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.