Thursday, April 12, 2012

Thursday, April 12, 2012

DOW + 181 = 12,986
SPX + 18 = 1387
NAS + 39 = 3055
10 YR YLD +.02 = 2.05%
OIL +.08 = 103.72
GOLD + 15.60 = 1676.30
SILV + .77 = 32.48
PLAT + 20.00 = 1611.00

The Federal Reserve Propaganda Tour continued last night with performances by Janet Yellen and William Dudley, the head of the New York Fed. Dudley said, “we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks... the incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established. But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery. On the inflation front, the year-over-year rate of consumer price inflation has slowed in recent months, and despite the recent rise of gasoline prices, we expect inflation to moderate further in 2012."

To translate, the Fed isn't worried about inflation and they have given themselves a green light for QE3 and they'll juice the economy with piles of free money when they feel like it. Of course, that's not the final word on the matter; St. Louis Fed President James Bullard says he sees the unemployment rate at 7.8% by the end of the year, noted that March’s monthly employment report was just one “mediocre” report and not an immediate concern that would push the central bank toward further easing. So, the Propaganda Tour is not without some dissension but tomorrow, Fed Head Bernanke delivers his second speech of the week, and that should make everything crystal clear.

So, the stock market has rallied for 2 days; the trade deficit dropped to $46 billion in February; the weekly claims for unemployment increased to 380,000; nothing conclusive there. But do you get the feeling that the rally might not hold? Something is wrong. Apple is up 653 percent since March 9, 2009, and that accounts for 8 percent of the S&P 500's climb during that time, but the last three days Apple has dropped, while the broader market has moved higher the past couple of days. How do you explain that divergence?

We've actually been through six months of a rally, going back to October, including a great first quarter; it doesn't seem sustainable. The problems in Europe are building again. This time the problem is Spain. The Spanish government says there will not be a bailout. They are trying to deal with the problem with austerity measures. Spain urged its EU peers to be “prudent” when making comments about its economic woes following criticism from France and Italy, even as it got praise for its reforms from across the bloc. Spain’s banks are fast joining the ranks of the most unloved in Europe just as many need to raise capital urgently. In France, Sarkozy says that if he loses the election and his Socialist rivals win, then France will experience a Greek style crisis. All the polls show Sarkozy trailing in the election.

The IMF said many governments should act now to raise mandatory retirement levels and encourage pension plans to better hedge their risk. The IMF says the US and other governments have underestimated the life expectancy of aging population and this could boost pension liabilities by nearly 10% and cause public debt levels to balloon. Only an economist at the IMF could make it sound like living longer is a bad thing.

CalSTRS, the California State Teachers' Retirement System, with a portfolio valued at $152 billion, is the largest teacher pension fund in the United States, reported earlier today that its underfunding increased by a massive 15%, or from $56 billion to $64.5 billion, which happened despite the market being relatively flat over the past year. In fact this is supposed to be good news: as CalSTRS states, its underfunding was supposed to be even worse by $4.3 billion. Here's the problem: the  pension fund has only 69% of what it needs to meet future obligations. To bring its program into balance, CalSTRS would need to boost the total contributions it receives from members, school districts and the state government 13% over the next 30 years.

The pension fund, which is still recovering from steep losses during the downturn of 2007-09, earned a 23% return on investments for the fiscal year that ended June 30. The fund's fiscal year-end return averaged 1.2% over the three years ending June 30, 3.8% over five years, 5.7% over 10 years and 8.1% over 20 years. Those are actually pretty good returns, but... CalSTRS admits they won't be able to invest their way out of the hole. Just pray they don't get stupid and turn to Goldman Sachs to solve the problem.

Goldman Sachs continues to behave badly and they continue to get away with it. Back in 2006, Goldman's research analysts would meet with Goldman traders and select clients in weekly meetings or “huddles”. They would pass along trading tips. Some of their recommendations differed from ratings printed in Goldman’s widely circulated long-term reports. The SEC says Goldman's huddles “created a serious and substantial risk that analysts would share material, nonpublic information concerning their published research” with major clients. The S.E.C. also said that the firm’s surveillance of trading of research “both in connection with huddles and otherwise, was deficient.”Goldman clients got the goods before you did through their public reports. Those clients traded on it.

Goldman will pay $11 million each to the S.E.C. and the Financial Industry Regulatory Authority; they will be censured and there is a Goldman acknowledgment that it “neither admitted or denied the charges.”

Seriously? Goldman can commit insider trading, they can lie to you and then pocket the difference for themselves and their special clients. And this isn't the first time. Goldman peddled inside tips less than three years after it paid $110 million to settle charges of conflicts of interest between its investment bank and its analysts. And yet in 2003 and 2006 the result was the same: Goldman traders made money and left the public holding the bag. They called it asymmetric service initiative or ASI. You might call it front-running. It started in 2006, actually in 2003, and there was a $110 million dollar fine, then it kept going in 2006; then it was publicized in 2009, in the Murdoch Street Journal, and it continued through last year – when the Goldman traders and analysts realized they should have greater respect for the Muppets and they were overwhelmed by the spirit to tell the truth to the Muppets.

Now, just to be clear, Goldman made a whole bunch of money by lying to the world over an 8 year period. They did not grow one leaf of lettuce, they did not hammer one nail, they did not pound out a single roll of steel, they did not cure cancer, they did not drill oil, they did not produce one watt of electricity, they did not build a car, they did not build a tire, they did not teach children, they did not extinguish any fires, they did not assemble a computer, they did not do squat to improve the quality of life in this world. They gambled and they lied to make sure they won their bets, and in the process they stole money from people that did actual work. 

Sinclair Noe

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