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. Amazon.com 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 1^st, 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.