April, Monday 2, 2012

DOW + 52 = 13,264

SPX + 10 = 1419
NAS +28 = 3119
10 YR YLD -.02 = 2.19%
OIL - .40 = 104.83
GOLD + 8.30 = 1678.00
SILV +.71 = 33.09
PLAT + 12.00 = 1657.00

The calm before the storm. Maybe I should say storms. This Friday we'll look at the monthly jobs report for March. The nonfarm payroll is one of the bigger economic reports each month and frequently moves markets. The report this Friday will be strange. I guarantee. This Friday marks the somewhat unusual occurrence of a payrolls report being released on a holiday (Good Friday) that will keep stock markets shut. On Friday, stock futures will be trading for at least 45 minutes after the release, and government bonds will trade until noon. All Canadian and most European markets will be shut.

It is widely expected the economy added 200,000 jobs in March; down from an average of 245,000 for the three prior months. The unemployment rate will probably stay at 8.3%. The addition of 200,000 jobs is not enough to lift the economy; it is just treading water, at best.

So, the economy is looking pretty good, not great but good. A warm winter may have exaggerated first quarter growth. Consumer confidence is up but spending is outpacing wage gains. It makes for a pretty straightforward scenario for growth. The consumer can rely on high debt and/or growing asset prices to fuel their consumption but if debt gets too high and/or asset prices slip, then the consumer must rely on income growth or reduced savings to grow his/her personal outlays. With consumption roughly 70% of the economy, that means slower growth. Oh yea, there's also that problem with high gas prices. The markets have a long pattern of weakness through the summer. Get out in May. There is a tendency for investors to pull money out of the markets to pay taxes, but April is usually a pretty decent month. So, there's a sense of complacency, and that's fine. Play a round of golf, get ready for the baseball season, watch the end of the college hoops season in the palindrome championship (UKKU). And walk, don't run, just walk to lock in your profits from a stellar first quarter.

The calm before the storm. In Europe, the first quarter brought massive liquidity injections from the European Central Bank, and already there is talk of the need for bigger firewalls. There is talk that Europe’s banks need to deleverage to the tune of $2 trillion to $2.5 trillion in the next two years. Where’s the money going to come from? The increase in the euro state’s bailout fund to 700 billion euros decided on Friday would not be enough.

The failure to resolve the Euro-crisis has a new name: “Merkel’s Law of Permanent Disappointment”. The German chancellor will always do more than she originally promised to help out errant states, but the funds committed will always be less than necessary to solve the euro’s problems once and for all. So people on both sides of the argument, whether conservative German voters or the financial markets or the hard-up states themselves, will always be disappointed — for equal and opposite reasons.

The Euro-zone is not going to grow its way out of its problems. Unemployment in the Euro-zone reached its highest level in almost 15 years in February, with more than 17 million people out of work and the official unemployment rate moving up to 10.8%. And so for now, the central banks will kick the can down the road, printing and then throwing money at any problems that crop up. On Friday, EU official warned Euro- finance ministers that the underlying causes of the crisis have not been resolved and they would need more money to build the mother of all firewalls. The calm before the storm.

There were two important budget votes in the House of Representatives last week. The one that got more attention was the near-party-line vote to pass the budget resolution produced by Representative Paul Ryan and the House Budget Committee. The Ryan budget cuts the top tax rate from 35 percent (Bush 2001) to 25 percent, maintains our current record-low tax rates on investment income, converts Medicare into a partial voucher program, makes enormous but unspecified cuts to discretionary spending, slashes Medicaid, and undoes last summer's deal to make automatic cuts in defense spending.

The more interesting vote, however, was the nearly bipartisan vote against the Simpson-Bowles deficit reduction plan that has been hailed by almost no one. Simpson-Bowles was the plan created by President Obama's bipartisan deficit commission in December 2010. It also cut tax rates, but spelled out how it would increase revenues by eliminating tax expenditures. It proposed an arbitrary cap on growth in federal health care spending; and it slashed defense and non-defense discretionary spending in equal measure.

Republican opposition to Simpson-Bowles is simple: It raised taxes; at least according to Grover Norquist. Democratic opposition is only slightly more complicated. Simpson-Bowles made significant cuts to Medicare spending. Democrats are not automatically opposed to Medicare cuts, only to cuts that are not accompanied by tax increases on the rich. More to the point, there's no reason to vote for a tax increase if it has no chance of passing. And the simple truth is that nothing is going to be passed. There will not be a political solution to deficit reduction; there won't even be a serious effort; there won't even be a serious effort to make it look like anybody really gives a tinker's dam about the deficit. Not this year, anyway.

The most recent debt numbers for the United States:

External debt (as % of GDP): 99.46%
Gross external debt: $14.959 trillion
2011 GDP (est.): $15.040 trillion
External debt per capita: $47,664

The calm before the storm.

The Commodity Futures Trading Commission, the CFTC, sued Royal Bank of Canada, saying the bank made hundreds of millions of dollars worth of sham futures trades to reap tax benefits on its holdings of company stock; plus the suit alleged RBC concealed the true nature of the trades and made false statements to a futures trading exchange. The agency said it is the largest case it has brought against so-called wash trades, which cancel each other out.

The CFTC alleged that Royal Bank of Canada made the trades in stock futures contracts from 2007 to 2010 with two foreign subsidiaries. The transactions weren't "at arm's length," as required by law, and reported by the bank to the exchange.

A wash trade is different from a wash sale. A wash sale is a sale of a security (it could be stock, bonds, options) and you sell at a loss and then repurchase the same or a substantially identical security soon afterwards. For example, you buy stock in company XYZ for $100 and the price drops to $90. It's December 30 and you decide to sell the stock and take the loss, which you will deduct on your taxes. If you do that, you can't repurchase shares of XYZ within at least 30 days. The idea is that the transaction wasn't really genuine, it was just a ploy to reduce tax liability.

A wash trade usually involves a trader simultaneously buying and selling shares to artificially pump up volume and share price, more specifically it is defined as "a securities transaction which involves no change in the beneficial ownership of the security." Apparently, the CFTC alleges RBC pulled off a wash for the purpose of collected tax benefits that existed between the US and Canada.

The biggest forum for sex trafficking of under-age girls in the United States appears to be a Web site called Backpage.com. This emporium for girls and women — some under age or forced into prostitution — is in turn owned by an opaque private company called Village Voice Media. Until now it has been unclear who the ultimate owners are. According to the New York Times that mystery is solved. The owners turn out to include private equity financiers, including Goldman Sachs with a 16 percent stake. Goldman claims they didn't know and they weren't involved in the operations of the website and they will sell their stake to management. I wonder if Goldman Sachs turned a profit on that trick?

-Sinclair Noe