Monday, April 30, 2012

Monday, April 30, 2012 - The Euro is Actually Kind of Important - Corporate Campaign Bribery - OWS Comes out of Hibernation

DOW – 14 = 13,213
SPX – 5 = 1397
NAS – 22 = 3046
10 YR YLD - .02 = 1.91%
OIL -.07 = 104.80
GOLD + 1.50 = 1665.30
SILV - .26 = 31.11
PLAT – 4.00 = 1574.00

A sharp drop in an index of Midwestern manufacturing and a slowdown in U.S. consumer spending last month added to worries that the U.S. economy is slowing down. Weaker earnings reports from health insurer Humana and the owner of the New York Stock Exchange, NYSE Euronext. The losses were broad. Nine of the ten industry groups in the S&P 500 fell, led by materials. Only telecoms rose.

The Spanish government said that country’s economy shrank 0.3 percent in the first three months of the year, the second straight quarter of contraction.
Spain is the fourth-largest economy among the 17 countries that use the euro. The worry is that Europe’s bailout funds won’t be big enough to rescue Spain if it needs help.
Ratings agency Standard & Poor’s downgraded Spain’s government debt to just three notches above junk Friday. Earlier today, S&P lowered its rating for 11 Spanish banks, which are loaded with bad debt from a collapsed housing market.
The good news is the euro hasn't collapse, at least not yet. Somehow, the countries of the European Union continue to overcome their varied self-interest and they seem to do just enough to avoid catastrophe, at least for now. One reason the Euro still exists is because it is more than a monetary union, it is also a political union on a continent that has been ravaged by a couple of World Wars; so there is some political value. Still, the euro is turning out to be an economic mess. The euro was supposed to make Europe economically vibrant and better able to compete with the United States and the rising Asian economies, and the vibrant emerging markets. Instead, the Euro-zone is the weak sister; begging for handouts from the BRICS and anywhere.

Looking solely at the economic wreckage, you’d think Europeans would be running from the monetary union in a mad panic. Three countries have already been bailed out and more could well be on the way. Those bailouts are potentially putting a big burden on taxpayers of the stronger nations, such as Germany and the Netherlands. The economies of Spain, Italy, Greece and Portugal are all expected to contract in 2012Even Germany and France might fall into recession. In truth, much of the Euro-zone is already in a depression. Unemployment in the euro zone is at a record high – more than three years after the financial crisis began. Nearly one in four people in Spain are jobless. Europe’s banking sector is on the verge of collapse, and would be gone already except for more than $2 trillion in bailouts from the ECB.
The euro can't be blamed for all of Europe's problems, but it is a big part. The monetary union bound diverse economies into economic lockstep, and as the economies diverged, the response was inappropriate; each country trying to protect their own position. Under previous ECB President Jean-Claude Trichet, the central bank, paranoid about inflation, took the insane step of raising its benchmark interest rate, suppressing growth and making the pain of adjustment in the weaker economies that much more severe. At times, the policies took on brutish overtones; Germany and others imposing technocratic rule over Greece and Italy. It is easy and incorrect to blame the divergence on a lack of moral discipline among the southern European states compared to a productive and disciplined workforce in the north. The reality is that the Greeks and Italians work more hours than the Germans and Greeks. This is not a morality play, at least not in the simplistic sense. The obsessive insistence on austerity is tanking growth throughout Europe, increasing unemployment and making deficit and debt targets harder to achieve. The mandates aren't working because the problems were misdiagnosed from the onset. Portugal has committed to the mandates and financial reform and it just isn't working.
The public is getting angry. The Dutch government recently collapsed. French President Nicolas Sarkozy is campaigning for re-elction by claiming his rival, Francoise Hollande would replicate Spain's disaster, if Sarkozy loses the election. Spain's pro-austerity government considers that rhetoric insulting. And for many people, the imposition of austerity must feel like an economic boot on the throat, and that brings up political wounds that have not yet healed.
There will be two elections this weekend, one in Greece, and the other in France. I don't know if anything specific will be resolved or dissolved. At some point, the question will be raised – what is the economy for, anyway? Who does it serve? If the economy is to build a path to peace and prosperity, then it is worthwhile. Otherwise, the sooner it ends, the better.

Meanwhile, back in the USSA, it's an election year, and we all know elections affect investments, just not how you might expect. We know that lobbyists are tremendously successful in lowering the tax bill for their respective industries, however, political involvement is a bad business decision – maybe. The more political contributions a company makes the worse their shares perform. That's the conclusion of a new study that found that for every $10,000 in direct political donations a company makes, its share price underperforms by 0.074% annually. While this may seem small, it works out to an average “cost” to shareholders of $1.33 million in market value a year for every 10 grand donated.

The study, published in Business and Politics examined corporate political donations from from 1991 to 2004, focusing on “the four main types” of political giving: political action committee (PAC) donations, donations by individuals affiliated with a company, soft money donations and donations to 527 Committees. Only 11% of all publicly traded US companies donated directly from company funds during the sample period—a total of 1,381 firms. That’s a good thing, too, at least as far as investors are concerned. A higher rate of political donation is associated with generally “worse corporate governance” in the classic definition of the term. In other words, companies that throw a lot of money at politics are more likely to have giant boards, CEOs who double as chairman, below-average institutional ownership and above-average CEO pay. There are a few ways to look at this; maybe they're bad managers who try to bribe their way out of difficult business conditions; maybe they're smart managers who overcome great difficulties by bribing their way out of difficult situations. One thing the study did find; they have more free cash flow but lower rates of R&D spending than their peers. So rather than build and grow and innovate they resort to bribery. They throw money at their problems instead of solving them, and they feel they are entitled to special privileges.

On June 30,2008, Morgan Stanley wrote the following report on Lehman Brothers: “Initiating at Overweight with a $31 price target. We think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing..., The firm's ability to weather near-term market headwinds and return to respectable ROE generation should help the shares trade closer to book value.”
Which was almost true, if you consider the book value was squat. By the way, the Morgan Stanley analyst who wrote this report is no longer writing analysis of stocks. He is now the Senior Policy Advisor at the US Treasury Department. No. I can't make this stuff up.
According to Nielsen ratings, from April 2011 to April 2012, CNBC's “Squawk Box” is down 16 percent in total viewers and 29 percent in the important 25-54 demographic bracket that advertisers buy. On Tuesday, the show drew its lowest numbers of the year in total viewers — 99,000. The breakfast show is in its third straight quarter of ratings decline, and the drop coincides with the addition of vaunted New York Times Dealbook editor and “Too Big to Fail” author Sorkin, 35, who started with “Squawk Box” on July 18.
According to the Nielsens, "Closing Bell" with Maria Bartiromo is also seeing its third straight quarter of decline. From April 2011 to April 2012, the show is down 16 percent in total viewers and 11 percent in the 25-54 demographic.
I can think of a few reasons.

Four New York City Council members sued the city today over the handling of Occupy Wall Street protestors, claiming the police used excessive force and should be subject to an outside monitor. The city and the Police Department made false arrests and violated the free-speech rights of protestors and journalists last year, 15 people including the council members said today in a complaint in Manhattan federal court. JPMorgan Chase, Brookfield Office Properties and Mayor Michael Bloomberg are among the defendants…“Through unlawful exercises of public power and misapplication of law, the NYPD has sought to prevent and has prevented plaintiffs and other citizens from exercising certain constitutional rights, including the right to public assembly and expressive speech.”
In New York, Occupy Wall Street will join scores of labor organizations observing May 1, traditionally recognized as International Workers’ Day. They plan marches from Union Square to Lower Manhattan and a “pop-up occupation” of Bryant Park on Sixth Avenue, across the street from Bank of America’s Corp.’s 55-story tower. “We call upon people to refrain from shopping, walk out of class, take the day off of work and other creative forms of resistance disrupting the status quo,” organizers said in an April 26 e-mail…Tomorrow, beginning at 8 a.m. in Bryant Park, scheduled events include teach-ins, art performances and a staging area for “direct action and civil disobedience,” such as bank blockades. Yea, that probably won't go over so great, but the party is starting again.

Friday, April 27, 2012 - Falling Down: US GDP, Spain, & Romania

DOW + 23 = 13,228
SPX + 3 = 1403
NAS + 18 = 3069
10 Yr yld -.03 = 1.93%
OIL +.26 = 104.81
GOLD  + 5.70 = 1663.80
SILV + .18 = 31.37
PLAT + 4.00 = 1579.00

This week was the best week in about one month for the major stock averages. Amazon climbed 15.7 percent to $226.85 and contributed half of Nasdaq's gain for the day. The S&P retail index rose 3.5 percent and hit an all-time high. Shares of Expedia, the Web-based travel provider, surged 23.5 percent to close at $40.31, after hitting a new high at $43 on record volume.

Growth in S&P 500 earnings rose to 7.2 percent this week from 3.2 percent at the start of the month. About 73 percent of the companies that have reported so far have beaten expectations. Earlier this week, a blowout quarter from Apple Inc gave the Nasdaq its best day of the year .  The S&P 500 is up 11.6 percent for the year. 

Pay no attention to the Commerce Department report behind the curtain of the Wall Street indices.  The report says the U.S. economy expanded at a 2.2 percent annual rate in the first quarter, far below expectations for growth of 2.5 percent. Growth of 2.2% is mediocre, but it’s worse than that once you peel away a few layers — about a fourth of the growth in gross domestic product was accounted for by a buildup in inventories, and half of it came from the building and selling of motor vehicles.

Strip away the inventory growth, and final sales in the economy increased 1.6%, the fourth quarter in the past five that was below 2%. Although all the headlines report on the GDP numbers, the number to watch is final sales, because that gauges demand for our products, not merely how much we made.
Consumers continue to outperform. Consumer spending rose at a 2.9% annual pace, the best in more than a year. Yet disposable incomes increased just 0.4%, the seventh quarter in a row in which spending growth outpaced income growth.

Business investment spending dropped 2.1%, the first decline since 2009. Spending by governments (federal, state and local) fell 3%, the sixth quarterly decline in a row. This austerity move just is not helping. Let’s not get carried away too much by the gloom and doom. The economy IS growing, even if it’s not as fast as we’d like. The economy has grown by nearly 7% since depths of the recession in 2009. Things are getting better, very, very, very slowly.
The largest US banks are accusing the Federal Reserve of attempting to misuse its new regulatory powers to shrink financial giants under the misguided belief that "big is bad."
Lobbying groups representing the big banks are pushing back against a set of proposed rules the Fed issued in December to more closely scrutinize the firms and rein in their risk taking after the 2007-2009 financial crisis.

In a letter sent Friday, the groups said the Fed is going too far and is proposing a set of policies on credit exposure and capital standards that go against the intent of the 2010 Dodd-Frank financial oversight law.
"We submit that an approach grounded in a 'too big' or 'big is bad' concept is not only contrary to Congress' intent but is misguided and detrimental to a sound, strong banking system and a strong economy," the groups wrote.

I remind you that the Volker Rule won’t go into effect until 2014, and most of Dodd-Frank has not been approved and likely won’t be. The Federal Reserve Bank of Dallas recently released a paper on Too Big To Fail. They concluded: “The too-big-to-fail institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism. It is imperative that we end TBTF. If allowed to remain unchecked, these entities will continue posing a clear and present danger to the U.S. economy.”

The Dallas Fed paper talks about the problems of Too-Big-To-Fail and says, “When competition declines, incentives often turn perverse, and self-interest can turn malevolent. That’s what happened in the years before the financial crisis.”

We are now assured that there will be no more bailouts. I’m not sure I believe it. I’m not sure the market believes it. I can assure you the banks do NOT believe it.

"The figures are terrible for everyone and terrible for the government ... Spain is in a crisis of huge proportions,", so says Spain’s Foreign Minister Jose Manuel Garcia-Margallo.

Standard and Poor's downgraded the government's debt by two notches. Unemployment shot up to 24 percent in the first quarter, one of the worst jobless figures in the developed world. Retail sales slumped for the twenty-first consecutive month as a recession cuts into consumer spending.
The downgrade spooked financial markets, raising the interest rate fellow euro zone struggler Italy was forced to pay to sell 10-year bonds at auction; 5.84% on the 10 year Italian notes. The yield was its highest since January as investors worried about the economic outlook in the bloc's indebted states. Italy's main banking association said the economy may contract by 1.4 percent this year, more than the government's 1.2 percent forecast. Spain's country risk, as measured by the spread on yields between Spanish and German benchmark government bonds, spiked before leveling off to around 420 basis points.

Romania's left-leaning opposition will try to form a new government after torpedoing the centre-right cabinet in a confidence vote today, the latest collapse of an austerity-minded ruling coalition in Europe. The defeat came hours before a confidence vote for another budget-cutting EU government, in the Czech Republic. Although the Czech Prime Minister survived, his unpopular cabinet will find it increasingly difficult to move forward.

The Dutch and the Romanian governments fall this week. The Czech almost fall. That’s just this week. 

Thursday, April 26, 2012

Thursday, April 26, 2012 -Home Sales Up, Expectations Up; Beard on Beard Violence; Spain Sinks; Draghi's Pretzel Logic; Big Banks Payday Tactics

DOW + 113 = 13,204
SPX + 9 = 1399
NAS + 20 = 3050
10 YR YLD -.02 = 1.96%
OIL - .50 = 104.05
GOLD + 12.80 = 1658.10
SILV + .38 = 31.19
PLAT + 16.00 = 1574.00

The number of people seeking U.S. unemployment benefits last week was 388,000; basically unchanged from a week earlier.

The National Association of Realtors’ pending-home-sales index rose 4.1% to 101.4 in March. March pending home sales were up 12.8% from year-ago levels. A sale is listed as pending when the contract has been signed but the transaction has not closed. Sales of existing homes during the first quarter were the strongest in five years, and the NAR said the pending home sales data suggests the second quarter will be equally good. Pending sales are now at a 23 month high. We told you there would be a push to stimulate the economy by way of the housing market. It probably started with Operation Twist, and the Fed buying mortgage backed securities, and then continued with the push for HARP 2.0.

We had a plethora of earnings reports today. Pulte Homes posted a smaller than expected loss. Citrix Software posted a better than expected profit. reported better than expected earnings even though profit dropped 35% from a year earlier.

Of the 51% of the S&P 500 companies that have reported first-quarter results so far, 72.4% have reported earnings above expectations, 11.8% reported earnings in line with expectations and 15.7% reported earnings below estimates. It's all about expectations.

Exxon Mobil reported a profit of $9.45 billion, or $2 a share, down from $10.65 billion, or $2.14 a share. Once upon a time Exxon earned more than any other corporation. Exxon increased its dividend yesterday for the 30th straight year, making its $10.7 billion annual distribution the largest in the world.

More Standard & Poor’s 500 Index companies are paying dividends than at any time since January 2000. Of the 500 companies, 401 now pay dividends, and the total payout this year will be about $279 billion. And even after paying record dividends, they'll still have some cash, having started the year with a stash of more than $1 trillion.

The Justice Department has closed an investigation into Google. You know the Google cars that ride around with a camera on the roof, recording anything that happens on the street; well, the Federal Communications Commission says that's a violation of the Wiretap Act. Google says they acted in good faith. The FCC says Google has admitted wrongdoing. Anyway, case is closed. Google will pay a fine of $25,000. And one, two, three; that is how long it took Google to earn the money to pay the fine.

Look for a check in the mail, or maybe just lower health insurance premiums. Health insurers will have to rebate $1.2 billion to consumers. The Obamacare health care overhaul limits health insurance companies to no more than 20 percent of the premium revenue insurers can keep for administrative costs and profits. UnitedHealth will have to pay $307 million. Aetna will pay $177 million, Blue Cross Blue Shield will have to rebate $250 million. A lobbyist for the health insurance industry, says this will not bring down the rising cost of health care. Umm, I think it just did.

Paul Krugman wrote an article in the New York Times Magazine called “Earth to Bernanke” arguing that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke’s comment in 2000 that the Bank of Japan should pursue faster inflation to escape deflation. “While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,” Krugman wrote. “Higher expected inflation would aid an economy” because it would persuade investors and businesses “that sitting on cash is a bad idea.”

Yesterday, Bernanke said,“The view of the committee is that that would be very reckless.” Bernanke said the main difference between Japan’s economic slump 15 years ago and the U.S. today is that Japan was in deflation and the world’s largest economy isn’t. And Bernanke said the US doesn’t face a deflation threat today, in part because the Fed expanded its balance sheet to $2.88 trillion through $2.3 trillion in bond purchases, plus the Fed has an anti-inflationary reputation to uphold. Bernanke then told reporters: "Who cares about the welfare of 305 million ordinary American citizens? It's only protecting the vast wealth of the handful of financiers that owns and controls the Fed that matters."

Krugman blogged that Bernanke’s answers were “disappointing stuff”. Someday this beard-on-beard violence will end. Someday.

A Commerce Department report tomorrow may show that US gross domestic product rose at a 2.5 percent annual rate in the first quarter after advancing 3 percent in the last quarter of 2011; that, in turn would fuel speculation that the Fed might need to consider more stimulus, which in turn would boost commodity prices. The Fed does more and the speculators speculate more. Oil rose to a three-week high. Oil in New York reached $110.55 on March 1, over concerns about Iranian sanctions and the possibility of supply disruptions. The Iranian premium seems to be coming out of the price. Israel’s Army Chief of General Staff Benny Gantz said Iran's leadership is “rational” and won’t seek to build a bomb. Go figure.

Freddie Mac just released the weekly report on mortgage rates. The 30-year fixed-rate mortgage averaged 3.88% for the week ending April 26, down from 3.9% last week and 4.78% a year ago. The mortgage has averaged below 4% since the beginning of the year, with the exception of one week. The record low for the mortgage is 3.87%, set in February. The 15-year fixed-rate mortgage averaged 3.12%, down from 3.13% last week and down 3.97% a year ago.

 U.K. bank Barclays PLC reported an improved performance at its revenue-generating investment banking although net profits fell at Deutsche Bank and Santander. The economic pain in Spain affected Banco Santander – The Spanish bank and the largest bank in the euro zone by stock market value. Santander had to set aside more than $4 billion-dollars to cover bad loans. Spanish unemployment is more than 23%, more than 50% among young people. There are harsh austerity measures; there are enormous protests in Madrid. Santander still managed to pull down more than 1.6-billion-euro in profits. The bankers always get paid.

Spain’s banks are still underestimating the losses they are holding and more losses to come on their huge loans to property developers and owners. Further losses on these ‘assets’ will mean yet more bad debts piling up in the banks. Those debts will be taken on by the national government and this will further corrode Spain’s ability to finance the debts it already has. This year Spain will have to refinance existing debts of 186 billion-euro and the rate of interest it will have to pay on all that debt is above what it currently pays. Spain is sinking. Late this afternoon, Standard & Poor's downgraded Spain's credit rating by two notches. S&P said the downgrade, from A to BBB+, "reflects our view of mounting risks to Spain's net general government debt as a share of GDP in light of the contracting economy." Spain is now rated at the same level as Ireland and Italy.

Mario Draghi, the president of the European Central bank gave a speech to the Committee on Economic and Monetary Affairs of the European Parliament. He says the Euro economy is stabilizing at a low level, demand is weak, inflation is not a problem. And he explained the LTRO, the multi-trillion dollar cheap money loan program for the banks. Draghi said the reason for the LTRO was to ensure monetary policy flowed into the real economy but he can't control what the banks do with the ECB loans but he can't blame the banks because the real problem is the lack of demand stemming from economic weakness. Draghi called for further fiscal tightening on economies that are already shrinking but it wouldn't be right for the ECB to dictate to banks what they should be doing while his institution bails them out.

The running pipe dream is that if the ECB saves the banks, the banks will invest in growth but apparently growth isn't on the banks list of actionable items. The banks and the funds are looking for short-term speculative trades, not slow investment returns. And the bigger the bad debt problems, the more the banks want to gamble, or speculate, because that slow growth stuff isn't going to cover the big bad piles of debt. What are they betting on? Failure and default. Who's doing the betting? About 20 dealer banks worldwide; which means that if one of them screws up and blows a big bet, all the others will collapse faster than you can say Hermanos de Lehman.

Bankers like those big money bets but they have forgotten the little people. The Federal Deposit Insurance Corporation estimates that about nine million households in the country do not have a traditional bank account, while 21 million, or 18 percent, of Americans are underbanked. For US banks this means new markets. An increasing number of the nation’s large banks — U.S. Bank, Regions Financial and Wells Fargo among them — are aggressively courting low-income customers with alternative products that can carry high fees. They are rapidly expanding these offerings partly because the products were largely untouched by recent financial regulations. While banks have offered short-term loans and some check-cashing services in the past, they are introducing new products and expanding some existing ones. Last month, Wells Fargo introduced a reloadable prepaid card, while Regions Financial unveiled its “Now Banking” suite of products that includes bill pay, check cashing, money transfers and a prepaid card. In May, Regions introduced its “Ready Advance” loan after determining that some of its customers were heading to storefront payday lenders. The loans can get expensive; the annual interest rate of more than 300 percent. The prepaid card business is expected to top $90 billion dollars this year.

Earlier this week we heard about the big bribery charges against Walmart de Mexico. They are not alone. Deere, Hewlett-Packard, Las Vegas Sands, Qualcom and many others are also under investigation for violations of the U.S. Foreign Corrupt Practices Act. There are at least 81 public companies under investigation by the Securities and Exchange Commission or the Department of Justice for running afoul of the Foreign Corrupt Practices Act, which makes bribery in foreign countries punishable in the US. In addition, a growing number of companies have started placing disclosures in their financial documents that say their employees may at times violate the U.S.'s overseas bribery law, despite the company's best efforts to prevent it. What can we do? The employees are out of control.

Occupy Wall Street was evicted from Zuccotti park in New York and then the whole movement lost visibility and momentum. Now they are planning a comeback, maybe. May 1st, May Day. Lots of stuff is planned, which may or may not happen. The banksters are nervous. There are setting up surveillance units to “identify, map and track” protesters across social media and at their assemblies.

Wednesday, April 25, 2012

Wednesday, April 25, 2012 - Bernanke Approximately Right, UK Approximately Wrong, Students Approximately Taxed

DOW + 89 = 13,090
SPX + 18 = 1390
NAS + 68 = 3029
10 YR YLD +.02 = 1.98%
OIL -.11 = 104.01
GOLD + 2.80 = 1645.30
SILV - .12 = 30.81
PLAT + 8.00 = 1559.00

If you own shares in Apple, congratulations. It gained nearly $50 to finish at $610, up nearly 9%. If you don't own Apple, don't worry about it, don't chase it. Realize that a big chunk of the move today for the broader market, was really just Apple, but it was a good day, with gainers outpacing losers by 3 to 1.

The Federal Reserve wrapped up their FOMC meeting and announced no changes. Wow, what a surprise. The Fed didn't raise rates – they can't. They didn't lower rates – they can't. They didn't announce QE3, but they didn't take it off the table.

Bernanke told reporters at a press conference, “We see monetary policy as being approximately in the right place at this point.” He said, “Our intention is to maintain highly accommodative stance of policy for the foreseeable future.” Kind of like QE in Perpetuity.

Bernanke stressed that the Fed could purchase more assets if it looked like the economy needed help, but he said some ways to boost the economy, like tolerating higher inflation, would be “reckless.” At the same time, he said it was too early to raise rates, “I think it’s a little premature to declare victory. I think that keeping interest rates low is still appropriate for our economy.”
The Fed’s unemployment forecast was lowered and the inflation forecast hiked for 2012, 2013 and 2014, though by fairly minor amounts: for 2012, the jobless rate is seen between 7.8% and 8%, compared with January’s forecast of 8.2% to 8.5%, and the PCE inflation rate is seen between 1.9% and 2%, compared with January’s forecast of 1.4% to 1.8%.
Yea, they might not want too declare victory just yet; they might not want to have Bernanke in front of a banner saying “Mission Accomplished”. Presently, the Fed is missing its employment target, and it is also below its declared inflation target of 2 percent. As the statement says, "the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate." So there is no risk of overshooting the inflation target according to the Fed, only a risk of undershooting it.
If that's true, if the Fed is likely to undershoot both of its targets -- the committee believes that in the worst case it will only hit its inflation target, not exceed it -- then why not pursue more aggressive policy?
And the Fed is afraid of inflation, in large part because the derivatives market has cut off any possible remedies. Interest rate risk is now credit risk and credit risk is enormous. Also, if the Fed faces inflation, they really have a conundrum; do they use their tools to fight inflation or do they use their tools to fight unemployment? They can't fight both with the same tools.

The British economy shrank in the first three months of 2012, falling back into recession as construction activity and industrial output fell.
The U.K. Office for National Statistics said gross domestic product contracted by 0.2% in the first three months of the year, following a 0.3% fall in the final quarter of last year. A recession is widely defined as at least two consecutive quarters of shrinking GDP.
The economy contracted 0.8% on an annualized quarterly basis, the method used to express quarterly changes in U.S. GDP.
So, the Brits have been hoping that austerity would set the stage for growth but it hasn't happened. The results aren't drastic enough to reverse policy but these latest results do highlight that the economy will not withstand any further acceleration in cuts.
The British economy is more exposed to the euro-zone economy than the U.S., but the euro-zone debt crisis was well known when austerity was rolled out; in fact, it was an argument in the last general election, that Britain wanted to avoid becoming Greece. Mission Accomplished, maybe.
Spain is also in a recession. The Dutch opposition parties refused to back austerity cuts needed to meet EU budget targets. Greece's central bank governor warned politicians and voters that they must stick to austerity targets, even after the May 6 elections, or they will surely be kicked out of the Euro-Union. Italy has imposed a limit on cash transactions – no more than 1,000-euros in cash – trying to curb under-the-counter transactions.
And don't forget, it's a global economy; a recession in the world’s third-largest economy (UK), combined with the current slowdown in the world’s second-largest (China), spells trouble for the world’s largest (US). If there’s not enough demand for US goods and services coming from the second and third-largest economies in the world, then we got trouble right here in River City.
The US housing market is showing more signs of stabilization as price declines ease and home demand improves, spurring several economists to call a bottom to the worst real estate collapse since the 1930s. “The crash is over,” says Mark Zandi, chief economist for Moody’s Analytics . “Home sales — both new and existing — and housing starts are now off the bottom.” Economists including Bank of Tokyo-Mitsubishi UFJ’s Chris Rupkey, Bank of America’s Michelle Meyer and Mark Fleming of CoreLogic are also predicting prices have bottomed, even as the threat of more foreclosures loom to boost supply. Mission Accomplished.

Student loan debt has passed the $1 trillion dollar mark. The interest rate that students pay on the basic “subsidized” loan is slated to rise from 3.4% this year to 6.8% next year, unless the lower rate is extended by Congress.
How does the government profit from student loans? Yield spread. Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%. Administrative costs are well below 1%. Prepayment risk is minimal; repayment stretches over many, many years, and the interest just keeps on growing. Interest rate risk is also minimal, given that Treasury can issue debt in a range of maturities.
Loans go into default at about 10% projected for 2013 loans, so credit losses are relatively modest. There is no statute of limitations on student loans, and even bankruptcy discharge is difficult. The $37 billion Treasury profit for FY2012 is after allowing for estimated credit losses in the $5 billion range. So what are the President and Congress arguing about? They are arguing about how much of the federal deficit to plug with student loan interest money. The current “baseline” budget assumes that the rate will jump up to 6.8% for 2013 loans, yielding another $30 to $40 billion return to Treasury. The debate is how much they can scalp off the students. Once upon a time college education was subsidized to a large extent. It was nearly free in California. The Arizona constitution requires that college education should be as nearly free as possible. Charging interest on student loans is just a way of moving the cost from one segment of the economy to another. It's a tax on young students. If the Federal Reserve can lend money to the banks at near zero, I don't know why they couldn't give a comparable deal to students. Just saying.
Of course, the default numbers could change. USA Today reports half of the new graduates are either jobless or underemployed in positions that don't fully use their skills or knowledge. Mission Accomplished.

Tuesday, April 24, 2012

Tuesday, April 24, 2012 - As the Euro Turns, Counting Protesters at Shareholder Meetings

DOW + 74 = 13,001
SPX + 5 = 1371
NAS – 8 = 2961
10 YR YLD +.03 = 1.96%
OIL +.20 = 103.75
GOLD + 3.20 = 1642.50
SILV -.03 = 30.93
PLAT – 14.00 = 1550.00

Yesterday's edition of “As the Euro Turns” included the collapse of the government in the Netherlands when it could not agree with a key allied party on budget cuts to bring the deficit below the EU-mandated 3 percent. In France, Socialist Francois Hollande led the first round of presidential elections; he has vowed to renegotiate a European treaty tightening rules on debt. All that was absorbed today. After all, the Dutch still have a Triple-A credit rating; they will probably pay their bonds.

It does appear, at least for today, that the Euro has turned; as if a sudden transformation has swept the continent. Austerity is dead. Keynes has been resurrected and placed on a pedestal in Brussels, right next to a chocolate covered waffle. There was a mass awakening that countries cannot cut their way to prosperity. Angela Merkel is fighting back against the austerity backlash; she argues the “credibility” of the Eurozone is at risk without more austerity and continuing cutbacks. But austerity isn't working and its hard to maintain credibility in the face of failed policy.

Here is the problem: If a government (say Greece) has a massive deficit and now they are trying to balance their budget, the government will be making the situation worse by imposing cuts, both because government expenditure is part of the GDP, and because of the multiplier effect of government deficits on the economy. A government trying to cut deficits by reducing government expenditures and raising taxes is bound to make their economy contract, which would then have a negative impact on tax collection, and consequently make the deficit worse. At the same time, because GDP contracts, the government is making the denominator of the debt-to-GDP ratio decrease, making the situation worse in such a metric. Sisyphus never had it this tough.

The Europeans have tried austerity and it hasn't been fun and the overall economy is now probably in a second recession, largely caused by slowing demand, caused by (drum roll please) austerity! And, worst of all, the economy may be entering a negative feedback loop: low demand leads to more unemployment which leads to lower demand ... you get the idea. As for the whole "confidence will return" argument: businesses don't invest in slow-growth environments when there is obviously slack demand.

And Merkel is facing opposition. A criminal lawsuit has been filed against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens. It's thought the bailouts could leave the Germans on the hook for trillions of euros. And the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors; not exactly the original idea behind a European Union. Merkel’s reputation as a hardliner for fiscal reform is wobbly. She’s about to lose her only ally (Sarkozy) in the push for austerity. And this is happening while inflation is rising in Germany, the economy is contracting – possibly heading into recession - and Germans are openly outraged regarding the EU bailouts.

The French still have a couple of weeks to decide if they want to dump the far right conservative Sarkozy in favor of the far left socialist Hollande.. The rhetoric is getting interesting: Francois Hollande, the Socialist presidential front-runner in France, doing his best Andy Jackson imitation: “Let me tell you who my rival is. It does not bear a name or have a face, it’s the finance industry. In the past twenty years, the financial industry has taken control of our societies, of our lives and threatens our states.”

Sarkozy set the standard for France’s approach to bank regulation by passing a 0.1 percent tax on all financial transactions within the country. Sarkozy tried to promote the tax worldwide but his proposal was too far to the left for the.... (wait for it) Obama administration. Hollande, meanwhile wants to go even further, separating retail and investment banking, banning “toxic” financial products, and preventing French banks from operating in tax havens. The third place in the runoff election went to Marine Le Pen, considered very far right. After the vote of Sunday she said: “We have blown apart the monopoly of the two parties of banking, finance and multinationals.” The far right is running against big business and the financial industry.

Wells Fargo held its annual shareholder meeting in San Francisco today. Depending on who you read, a couple of hundred, or 500, or a thousand or thousands (plural) of protesters showed up. Some of the more clever protesters actually hold stock certificates and they were able to get inside. I still haven't seen reports on what they may or may not have said inside the meeting. Six protesters were arrested.

Protests are planned for General Electric's shareholder meeting in Detroit tomorrow. A couple of thousand are expected to protest. Protesters interrupted a speech by GE Chief Executive Jeff Immelt in Detroit today, yelling "pay your fair share," before being escorted out of the event. A Citizens for Tax Justice report released in February said GE had an effective tax rate of 11 percent in 2011. GE disclosed in filings with the U.S. Securities and Exchange Commission that its overall tax rate - on both foreign and US earnings - was 7 percent in 2010 and negative 12 percent in 2009.

Morgan Stanley says U.S. high-yield obligations, otherwise known as junk bonds, were in a “sweet spot” as borrowers cut their debt loads. JPMorgan said junk yields will fall more than half a percentage point by year-end. Bank of America favors debentures rated in the middle tier of speculative grade. Gains on U.S. high-yield, high-risk bonds, which are little changed since the end of February, are set to accelerate as central banks respond more aggressively to contain Europe’s fiscal imbalances, Morgan Stanley and JPMorgan said. While forecasting the default rate will rise this year, Moody’s Investors Service says the figure will stay below historic averages.

The Justice Department says a BP engineer intentionally deleted more than 300 text messages that said the company's efforts to control the Gulf of Mexico oil spill were failing, and that the amount of oil leaking was far more than what the company reported. Criminal charges have been filed against the engineer, Kurt Mix of Texas. Two years after the explosion that killed 11 men and spilled millions of gallons of toxic oil into the Gulf, and destroyed unknown amounts of marine life and crippled the livelihood of millions of residents of the Gulf – and we finally have a criminal charge – the first criminal charge - for obstruction of justice.

The Federal Reserve's top policymakers are meeting behind closed doors for two days, tweaking their economic forecasts and reevaluating their game plan for boosting the US recovery. Or maybe they'll order pizza and play pinochle. And then tomorrow morning, they'll announce the same thing they announced a few weeks back. They can't raise rates; they will continue to have a very accommodative monetary policy which they will not call QE3

A new case of mad cow disease has surfaced in a dairy cow in California. Mad cow disease, or bovine spongiform encephalopathy (BSE), can be fatal to humans who eat tainted beef. The World Health Organization has said that tests show that humans cannot be infected by drinking milk from BSE-infected animals. The disease is always fatal in cattle, however. There have been three confirmed cases of BSE in the United states, in a Canadian-born cow in 2003 in Washington state, in 2005 in Texas and in 2006 in Alabama.

Apple sold 11.8 million iPads in the last quarter, the latest version of which hit store shelves in mid-March. That compared with the average forecast of up to 13 million. Apple sold 35.1 million iPhones - which accounts for about half its revenue; and that was a little better than expected. Net income rose to $11.6 billion, or $12.30 a share, from $6 billion, or $6.40 per share, a year earlier. That also outpaced Wall Street's target of $10.04 a share. There margins are freaky high and they just might take over the world at this rate.

Monday, April 23, 2012

Monday, April 23, 2012 European Debate Austerity v. Growth, Walmart in Mexico, Apple in Seattle

DOW – 102 = 12,927
SPX – 11 = 1366
NAS – 30 = 2970
10 YR YLD - .04 = 1.93%
OIL +.03 = 103.14
GOLD – 4.10 = 1639.30
SILV - .84 = 30.86
PLAT – 22.00 = 1565.00

There is some uncertainty in Europe. Sarkozy is losing the election in France; the Dutch government has collapsed, and the debt continues to mount and the austerity plans aren't working and the natives are getting restless.

In France, Sarkozy came in second behind Francois Hollande, the Socialist candidate and a harsh critic of the spending cuts prescribed as a way to end the region's debt crisis. This was the first round of voting and there will be a runoff election on May 6th. Hollande won 28.6 percent to Sarkozy’s 27.1 percent; Hollande has the momentum. Voter frustration with the status quo and with the E.U. fed a rise of support for extremes at both ends of the political scale, making potential kingmakers out of 11 million voters who supported candidates of the far right and left.

Sarkozy and Germany's Chancellor Angela Merkel have been the main architects of Europe's efforts to avoid a collapse of the region's shared currency. If Sarkozy loses, it means Merkel might not last. If both Sarkozy and Merkel lose power, we've got a whole new situation.

Figures reported by the European Union's statistics office confirmed the effects of budget-cutting programs on countries that use the euro currency. Even with widespread spending cuts, overall debt rose to 87.2 percent, the highest level since the euro was created. Separately, a survey of the euro zone's manufacturing and services sectors fell in April. Official data confirmed that Spain is in recession, after economic output fell 0.4 percent in the first three months of the year; that qualifies as a recession although I would categgorize it as a depression. Spain joins other European countries now officially in recession, including Italy, Belgium, the Netherlands and, outside the euro zone, the Czech Republic. Even Germany may have fallen into recession in the first quarter, though official data is not out yet.

The Dutch government resigned Monday after it couldn't reach agreement with an opposition party to bring its budget deficit within European Union rules. The budget dispute raised the prospect that the Netherlands could lose its top AAA credit rating. Euro zone unity is under strain as other Europeans resent what they perceive as Germany’s holier-than-thou attitude in insisting that all the other Euro-zone countries keep their promises to reduce government budget deficits to 3 percent or less of gross domestic product. The Dutch debate basically boils down to austerity versus growth.

Christine Lagarde, the president of the International Monetary Fund, speaking in Washington over the weekend, said: “A global, undifferentiated rush to austerity will ultimately prove self-defeating.” But Ms. Lagarde also acknowledged the quandary facing European leaders. Most of them simply do not have the resources to pay for public works projects or social programs that would ease the pain of rising unemployment and declining wages.

Last week, the International Monetary Fund called for Europe to begin issuing bonds backed by all members, so-called euro bonds, a measure that would take pressure off the most debt-burdened countries whose high borrowing costs are contributing to their economic woes. In Germany, there is little support for such measures. At weekend meetings the IMF announced an additional $430 billion in lending capacity by developed economies. The contributions came after IMF economists determined that countries around the world might require up to $1 trillion in new loans because of the combined effects of the sovereign debt crisis in Europe and sluggish global economic growth. 

There are also calls for the European Central Bank to issue another round of cheap three-year loans to banks, as it has already done twice since December. The bank should also cut the benchmark interest rate from 1 percent, or resume purchases of euro zone government bonds to hold down borrowing costs. Now, the ECB can't seem to enforce deficit reduction plans in exchange for bailing out the banks. The population is catching on to the idea that the banks are part of the problem and not the solution.

The IMF has three recommendations, as outlined in last week’s World Economic Outlook, which are somewhat at variance with current euro zone policy. First, it wants the region not to overdo short-term fiscal austerity while placing more emphasis on longer-term structural measures to improve budgets. Second, it wants the European Central Bank to continue very accommodative monetary policies. Finally, it wants the euro zone authorities to be prepared to inject capital directly into troubled banks and to accompany that with stronger European-wide supervision of lenders.

When the ECB give the banks cheap money, the banks take the money and gamble – why not? It is cheap money. The banks buy the sovereign bonds and then they bet against the same with Credit Default Swaps. For the banks, the best bet is that the economy will shudder and shake and quake and maybe default. And to aid in the bet, the banks are not lending out the cheap money they received from the ECB.

Just a reminder that the Greeks hold an election on May 6, the same day as the runoff in France. Surely the Greeks are looking at the Dutch indignation regarding austerity. The same Dutch that demanded Greek leaders submit to EU demands for punitive austerity measures or forget about getting any help to avoid bankruptcy.

From Reuters: A former chief executive of Calpers, the biggest U.S. public pension fund, and a former board member were charged by federal regulators on Monday with scheming to defraud Apollo Global Management, a private equity firm, of more than $20 million in placement fees.

The U.S. Securities and Exchange Commission said that Federico Buenrostro, a former chief executive of the California Public Employees' Retirement system, and Alfred Villalobos, a friend and former board member who became a placement agent, fabricated documents as part of the fraud. Villalobos is also a former deputy mayor of Los Angeles.
Investment firms hire placement agents to help them land business at pension funds. According to the SEC, Buenrostro and Villalobos, gave Apollo Global the impression that Calpers, which has $235 billion in assets, had reviewed and signed placement-agent fee disclosure letters in accordance with its procedures.
"In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos's firms," the SEC said in a statement. "The false letters bearing a fake Calpers logo and Buenrostro's signature were provided to Apollo, which then went ahead with the payments."
Villalobos generated more than $70 million in placement agent fees over approximately a 10-year period, at least $58 million of which was related to Calpers' investments, according to the SEC.
Buenrostro served as Calpers' CEO from 2002 to 2008.
From the Murdoch Street Journal: In a letter set to be sent to regulators and lawmakers on Monday, an MF Global customer group calls for J.P. Morgan to “return hundreds of millions of dollars in MF Global customer funds transferred” to J.P. Morgan in late October. The group, called the Commodity Customer Coalition, urged U.S. officials to “demand” that the New York bank “disgorge all MF Global customer property immediately.” J.P. Morgan is cooperating with the ongoing investigation, has said it did nothing wrong and lost some of its own money in the Oct. 31 bankruptcy because it was a creditor of MF Global.

Next up, we have two tales of corporations performing badly. We start with Walmart. Walmart, has just been caught in a massive bribery scandal that extends to the highest levels of the organization. Just as bad, Walmart's senior management appears to have long known about the scandal and has deliberately tried to cover it up. About 20% of all Walmart stores worldwide are in Mexico.
Walmart de Mexico apparently bribed Mexican officials for years; the bribes may have totaled more than $24 million and they were paid to win permission to open new stores without having to go through regular legal channels. The bribes were initially hidden from Walmart's global headquarters in Bentonville, Arkansas, by disguising them as normal legal bills, which would be accounting fraud. One of the key executives in charge of the bribery payments quit the company in 2005 after being passed over for promotion. He then detailed his behavior to some of Walmart's lawyers, implicating many senior Walmart executives in the process. The CEO of Walmart de Mexico is said to have personally approved the bribes. Walmart's global headquarters launched an investigation of the bribes but despite finding evidence of suspicious behavior and possbly clear violations of law, they shut down the investiagtion. Walmart's then-CEO, H. Lee Scott, Jr., was briefed on the investigation. He reportedly rebuked the company's investigators for being too aggressive.Walmart's current CEO, Michael Duke, was chairman of Walmart International at the time of the scandal. He received frequent briefings about the bribery allegations and progress of the investigation.
The Foreign Corrupt Practices Act makes it illegal to bribe officials in countries in which American companies do business, which is what Wal-Mart is accused of doing here. And don't forget the accounting fraud.

Our next example of a corporation behaving badly is Apple. A guy from Seattle named Rex sued Apple and won. He kept a blog of his battle. Here is the quick version. In 2008, Rex bought an Apple laptop was part of a batch that contained a defective chip. Apple acknowledged the defect and said it would replace it when it burned out. When the chip burned out three years later, Apple flaked out; they claimed his computer was a slightly different version than the model for which it had agreed to replace the chip. So, this guy, Rex, goes to the Apple store, he mails letters, he makes phone calls and he keeps meticulous records of everything, and he writes a blog about his experience. And finally, in March he ends up in small claims court and he wins. David beats Goliath.

If it sounds like a heck of a lot of work and hassle for a computer repair – it is. And that is what Apple was counting on. They thought they could just wear the guy down and eventually he would quit. Most people would give up. Who could blame them? In the past, wronged customers could band together and file a class-action lawsuit. The whole reason why class actions were set up is because most Americans don’t have time or money to go to court over a small item. But today, most companies have added clauses to their customer contracts that prohibit class-action suits. Instead of class action, the corporations now have contracts that mandate arbitration. The problem with arbitration is that customers lose 95% of the time. Coincidentally, the arbitrators are selected by the companies.

So, Rex sued Apple and took them to small claims and Apple fought back. They sent two attorneys to fight the battle, even though it was pretty clear they were liable for the defective chip. They probably thought they could wear the guy down, that he might not show up, or that he might slip up and not be prepared. Maybe Apple was just trying to be a bully. Now the guy is entitled to a new computer and Apple has to pay their attorneys. Once upon a time, Apple was the scrappy underdog, throwing a hammer through the window of conformity. Those days are gone. Apple is now a monolith that thinks the legal system is there to serve them; and customers are meant to be beaten into submission. And they do it for the worst possible reason: because they can. It is only a matter of degrees between screwing one guy in Seattle, screwing the Mexicans who live near a Walmart, screwing the clients of MF Global, screwing the pensioners in California, screwing Europe. And everybody is doing it.

Sinclair Noe
Eat the Bankers