March, Thursday 01, 2012

DOW +28 = 12,980
SPX + 8 = 1374
NAS + 22 = 2988
10 YR YLD +.06 = 2.04

OIL + 1.53 = 108.60
GOLD + 21.00 = 1718.70
SILV + .87 = 35.61
PLAT + 22.00 = 1705.00

So, a big question lingering from yesterday was, what happened to gold? And there probably isn't a good answer. The first temptation is to blame Fed Chairman Bernanke, but if you own gold, really, we should all be thanking Bernanke; no one has done more for the price of gold than Helicopter Ben. Here's the thinking. Quantitative Easing, or QE and the sequel, QE2, and the next sequel, Operation Twist, swapping short-term bonds for long-term bonds; these are all just different names for printing money out of thin air, and that is generally bullish for gold prices. Yesterday, Bernanke is talking to Congress and he acts like there isn't a QE3, even though we know the Fed is buying mortgage backed securities, even though the ECB is throwing currency out of helicopters over in Europe. Remember, yesterday the ECB handed out 530-billion-euro in the Long Term Refinance Operation. So even though it isn't officially QE3, there is still $700 billion dollars worth of money injected into the global financial system, and this isn't enough to satisfy the wags, and they go running for the exits, and that triggers sell orders, and the next thing you know, gold is down 4%; which in the grand scheme of things, 4% is not much. Stay calm. Pay attention but stay calm. If we see some consolidation and a slow but steady retrenchment of the position, then all is well. Remember, gold prices had been moving higher at a fast clip; up 10%  year to date heading into Bernanke's testimony. And then following the drop, we've see prices inching back, indicating that investors used the dip as an excuse to get back into gold. I can't see that the move did any psychological damage. The trend is in place.

Never before have the world's central banks sent so much money sloshing through the global financial system. From slashing interest rates and buying government debt to dangling cheap loans to banks and taking on their risky assets, central banks have taken extraordinary steps since the 2008 financial crisis to nurse the international banking system back to health. Over the past 3 1/2 years, the central banks of the United States, Britain, Japan and the 17 countries that use the euro have pumped out so much money that their balance sheets have reached a combined $8.76 trillion. That's a record, by far. The infusion of money has eased borrowing costs and raised confidence in banks, governments and companies. Central banks are separate banking facilities and responsible for various elements of their country's economies, but we are now seeing that monetary policy is being coordinated worldwide.

In Europe, the central bank is pursuing a policy similar to the Fed's; the Bank of England is also using the Fed playbook. Earlier this month, the Bank of Japan strengthened its asset purchase program. Everyone is following the Federal Reserve's example of printing money to get out of this economic slump. Of course, injecting so much capital into the financial system devalues the money already there; this is the process of inflation and it leads to price inflation, and we are seeing some signs, and in the US there are estimates that the real rate of price inflation is around 9%. Meanwhile, in Europe, the fiscal response is a demand of more austerity, and the counter-balance to austerity is more monetary stimulus, at least that is the Euro-banks preferred counter-balance.

And so every now and then it is necessary for the Fed Chairman to talk down the risk-on, inflationary aspects of all this money printing. And so lately we've been hearing Bernanke talking about the improving economy and the possibility the Fed would soon tighten credit and stop the printing press. It almost sounds a little crazy to even suggest the Fed will stop injecting liquidity into the financial system. I really don't think the central bankers have a tool in their tool belt for draining money out of the system, and if they tried, the result would be deflationary, and if they drain money aggressively, the result would be a global depression, a severe global depression. That is the only possible exit from all this stimulus; there is no other exit plan. And so, for now the central bankers around the world try to control the inflationary aspects of stimulus, and one way is jawboning; talking down the markets, diminishing expectations.

Now, the next question you are probably asking right now is why is the stock market continuing to move higher and higher? If the Fed is jawboning that they won't be injecting liquidity into the market, why are stocks still moving higher? Today, Bloomberg reports the Bank of Israel is investing in US stocks, and so is the Swiss National Bank.

Now, let's turn our attention to Europe, where the International Swaps and Derivatives Association made the proclamation that  Greek debt did not default and credit default swaps will not be forced to pay for losses on Greek debt held by the European Central Bank. The ECB wants to avoid losses on its own Greek debt, and they are leaving private investors with a 70% haircut, possibly a little more. So, the question today was whether this constitutes the type of “subordination” for non-E.C.B. bondholders that would prompt a payout on Greek credit-default swaps. Subordination describes the process of relegating a creditor’s claim below that of others.

 Greece's debt restructuring deal is voluntary. But Athens has already approved a law with so-called Collective Action Clauses (CACs), which, if needed, allows it to impose the same conditions on all bondholders — willing or not. Essentially, this means that next week, we'll find out whether the ISDA considers the Greek default a credit event that will pay off for people who bought CDS insurance. What it is looking like is that the people that wrote the Credit Default Swaps were in the premium collection business, and not in the claims payment business; which is exactly what the insurance companies do.

In the financial crisis of 2008, banks feared that their trading partners might not be able to meet their obligations on derivatives and other financial arrangements. The situation set off a chain reaction that paralyzed global markets until governments and central banks provided enormous financial support.

To prevent a similar disaster from happening again, finance ministers in the United States and Europe committed in 2009 to move derivatives like credit-default swaps onto clearinghouses. These organizations, if they work properly, can sharply reduce the chances that a large bank will not make good on such contracts.

So, the idea that CDS won't have to pay, may seem like a calming event for the market, but the bigger question is can the market work and function without the risk controlling safety net of CDS, because if there is no payout, what's the point – you're not really controlling risk. The big question is whether this is going to kill the CDS market. If it does, it might actually be a good thing. At least then we don't have to worry about side bets crashing the financial system.

The nationwide price of gas is $3.73 a gallon; it is averaging $4.23 a gallon in California. So fill up in Quartzsite or just before you cross the river. Gas prices typically go up 20 cents a gallon as we head into the summer driving season. On Wednesday, the price of the benchmark American crude settled at $107.07 a barrel, up to 108.60 today. That is about four dollars higher than on the same day in 2008. As a rule of thumb, a penny a gallon is worth a bit over $1 billion in consumer purchasing power if it is maintained a whole year. A dollar more would be something in excess of $100 billion. Today, there was a report of a fire at a pipeline in Saudi Arabia. By the way, if you wanted to design a vulnerable infrastructure for energy, it would be pipelines. Saudi Arabia denied the explosion, despite the pictures on TV.  Prices spiked up to $110 a barrel for a short time.

Of course, the bigger question deals with tensions in the Middle East. Is war imminent? Both the US and UK military commands ask for more funding to increase the preparation and deployment of military arms and personnel in the Persian Gulf. The US has already added to the number of aircraft carriers it has stationed in the area, sending both the USS Abraham Lincoln and the USS Carl Vinson, along with a number of warplanes and tens of thousands of troops. The warships will be modified with antitank weapons and rapid fire machine guns, all specially designed for dealing with the Iranian fast attack boats. The Pentagon has also requested $82 million in order “to improve its largest conventional bunker-buster bomb, designed to take out bunkers like those used by Iran to protect its most sensitive nuclear development work.”

Right now, it is all in the saber rattling phase. Any actually attacks, and it really doesn’t matter who starts it, would result in a massive spike in oil prices.

Economic news today: the Institute for Supply Management' manufacturing index declined to 52.4% in February from 54.1% in January. A reading above 50 means the manufacturing sector is expanding but not real strong.

 Initial claims for unemployment benefits fell by 2,000 to a seasonally adjusted 351,000 in the week ended Feb. 25. So we have a modest improvement in hiring trends.

Personal income rose 0.3% in January after a 0.5% jump in December. Consumer spending edged up 0.2% after no movement at all in December. Wages and salaries grew 0.4% in January after a 0.4% advance in December. Last year, Americans saw their biggest gains in income since 2007, income was up 5.7%, and spending grew by 5.1%.

About 18.6 percent of Americans, almost one out of every five, told Gallup pollsters that they couldn't always afford to feed everyone in their family in 2011.

Goldman Sachs and Wells Fargo received  "Wells notices" from the Securities and Exchange Commission. A Wells notice indicates SEC staff plan to recommend that the agency take legal action and gives a recipient a chance to mount a defense.

Goldman received its Wells notice on Feb. 24, relating to a $1.3 billion subprime mortgage-backed securities deal in late 2006 that the bank underwrote. Goldman also received inquiries from governmental, regulatory bodies and self-regulatory entities concerning certain transactions Goldman entered with MF Global prior to the brokerage firm's bankruptcy filing. Wells Fargo said it is also facing investigations related to home loan origination practices. Last week, Bank of America filed its annual report which included information that it had "received a number of subpoenas" from regulators and other authorities about the bank's underwriting and issuance of mortgage-backed securities.

Remember a few months ago when Bank of America was trying to gouge customers, or I should say they were trying to improve revenue by gouging customers with a monthly fee to use their debit card. And remember how people were so angry that BofA finally had to back down form that idea. Bank of America pilot programs in Arizona, Georgia and Massachusetts now are experimenting with charging $6 to $9 a month for an “Essentials” account. Other account options being tested in those states carry monthly charges of $9, $12, $15 and $25 but give customers opportunities to avoid the payments by maintaining minimum balances, using a credit card or taking a mortgage with Bank of America, according to a memo distributed to employees. So, what is a Bank of America “Essentials” account? It is an account that has been labeled “Essentials”. Which is another way of saying it is a smaller account that BofA isn't making money on.

So, clearly we are seeing that the bigger a bank the less efficient the bank. In fact, every study of bank efficiency ever done in the US has found that bigger banks have HIGHER costs per dollar of assets once a certain size threshold is passed (and that is usually pretty low, between $1 and $5 billion in assets). That means there is no economic justification for mega banks, since smaller ones could do the job more cheaply.

Oh, and remember, back in 2008, when BofA nearly collapsed, and the taxpayers were forced to bail them out? I'm just saying, if they ever come back with their hands out, with a sad story about needing another bailout, I'm just saying – remember.