the Act in place, including the requirement that health plans accept all applicants.

The Labor Department reports Green Jobs accounted for 2.4% of the nation's total employment in 2010. There were 3.1 million green jobs in 2010, the vast majority of them in the private sector. The public sector listed 860,000 green jobs.

Bats Global Markets, Inc. is the newest stock on the Nasdaq, with the ticker symbol BATS; I would like to say it is trading under the ticker BATS, but there has been a problem. BATS stands for Better Alternative Trading System, kind of an electronic trading platform that runs parallel to the major exchanges. The company was founded 7 years ago by a high frequency trader who wanted to hold down transaction costs and expand hours of trading. Last month, the BATS platform accounted for 10.9% of all equity trades in the country. They had their initial public offering, or IPO; the stock opened at $16 per share and the price drifted lower to about $15.25, and then – boom – the price dropped to under a penny per share. Trading was halted. And then it got worse; a single 100 share trade of Apple on the BATS platform traded at a 10% discount – for no apparent reason – and that  flash crash produced a 5 minute halt in all trading of Apple stock. It was one of the ugliest IPO's in a long time, but wait, there's more!

Federal securities regulators are examining whether some sophisticated, rapid-fire trading firms have used their close links to computerized stock exchanges to gain an unfair advantage over other investors. The investigation is being handled by the enforcement staff of the Securities and Exchange Commission, and it's focusing on the computer-driven trading platforms of exchanges, including BATS Global Markets Inc.

By the way, high frequency trading accounted for 55% of all the stock-trading volume last year.

Bank of America is testing a new “Mortgage to Lease” program in Nevada, Arizona, and New York. BofA will basically foreclose on a homeowner and then offer to let them stay in the home by renting for less than the old mortgage for up to 3 years. The program is for people who have fallen behind on their mortgage payments and the house must be underwater. I just don't get this deal. Why not give the homeowners a loan modification? Somebody will eventually buy the house at the current market value – why not the homeowners? What is the sales pitch for this program - “We just foreclosed on you. Would you like to rent a house from us now?” or is it “You're not good enough for a mortgage, but we'll stoop down to collect your rent check.” I just don't get it.

The Murdoch Street Journal article on the Mortgage to Lease Program may have revealed the motivation for the test program: Foreclosures have slowed sharply in some states amid heavy scrutiny of allegedly forged paperwork used by processing firms. Banks completed 860,000 foreclosures last year, down from 1.1 million in 2010, according to CoreLogic Inc.
One of the outcomes of the ‘robo-signing’ scandal is that it is more difficult to foreclose. It’s more worthwhile for banks to pursue alternatives.

Charles Schwab today released new data showing that active traders are turning more bullish and plan to invest most of their tax refunds in the stock market. The latest Charles Schwab Active Trader Sentiment Survey polled 421 individual investors who trade frequently (at least 36 times per year) and found 51 percent of respondents now consider themselves bullish, the highest level seen since Schwab began tracking active trader sentiment in April 2008 and compared to just 25 percent in October 2011. Only 14 percent say they are currently bearish. I hope you realize that this is a contrary indicator; that this really bearish. Although not necessarily today.

The bottom line: The strength of this market — or at least, the Fed’s liquidity beneath it — deserves the benefit of the doubt. You know the mantra: a trend in place is more likely to continue than it is to reverse.

Goldman Sachs Portfolio Strategy Research put out a 40 page report this week, with a cutesy title: “The Long Good Buy; the Case for Equities” and it essentially says stocks are impossibly cheap relative to bonds and the market is unrealistically negative, and you should be really, really bullish. Maybe Goldman is right but the S&P just had its worst week of the year and bonds bounced back quite nicely from their death bed.

Many of the recent moves in the market have been connected to the Euro-crisis, and the immediate situation is that the Eurozone did not implode with an orderly default of Greek debt. Still, they aren't out of the woods. Output is shrinking, unemployment is rising, and austerity measures aren't helping. After shrinking in the fourth quarter of 2011, the euro-zone economy showed early signs of life in 2012, but new data indicates further contraction in the first quarter, and the odds that the downturn stretches into the second quarter are rising sharply. Spain's 10-year bond yield, the best real-time gauge of how private investors view Spain’s prospects, jumped to 5.5 percent from 4.9 percent. The question for countries like Spain is, What will restart growth? The Spanish Prime Minister will present the government's 2012 budget next week; it's based on a forecast that the economy will contract 1.7% this year; that's probably overly-optimistic. Spain already declared they won't meet the EU's original deficit target of 4.4% of GDP, they'll aim for 5.3% instead. One big move would be to bring down unemployment which is hovering around 25%.

The Center for Public Integrity, a Washington based nonprofit has ranked New Jersey as the state with the lowest corruption risk in the country. Apparently there is a fine but discernible line between “corruption risk” and “actual corruption”. When asked how New Jersey won the top ranking, an official from the Center said, “They made us an offer we couldn't refuse.” I'm not quite sure which metrics were used to determine corruption risk but I think it says something really, really bad about the other 49 states.