Friday, April 13, 2012

DOW – 136 = 12,849
SPX – 17 = 1370
NAS – 44 = 3011
10 YR YLD -.05 = 2.00%
OIL - .81 = 102.83
GOLD – 16.80 – 1659.50
SILV - .88 = 31.60
PLAT – 20.00 = 1581.00

The S&P 500 is now down 3.4 percent from this year's closing high, after falling 2.7 percent over the past two weeks.

Wells Fargo and JP Morgan reported first quarter results; both beat expectations. JP Morgan came in with EPS of $1.31 on $26.7b in revenues; topping estimates of EPS $1.18 and revenues of $24.6b. Wells Fargo posted EPS of $0.75 on $21.6b in revenues, beating estimates of $0.73 and $20.4b. JP Morgan made a big chunk of earnings by lowering their reserves for loan losses by $2 billion. In the last 2 years, JP Morgan has generated $12.3 billion in non-earning earnings, even as non-performing loans increased by $600 million in the last quarter. Or as CNBS said, they “blew expectations out of the water.” Blowing smoke is more like it. WFC - 3.4% JPM -3.6% BAC -5.3% GS -4.4% C -3.5%.

Jamie Dimon, the CEO of JP Morgan said he would fight buyback demands or repurchase claims on mortgage securities that turned sour. Bank of America has already lost a few of these multi-billion dollar battles. JP Morgan is in the same business as Bank of America.

Jamie Dimon briefly responded to questions about the Chief Investment Office, or CIO; that's the proprietary trading division. According to JP Morgan the CIO division uses approximately $360 billion in excess deposits to manage risk, not to make bets for its own accounts. There have been recent reports that the prop trading has increased the size and risk of its speculative bets over the past few years. According to one CIO trader, the division recently wrote $100 billion in protection on a single CDS index. If they aren't using deposits to bet, where are they getting the money to write those kinds of contracts.

If I ever hear another nut job talk about the fundamentals for the banks I think I'll puke. What fundamentals? Aren't fundamentals supposed to have some relationship with earnings and revenue and reality?

And then we had Ben Bernanke talking about financial stability, which must be something like an instructional video from the Captain of the Titanic on iceberg avoidance techniques, or a lecture on sobriety from Snoop Dog. Bernanke wrapped up this week's edition of the Federal Reserve Propaganda Tour by explaining how he couldn't figure out how to forecast the financial crisis of 2007-2009 because it's really difficult to forecast that stuff and then he explained how the subprime problem wasn't the trigger and even if it was it didn't make sense to him. And if we want to avoid a problem like that again, we need more regulation from the Fed. Now, here's the problem of the day: Bernanke forgot to talk about handing out free money to the bankers, and before you could clear your throat, the stock market tumbled. Five days down, two days up, one day down. You've got to take sea-sick pills just to buy a mutual fund. And then the CPI report showed inflation picked up last month, a dangerous gain of 0.3%; the core rate, excluding food and energy was up 0.2%. There is no doubt that if all you people would just stop eating and driving cars we wouldn't have a problem with inflation and the Fed would be happy to pass out free money.

Actually Bernanke skirted the issue in his summation as he praised “backstop liquidity provisions”. Of course, not actually speaking the letters Q & E might be the best indicator the money is on the table; the thing that shall not be named. I think it would be a courtesy to investors if the Fed would just post a daily price for every stock, bond and commodity; that way we wouldn't have to guess and we could spend our time doing something productive.

Sheila Bair, the former head of the FDIC, wrote an article in the Washington Post today. Here's what she wrote:

“Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

“For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

“So why not let everyone participate?

“Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

“Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

“Of course, we will have to persuade Congress to pass a law authorizing all this Fed lending, but that shouldn’t be hard. Congress is really good at spending money, so long as lawmakers don’t have to come up with a way to pay for it. Just look at the way the Democrats agreed to extend the Bush tax cuts if the Republicans agreed to cut Social Security taxes and extend unemployment benefits. Who says bipartisanship is dead?

“And while that deal blew bigger holes in the deficit, my proposal won’t cost taxpayers anything because the Fed is just going to print the money. All we need is about $1,200 trillion, or $10 million for 120 million households. We will all cross our hearts and promise to pay the money back in full after 10 years so the Fed won’t lose any dough. It can hold our Portuguese debt as collateral just to make sure.

“Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do. And since we will be earning money through investments, not work, we won’t have to pay Social Security taxes or Medicare premiums. That means no more money will go into these programs, but so what? No one will need them anymore, with all the cash we’ll be raking in thanks to our cheap loans from the Fed.

“Why should hedge funds and big financial institutions get all the goodies? ”

Brilliant.

Spanish CDS hit a new high. This is credit default swaps, or a type of derivative that is a cross between a bet and insurance that Spain will go into default. Now, more than ever before investor/gamblers are betting that Spain will default on its debt. Spanish and Italian bond yields jump again, IBEX and MIB stock indexes both fall more than 5% on the week. I'm trying to figure out this Euro-mess. Spain owes about a trillion dollars, Ireland owes about $900 billion. Italy – more than a trillion. So they need bailouts from the ECB. So they owe the money to the other Euro countries and the other Euro countries are paying the bailouts and then that money can be used to pay off the Euro countries that are..., wait, wait, my brain just turned into a pretzel.

Oil prices appear to have stabilized — and may even be on their way back down. At least, so says the International Energy Agency’s report for April, which notes that Saudi Arabia and other OPEC countries seem to be pumping out enough crude to offset the oil lost by sanctions on Iran.

As a result, gas prices may have peaked last week, at $3.94 per gallon, and will start to decline for the summer. It’s probably too soon to say for sure — a frantic bit of tension in the Middle East could easily jolt prices back upward. But it does raise a question: If oil and gasoline prices dodrop, will that boost the U.S. economy?

(A 5 percent reduction in the price of crude, sustained for a year, would save the average American about $250 from lower gasoline prices, smaller utility bills, and lower inflation. That’s not bad, though it’s only about one-fourth the size of the payroll tax cut passed this year. So, if lower oil prices won't really juice the economy, then why are we hearing so much talk about the necessity to lower oil prices? This is the big political talking point?)

I read an article on Yahoo Finance this morning about Edward Luce. Luce is the chief U.S. columnist for the Financial Times; he is British but has spent many years in the U.S. Luce took some time off to travel around the U.S. for several months. And he's written a new book Time to Start Thinking: America in the Age of Decline. I have not read the book but it got me thinking. Is America in decline?

He saw a middle-class being hollowed out, declines in once-great cities like Detroit, the loss of manufacturing jobs, busted education systems, and a political system paralyzed by bitter partisanship and an inability to get things done. While not predicting America's collapse, Luce is "skeptical about America's ability to sharply reverse her fortunes." And so that raises the question; if America is in decline, is it too late to pull ourselves back up? Is it inevitable? If it is not inevitable, what should we be doing right now?

He says America is losing its pragmatism - and the consequences of this may soon leave the country high and dry. Luce turns his attention to a number of different key issues that are set to affect America's position in the world order: the changing structure of the US economy, the continued polarization of American politics; the debilitating effect of the "permanent election campaign"; the challenges involved in the overhaul of the country's public education system; and the health-or sickliness-of American innovation in technology and business. His conclusion, "An Exceptional Challenge" looks at America's dwindling options in a world where the pace is increasingly being set elsewhere. While many Americans believe that their country can and should retain its status as a global superpower, Luce sees this as an increasingly unlikely scenario, unless Americans themselves can stand up against the country's increasingly plutocratic character. America has bounced back successfully from the shocks of The Great Depression and the Soviet launch of Sputnik, but Luce wonders if the next crisis in American confidence may knock it off the top-dog position for good.

The world’s largest company, Wal-Mart Stores, has revenues higher than the GDP of all but twenty-five of the world’s countries. Its employees outnumber the populations of almost a hundred nations. The world’s largest asset manager, a secretive New York company called Black Rock, controls assets greater than the national reserves of any country on the planet. A private philanthropy, the Bill and Melinda Gates Foundation, spends as much worldwide on health care as the World Health Organization. The rise of private power may be the most important and least understood trend of our time.

Acrimony and hyperpartisanship have seeped into every part of the political process. Congress is deadlocked and its approval ratings are at record lows. America’s two main political parties have given up their traditions of compromise, endangering our very system of constitutional democracy. Are we looking at something more dangerous than a gradual decline? Is the situation worse than it looks?

Until now we have been able to pass the buck to future generations by saying, "We don't need to raise taxes. We can borrow the money today and trust that the economy will grow sufficiently in the future to pay it off." Have we finally reached the plateau of slow economic growth whereby the old theory of "paying off the debt with future growth" will be insufficient to the task? I can tell you that debt is actually a tax on future growth. In fact it was once considered the actual theft of time.

The most immediate problem facing our nation is the high level of unemployment that persists years after the peak of the financial crisis, leaving the economy operating significantly below capacity. But our national debt, and the spending and tax policies that underlie its growth, will be a major challenge for at least the rest of the decade, as we figure out how to adapt our government and our society to do less with less or whether we might be able to do more with more. Do we have a solution? And if you think you have a solution, do you think you could be heard?

Remember the Super Committee? Twelve politicians, split down party lines; bicameral but ultimately not bipartisan; brought together to hammer out a solution to the debt problem; failed like a North Korean rocket launch.

Teddy Roosevelt said it best: “In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing.” Our nation, for the most part, is sadly accepting of the broken nature of our Congress. Nothing is the new norm in Washington.

Is this proof that America is in decline?

What are the consequences? There has been almost no discussion since around Thanksgiving. The Super Committee has been washed through the news cycle and hung out to dry. Maybe we'll remember it when the automatic cuts hit at the start of 2013 – if they hit. Who knows?

What we do know is that our politicians can't do the right thing? Why? Because they sold out.

The politicians on the Super Committee were supposed to do their work without intervention from other politicians. They did their work or lack thereof, without intervention from their constituents; private citizens were not permitted to address the committee; 250 lobbyists were permitted to address the committee but not private citizens. Money buys access and the average increase for SuperCommittee members was more than $2,200 per day in additional fundraising dollars. Donations rolled in from the PACs, more than $100 million dollars from the top ten industry groups alone.

Is America in decline? I would say yes but I don't want to believe it is too late or inevitable.