DOW – 64 = 13,199
SPX – 5 = 1413
NAS – 6 = 3113
10 YR YLD +.09 = 2.28%
OIL +.07 = 104.08
GOLD – 31.20 = 1646.80
SILV -.31 = 32.78
PLAT – 10.00 = 1647.00
SPX – 5 = 1413
NAS – 6 = 3113
10 YR YLD +.09 = 2.28%
OIL +.07 = 104.08
GOLD – 31.20 = 1646.80
SILV -.31 = 32.78
PLAT – 10.00 = 1647.00
Stocks slumped, bond yields rose, the dollar strengthened, and Wall Street traders experienced DT shakes as they read the Federal Reserve's March FOMC meeting minutes. There was no direct mention of QE3, the Fed's big money giveaway to the big banks. And so, the traders started twitching and squirming. Where would they get their next fix of free money?
Market expectations for more Fed easing—both quantitative easing or an extension of its ‘operation twist’—have seesawed back and forth in the past several weeks. In the beginning of March, markets factored out quantitative easing based on comments from Fed Chairman Ben Bernanke that it might not be needed and that the economy was showing improvement.
At the time, yields rose and stocks also held gains. But some weaker economic reports and new comments from Bernanke last week, defending the Fed’s easing stance, while not new, helped renew expectations for more easing.
The minutes of the March 13 FOMC meeting show the voting members talking about more stimulus if the economy deteriorates. It also showed that the recent economic data did not materially change the forecast for 2013, or 2014. They also repeated past concerns about housing and unemployment, as well as discussed recent improvements in employment.
Bernanke last week said the improvement in employment may be the result of companies making up for the overly deep cuts they made during the financial crisis, and the gains may not be sustainable.
There was also discussion of the potential for an abrupt sharp fiscal tightening at the beginning of 2013, something economists say concerns some Fed members and could be a reason for more monetary stimulus.
There are expectations that the Fed could extend or announce the end of its “operation twist” program at the April 24, 25 meeting. The ‘twist’ program is just another name for quantitative easing and is set to end in June and involves the purchase of longer dated Treasury securities by the Fed, and the sale of an equal amount of shorter duration securities, a process aimed at lowering long term rates. The Fed could also consider another round of outright asset purchases, a third round of quantitative easing or QE3. In this round, the Fed has said it could purchase mortgage securities to drive rates lower and help the housing market. There is a good chance the Fed will do one or the other by its June meeting, but if the free money junkies on Wall Street don't get their dose of QE by June, you'll see some serious shakes.
So, if the markets are counting on more easing, what is the Fed waiting for? The answer is: they are waiting for a crisis. There is a problem with handing out hundreds of billions of free money to the Wall Street bankers – it is a little bit inflationary. When the Fed tossed out money in QE2, food prices moved higher and there were revolutions around the world when people couldn't afford food. Food prices are still quite high and gas prices are hovering around $4 a gallon. So the Fed doesn't want to rev up inflation and they want to leave their powder dry because there might just be a crisis on the horizon, or more specifically across the pond. Europe's banking system has tens of trillions of dollars of toxic assets on their balance sheets and it is leveraged.
The leverage is almost as high as Lehman Brothers, but the sheer size of the toxic assets is unlike anything anyone has ever seen. If there is a Euro-crisis it will be far bigger than anything the Fed has dealt with before.
So we’re talking about a banking system that is nearly four times bigger the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a European Central Bank that has stuffed its balance sheet with loads of toxic assets, giving it a leverage level of 36 to 1. And the Euro-banks are leveraged even higher. French banks have capital reserves of around 1% to 1.5%, meaning their leverage could be as high as 100 to one.
What about all the money that has already been thrown at the Euro-crisis? Soaked up apparently. The ten-year Italian bond is right back where it was before the most recent round of Long Term Refinance Operations. And the second round of LTRO was bigger than the first round, and the finance ministers in Europe are saying they need a bigger firewall. Today, Christine LaGarde, the head of the international Monetary Funds said that even though the global economy has improved in recent months the financial system in Europe is still "under heavy strain" and that debt levels are "too high." She says, "The recovery is still very fragile."
It's kind of like in the movie Jaws, when Roy Scheider, he was the actor playing the police chief, and they're out on the boat, and the first time he sees the shark, he says: “We're gonna need a bigger boat.”
But for now we float merrily along. And as bad as things are in Europe, things aren't exactly perfect here. Yes, we have seen a recovery but it has been a cyclical bull in a secular bear; a small rally in a long-term downtrend. The stock market had a superb first quarter and now there is some catching up to do. Analysts expect the first quarter to be the worst period since mid-2009 for profit growth at U.S. corporations, even as stocks sit near multiyear highs. On the aggregate, companies in the Standard & Poor's 500 are expected to report little or no increase in earnings for the first quarter. That represents a marked slowdown from two years of expansion. You can only squeeze your expenses so much. At some point you have to lean on revenue growth. Analysts polled by Thomson Reuters were expecting a 3.2% increase in the first-quarter profits of S&P 500 companies, the smallest increase since the third quarter of 2009. According to a separate tally of estimates by FactSet Research, analysts are expecting a 0.1% profit decline. Analysts estimates are not entirely reliable; there is a tendency for analysts to underestimate, and then the companies can report better than expected earnings; it's a little game they play on Wall Street. Earnings season unofficially kicks off on April 10 with the report from steelmaker Alcoa. What we are likely to see is that stock prices have jumped but earnings have slowed.
There was a great article by Joe Nocera yesterday titled, Why People Hate Banks. Nocera says a few months back he was in a crowded elevator and Jamie Dimon, the CEO of JPMorgan Chase, stepped in. When he saw me, he said in a voice loud enough for everyone to hear: “Why does The New York Times hate the banks?”
Nocera says: It’s not The New York Times, Mr. Dimon. It really isn’t. It’s the country that hates the banks these days. If you want to understand why, I would direct your attention to the bible of your industry, The American Banker. On Monday, it published the third part in its depressing — and infuriating — series on credit card debt collection practices.
You can’t read the series without wondering whether banks have learned anything from the foreclosure crisis, which resulted in a $25 billion settlement with the federal government and the states. That crisis was the direct result of shoddy, often illegal practices on the part of the banks, which caused untold misery for millions of Americans. Part of the goal of the settlement was simply to force the banks to treat homeowners with some decency. You wouldn’t think that that would be too much to ask. But it was never going to happen without the threat of litigation.
As it turns out, this same kind of awful behavior has been taking place inside the credit card collections departments of the big banks. Records are a mess. Robo-signing has been commonplace. Collections practices hurt primarily the poor and the unsophisticated, just like foreclosure practices. (I sometimes wonder if banks would make any profits at all if they couldn’t take advantage of the poor and unsophisticated.)
At Dimon’s bank, JPMorgan Chase, the records used by outside law firms to sue people who had defaulted on credit card debt “sometimes differed from Chase’s own files at an alarming rate.” It sold debt to so-called “debt buyers” — who then went to court to try to collect — from one Chase portfolio, in particular, “that had long been considered unreliable and lacked documentation.”
Meanwhile, at Bank of America, executives sold off its worst credit card receivables for pennies on the dollar. Its contracts with the debt buyers included disclaimers about the accuracy of the balances. Thus, if there were mistakes, it was up to the borrowers to point them out — after the debt buyer had sued for recovery. There was at least one woman who had paid off her balance in full — and then spent three years trying to fend off a debt collector. Sounds just like some of the foreclosure horror stories, doesn’t it?
The practices exposed by The American Banker all took place in 2009 and 2010. In response to the problems, JPMorgan shut down its credit card collections, at least for now, and informed its regulator. (It also settled a whistle-blower lawsuit.) Bank of America says that its debt collection practices are not unique to it. Which is true enough.
But lawyers on the front lines say that credit card debt collection remains a horrific problem. “Most of the time, the borrower has no lawyer. There are terrible problems with people not being served properly, so they don’t even know they have been sued. But if you do get to court and ask for documentation, the debt buyers drop the case. It is not worth it for them if they have to provide actual proof.”
In effect, the banks are outsourcing their dirty work — and then washing their hands as the debt collectors harass and sue and make people miserable, often without proof that the debt is owed. Banks should not be allowed to “avert their gaze” so easily.
“In my church, we pray for forgiveness for the ‘evil done on our behalf,’ Banks should do more than pray. They should be held responsible.”
Nocera says the Consumer Financial Protection Bureau is placing a lot of emphasis on debt collection practices, which, up until now, have been unregulated. And apparently the agency has read The American Banker series. The CFPB issued a statement saying: “We take seriously any reports that debt is being bought or sold for collection without adequate documentation that money is owed at all or in what amount. The C.F.P.B. is taking a close look at debt collection practices.”
Not a moment too soon.
Tornadoes ripped through the Dallas-Fort Worth area this afternoon. If you haven't seen a video of this yet, it's pretty dramatic, big tractor trailer trucks flying through the air. All flights at the Dallas- Forth Worth airport were grounded.
The most recent report from the ISM Manufacturing survey shows economic activity in the manufacturing sector expanded in March for the 32nd consecutive month, and the overall economy grew for the 34th consecutive month. PMI was at 53.4% in March, up from 52.4% in February. The employment index was at 56.1%, up from 53.2%, and new orders index was at 54.5%, down from 54.9%.
The Census Bureau reported that overall construction spending declined in February .
Auto sales rose about 13 percent in March. The strong March sales rounded out the best quarter for U.S. vehicle sales since 2008, even better than August 2009, when there was a spike in sales for the “cash for clunkers' program. It appears buyers are replacing older cars with more fuel efficient models. Chrysler posted a 34 percent U.S. sales increase over the previous March, while sales at GM rose by 12 percent and Ford posted a 5 percent increase. Toyota had a 15 percent gain and Volkswagen's sales were up by 35 percent.
A Brazilian federal prosecutor has launched his second $11-billion lawsuit against Chevron and Transocean. The new lawsuit is related to an oil leak discovered in Chevron's offshore oilfield northeast of Rio de Janeiro on March 4. In November, the same prosecutor launched an $11 billion dollar lawsuit over an estimated 3,000-barrel spill in the same area earlier that month. The new suit also seeks to prevent Chevron and Transocean from operating in Brazil, transferring Brazilian profits overseas, obtaining government-backed finance and moving equipment from the country. There have been arrests in association with the first spill. In both spills, there was a total of a little over 3,000 barrels that contaminated the ocean. Just by comparison, BP and Transocean dumped more than 4 million barrels into the Gulf of Mexico a few years back. There were no criminal charges; there were fines but otherwise it was business as usual.