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