March, Friday 02, 2012

DOW – 2 = 12,977
SPX – 4 = 1369
NAS – 12 = 2976
10 YR YLD -.05 = 1.99%
OIL – 2.34 = 106.50
GOLD – 6.70 = 1712.00
SILV -.78 = 34.83
PLAT – 2.00 = 1703.00

Ben Bernanke has wrapped up his semiannual testimony on Capitol Hill. There was a total of 83 questions asked by the 61 members of the House Financial Services Committee, only seven questions were about Bernanke's actual job: monetary policy. Many, if not most, members used their 5 minutes for statements rather than questions. It's an election year. So, we can pretty much break down all the worthwhile comments from Bernanke in four categories, and cover it all in a couple of minutes:

Bernanke on QE

"If you look back at Quantitative Easing 2, so called, in November 2010, concerns at the time were that it would be a high inflationary environment, it would hurt the dollar, it would not have much effect on growth, etcetera.

"But since November 2010, we have had since then the QE2 and the so-called Operation Twist, we have had about 2-1/2 million jobs created, we have seen big gains in stock prices, we have seen big improvements in credit markets, the dollar is about flat, commodity prices excluding oil are not much changed, inflation is doing well in the sense that we are looking for about a 2 percent inflation rate this year.

"And one other point, in November 2010, we had some concerns about deflation, and I think we have sort of gotten rid of those and brought ourselves back to a more stable inflation environment as well."

As I look at that testimony, it doesn't seem Bernanke is saying “no” to QE3.

Bernanke on US banks' exposure to Euro-crisis -

"Our sense is that the direct exposures of U.S. banks to sovereign debt in Europe, particularly that of the weaker countries, is quite limited and is well hedged and that those hedges in turn are pretty good hedges - that the counterparties are diversified and financially strong. If you look at it more broadly, of course, our banks are exposed to European companies and banks, inevitably, they are major trading partners and major financial partners, and again they've been working hard to provide adequate hedges.

"It is very important to note that if there is a major financial problem in Europe, there will be so many different channels on which that will affect our financial system that I would not want to take too much comfort from that."

Bernanke on US growth-

"We have had growth now since mid-2009 and unemployment has come down, but of course, growth is not as strong and the improvement in the unemployment rate is not as quick as obviously we would like.

"The United States is on a unsustainable fiscal path looking out over the next couple of decades. If we continue along that path, eventually we will face a fiscal and financial crisis that will be very bad for growth and sustainability.

"The recovery is not yet complete, unemployment remains high, the rate of growth is modest.”

So, looking at the actual testimony, I'm not hearing any “green shoots” baloney from Bernanke, and I'm not hearing anything that says we won't see QE3.

I didn't see any quotes from Bernanke on the subject of mega banks prop trading in the commodities markets.  The big banks are big traders in the commodities markets, and to really control that market, they've built up billions of dollars worth of warehouses and storage tanks. This allows them the ability to hold commodities, to manipulate the supply side of the equation. For example, if there is a large inventory of oil, the bankers can set some oil aside in storage tanks, to take that oil off the market and push prices higher. The bankers do not refine oil, they don't process wheat into flour, they don't roast the coffee beans. They just manipulate the markets. It gives the banks visibility of the market in order to make far more successful proprietary trading decisions. It basically allows the banks to trade with material non-public information. The banks like the ability to trade on this insider information, and the crazy part is that it is considered legal.

Over the next 18 months, the Federal Reserve will have to decide whether to allow the banks to expand their commodity facilities or divest those facilities. Goldman and Morgan Stanley argue the right to own such assets is 'grandfathered' in from their lightly-regulated investment banking days, or that at least they should be allowed to retain them as "merchant banking" investments, kept segregated from the trading desks.

The combination of trading in commodities and also controlling the supplies of the commodities has a nasty history; you may remember the story of Enron.

Meanwhile, the Justice Department is conducting a criminal probe into whether the world's biggest banks manipulated a global benchmark rate that is at the heart of a wide range of loans and derivatives, from trillions of dollars of mortgages and bonds to interest rate swaps.

While the Justice Department's inquiry into the setting of the London interbank offered rate, or Libor, was known, the criminal aspect of the probe was not. Several major global banks, including Citigroup, HSBC Holdings, Royal Bank of Scotland and UBS AG, have disclosed that they have been approached by authorities investigating how Libor is set. No bank or trader has been criminally charged in the Libor probes. The probes have called into question whether firms can be trusted to set, with no regulatory oversight, a rate that is the basis for about $360 trillion of securities from floating-rate mortgages to commercial loans. So far, the investigation has discovered that staff responsible for submissions to the London interbank offered rate regularly discussed where to set the measure with traders sitting near them, interdealer brokers and counterparts at rival banks – and this has been confirmed by traders at three firms. Traders interviewed said there were no rules stopping talks between employees, or guidelines on how the rate should be set. The British Bankers’ Association, the London-based lobby group that publishes the rate, said it has never required banks to erect Chinese walls between those setting the rate and traders making bets on the future direction of the measure, leaving it up to the firms themselves and their regulators.

Earlier this week, an EU Commissioner said: “Given the number and the value of transactions in interest-rate derivatives, and the crucial role these products play in the management of risk, any confirmed manipulation of these interest rates would probably imply a very significant cost to the European economy.”  That's probably not an accurate assessment. The reality is that these risk management tools don't manage risk, they are simply tools to allow banks to skim profits without adding value. The further reality is that these risk management tools are actually at the core of the risks associated with most of these transactions.

Over the past few days, the Euro-zone has dealt with some big issues; mainly Greece accepted a bailout plan, the ISDA accepted plan that would not trigger a credit event that would trigger Credit Default Swaps to pay on a default. And so, today there was a summit in Brussels. And you're probably thinking it was lots of fun and waffles and beer and chocolates, but no.

Spain announced that it would not meet its deficit reduction targets for this year, it was abandoning the targets, and the country is slogging through a worsening recession. This isn't exactly a startling revelation, it was rather expected but Spain was hoping for some breathing room and the Germans apparently want no part of it.

I've been telling you the Euro-zone is following the Federal Reserve Playbook. Here's more proof: After receiving 530 billion-euro in free money from the ECB Long Term Refinance Operation, the Euro-banks immediately redeposited 300 billion-euro right back at the ECB. The bailout money goes to the banks, gets hoarded, doesn't make its way into the broader economy.

The Euro-crisis isn't over, not by a long shot. Nikolas Sarkozy was just chased into a French pub in Basque country and had to hide out there for several hours while the crowd raged outside. The mood in Europe is foul.

The quote of the day comes from US Treasury Secreatary, Tim Geithner, writing in the Murdoch Street Journal and calling for more regulation of the financial services industry, specifically the passage of Dodd Frank.

Geithner writes: “My wife occasionally looks up from the newspaper with bewilderment while reading another story about people in the financial world or their lobbyists complaining about Wall Street reform or claiming they didn't need the Troubled Asset Relief Program. She reminds me of the panicked calls she answered for me at home late at night or early in the morning in 2008 from the then-giants of our financial system.

We cannot afford to forget the lessons of the crisis and the damage it caused to millions of Americans. Amnesia is what causes financial crises. These reforms are worth fighting to preserve.”

I did a double-take today. Typically, the first Friday of each month we receive a report on jobs for the previous month. For some reason, the Department of Labor will release the February report on March 9, next Friday.

The new rule adopted on October would enforce spot-month position limits, or limits on the contracts closest to expiration, prohibiting traders from acquiring more than 25 percent of the deliverable supply for a given commodity. For other contracts, the agency will phase in position limits over time, once it gathers additional data.