Thursday, May 31, 2012

Thursday, May 31, 2012 – Jobs and the Food Chain – by Sinclair Noe

DOW – 26 = 12393
SPX – 2= 1310
NAS – 10 = 2827
10 YR YLD -.04 = 1.58%
OIL +.04 = 86.57
GOLD – 2.30 = 1561.20
SILV - .22 = 27.81
PLAT +15.00 = 1421.00

The S&P 500 index fell 6.3 percent in May, its largest percentage drop since September. The Dow's 6.2 percent drop and Nasdaq's 7.2 percent loss are their largest monthly declines in two years. Crude oil futures prices finished May with losses of 17%, their worst drop (or best, depending on your position) since December 2008, near the height of the U.S. financial crisis. Gold ended May with its fourth straight monthly decline – about 6%, the most in 12 years, and only slighly better than the S&P500. The troubles in Europe sent investors looking for the safe haven of the dollar and the dollar index gained 5.4% in May. The Euro finished the month at $1.233, down 7%. The Spanish market index, the Ibex25 is down 13%, Japan's Nikkei is off 10%, and the Russian RTS is down 22% in May. The 10-year US Treasury note returned 1.6% for the month as yields dropped to historic low. If you think the markets are starting to resemble Mr. Toad's Wild Ride – you are correct. The VIX, the Volatility Index jumped 40%.

We had a few economic reports, disappointing economic reports, however the big jobs report tomorrow will overshadow today's news.

The Commerce Department reports economy grew at an annual rate of 1.9 percent in the first three months of the year; that number is a downward revision of the initial estimate of 2.2% growth. The new, lower number can be attributed to less spending by consumers and government, while businesses were slower to restock, and the trade deficit grew.

Consumer spending grew at an annual rate of 2.7 percent in the first quarter. While that was the fastest pace since the end of 2010, it was down from an initial estimate of 2.9 percent. Personal after-tax income was revised lower to growth of only 0.2%; that's down form the earlier estimate of 1.7%. And that means that consumer spending only increased because people were saving less. The savings rate fell to 3.6% of disposable income.

More demand from consumers leads businesses to step up restocking, which also boosts growth; however consumer spending was not strong and there was now need to restock shelves.

Government spending at all levels fell at a 3.9 percent annual rate. That's much more than the 3.0 percent decline first estimated. It was the sixth straight quarter that government spending has declined.

A rising trade deficit slows growth because the country is spending more on foreign-made products than it is taking in from sales of U.S.-made goods. One bright spot for the trade deficit is that oil prices have been dropping hard in the past month, which should give a slight boost.

And while it is widely anticipated that the second quarter is growing at a little better pace of 2 to 2.5%. So, the first quarter GDP number is sluggish; we need to see twice as much growth to cut the unemployment rate by a percentage point over the next year.

The unemployment rate has dropped from 9.1% to 8.1% and part of the reason is that the economy has added 1.5 million jobs since August, and 2 million jobs in the last year, which is good, but also the unemployment rate dropped because many people have dropped out of the labor market – they given up looking for a job or they've retired. The fact that hundreds of thousands of people are being dropped from long-term unemployment benefits likely means that they will no longer be counted as part of the labor market, and might skew the unemployment rate lower.

Weekly unemployment claims last week were slightly higher than expected (383K vs. 370K), but that is well within the normal level of "noise" for this series. At worst, this could be a sign that the downtrend in claims is slowing; still, the unadjusted claims number was down 10.6% from a year ago, and that is a good thing.

ADP, the payroll processing company issues a monthly report on private sector jobs; private employers created 133,000 jobs in May, fewer than the expected 148,000; the pace of hiring in private jobs has slowed. So far in the second quarter, the average monthly gain for private-sector payrolls is 123,000, compared with a pace of more than 200,000 seen for the U.S. economy in the first quarter. The ADP report is not a precise guide to tomorrow's jobs report.

Tomorrow morning, we'll get the monthly nonfarm payroll report and the consensus is for an increase of 150,000 payroll jobs in May, and for the unemployment rate to remain unchanged at 8.1%.

The numbers in tomorrow's report will indicate whether the economic slowdown of March and April was largely a statistical blip, perhaps just a weather related anomaly. A solid monthly jobs gain in May — at least 150,000, if not closer to 200,000 — would suggest that the recovery remains on track. Anything below 150,000 would suggest that Europe’s troubles, high gas prices and the continuing hangover from the American debt bubble had caused a spring slowdown for the third straight year.

Job growth of more than 200,000 in May would qualify as excellent news. Growth between 175,000 and 200,000 would be very good, while growth between 150,000 and 175,000 would still be pretty good. Anything less than 150,000 would count as a disappointment — and a sign that the strong hiring pace of early this year seems to have faded.

Also, remember to watch the revisions to the March and April numbers. As of now, the Bureau of Labor Statistics shows a gain of 154,000 jobs in March and 115,000 in April, but those numbers will be updated.

The numbers matter for businesses and job seekers, including those two guys looking for a job at 1600 Pennsylvania Avenue.

PIMCO's Bill Gross, manager of the world's largest bond fund says the debt crisis and central bank policy responses have degraded the quality and value of debt markets and signal a potential breaking point in the global economy. In his June outlook entitled "Wall Street Food Chain," Gross said stimulus policies by the Federal Reserve and the European Central Bank have led to riskier government bonds with lower value and paved the way for higher inflation.

Gross writes: "Policy responses by fiscal and monetary authorities have managed to prevent substantial haircutting of the $200 trillion or so of financial assets that comprise our global monetary system, yet in the process have increased the risk and lowered the return of sovereign securities which represent its core."
Gross writes: "Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year old global monetary system.”
Gross said investors should seek higher-quality sovereign bonds in the U.S., Mexico, and Brazil with intermediate durations and stocks of global companies with stable cash flow that are exposed to high-growth markets.

He also warned that the higher risk and lower quality of U.S. Treasuries could spur investors such as China and firms like PIMCO to drop them for more profitable investments such as commodities and real assets, a move that could disrupt the current dollar-based credit system.

Gross also said, "At a 1.57 percent yield for Treasuries on the 10-year level, you'd have to think they're looking for other alternatives" such as commodities or oil, and he doesn't expect a common euro bond to be issued, but that such an event would stifle demand for Treasuries and could raise 10-year U.S. Treasury yields to 2.5 to 3 percent.

In Europe, ECB President Mario Draghi ruled out hopes that the central bank would step in to ease the pressure in financial markets as EU leaders grappled with measures to tackle structural problems in the debt crisis. Concerns over Europe's debt crisis and the lack of a clear policy response have been rising since Spain unveiled unconvincing plans to recapitalize nationalized lender Bankia. Those worries kept Spain's 10-year bond yields at around 6.6 percent, The flight from Spanish debt and Italian bonds, which are under threat of contagion from Spain, has boosted demand for the safety offered by German government paper.

Germany's two-year bonds traded just above zero percent, while benchmark 10-year Bund yields hovered around their record low of about 1.25 percent.

Wednesday, May 30, 2012

Wednesday, May 30, 2012 – Spanish Winter, Mexican Spring – by Sinclair Noe

DOW – 160 = 12,419
SPX – 19 = 1313
NAS – 33 = 2837
10 YR YLD – 0.11 = 1.62%
OIL – 3.38 = 87.38
GOLD + 7.70 = 1563.50
SILV +.05 = 28.03
PLAT – 28.00 = 1406.00

Yesterday the Dow gained 125 and I said: “The reason du jour for today's market gains: positive news regarding Greece. Really? I'm not buying it. Make up your own reason for today's gains because we are just as likely to see declines tomorrow.”

And sure enough. The problem du jour was Spain and the Dow dropped 160. This economic stuff is easy. Remember when I told you a couple of months ago to get out in May? The S&P 500 has fallen nearly 6 percent in May, heading for its worst monthly performance since September. You're welcome. The Nasdaq is down 6.9% for the month. US Treasury benchmark yields fell to their lowest in at least 60 years. Oil dropped more than 3 percent to the lowest level in nearly six months; oil prices are down 16% in May. The dollar remains the cleanest shirt in the dirty laundry hamper, up 5.5% for the month. The euro dropped below $1.24 to a 23-month low. Spain's stock market hit a 9 year low. Yields on 10-year Spanish bonds topped 6.6%, which is close to levels at which Ireland and Greece sought international bail-outs.
The news from Europe was all Spanish overnight as the country struggles to find traction on any plan that will lead it away from the need for external help The Spanish Economy Ministry played down a report that the European Central Bank had rejected an initial plan to rescue Bankia, Spain's fourth biggest bank, by stuffing it with government bonds that could be used as collateral to borrow from the ECB. A ministry spokeswoman said: "Spain did not formulate any proposal to the ECB on funding the Bankia plan, so it was difficult for it to have an opinion."
Spanish Prime Minister Mariano Rajoy insisted the government has no intention of seeking an EU/IMF bailout either for its banks or for the state, but then a Governor for the Bank of Spain resigned, abruptly, a month before his term was due to end, adding to concerns about the handling of the Bankia crisis and relations with European institutions.
Highlighting Spain's difficulty in meeting fiscal targets while gripped by a worse-than-forecast recession, the outgoing central bank chief said tax revenue may fall short of government estimates and spending may be higher than expected. He recommended bringing forward a rise in value-added tax set for 2013 if the deficit objective goes off track this year.
Also, Spain announced its joint national-regional bond issuance scheme would go live within days:
Spain’s government said it would approve the issuing of joint bonds by the 17 regional governments next Friday, so as to make it cheaper for them to finance their debts. And so the blurry line between Spanish banks and national and regional governments gets a bit more out of focus. The problems of Spain’s economy all stem from the fact that the government sector is attempting to implement an austerity program at a time when the private sector is in deep retrenchment. Given the economic and political circumstances the country finds itself in it may have no choice, but that won’t change the outcome. Private sector demand is falling and economic circumstances continue to make it harder for the private sector to recover from the economic shock of the housing market collapse. The Bank of Spain says retail sales declined in April at a record rate and the economy will slow even more in the second quarter. It looks like Spain has entered the very nasty and possibly inescapable downward spiral.
Meanwhile, the National Bank of Greece is threatening that the Greeks face economic catastrophe if they leave the euro. Living standards would plummet, incomes would be slashed by more than half, and inflation and unemployment would skyrocket. The bank claims per capita income would collapse by at least 55 percent, the new national currency would depreciate by 65 percent against the euro and a recession (I hate to think what a depression would look like for Greece), now in its fifth year, would deepen by 22 percent, pushing unemployment and inflation through the roof.
Tomorrow the Irish vote in a referendum on a European budget discipline treaty which is seen as a precondition for receiving further EU/IMF aid.
So far, voters in Europe have sent an inescapable signal to the EU powers that be: no more austerity. In doing so, they showed that the average voter has a better understanding of economics than the technocrats in charge. So far, the all-austerity plan has not solved the debt crisis and has sent weaker economies into depression, with high unemployment, higher and higher costs to service debt, and strain that threatens the union. There is a case to be made that the problem with austerity is not the austerity itself, but the pace at which it is being imposed. Rather than a mad rush to meet euro-zone deficit limits, more flexibility is needed to allow governments to adjust over a longer period of time and benefit from economic recovery.

And there is another argument that says whatever the verdict at the ballot box, Euro-land can't avoid austerity. Its indebted governments can’t simply return to spending and borrowing as they had in the past. Financial markets just wouldn’t stand for it. And what we really have is a battle to see who will prevail in Europe, democracy or financial markets. Of course, a democratic union can suport financial markets, and indeed the vast majority of Europeans are in favor of keeping the Euro-union intact. However, the bigger question is whether the financial markets can live with a democracy, which can be messy at times. So far, there doesn't seem to be much flexibility.

The world is a dangerous place; the Muslim Brotherhood has been elected to lead Egypt past the Arab Spring. Syria is being butchered by a madman. UN nuclear inspectors showed new satellite imagery indicating that Iran may be conducting clean-up work at the military site where inspectors suspect tests relevant to developing nuclear weapons have been carried out. 

Meanwhile, just one state to the south, in case you hadn't noticed, is another exercise in flexibility, or lack thereof. I found this report on the situation in Mexico. On May 6th, the four candidates for the Presidency debated. In a nation where the internet reaches only 30%, and few can afford cable, the debate was not carried on broadcast television. The Federal Electoral Institute (IFE) chose to have a former porn star host the debate. She was clad in a thin, revealing white dress.

On May 11th, the PRI's candidate, Pena Nieto, attempted to speak at Mexico's elite Iberoamericana University. Student protests prevented him from speaking.

As governor of the State of Mexico, Nieto had repeatedly used police force to prevent student protests. In the wake of the Iberoamericana protests, thousands marched through Mexico City, and then other cities, against Pena Nieto. Their demands were simple: above all, clean elections. An end to corruption and manipulation in the IFE. Fair and equal access to the media-- an end to the unfair, biased and deceptive coverage by Party-controlled media.

In the weeks that have followed, this youth movement has come to be known as "YoSoy132," or "I Am 132." It takes some of its inspiration from the Occupy and Anonymous movements. It remains independent, its primary focus on organizing to observe the polls and, if possible, ensure their integrity.

Much and serious talk has arisen, of a "Mexican Spring." What this would mean, remains unclear. In both Eastern Europe and the Middle East, it entailed replacing authoritarian governments with democratic regimes. In Mexico, the loudest criticisms of the democracy movement remain focused on "stability." These same critics argue loudest that Mexico today is a democracy, with a three-party system and a limited Presidency. All experience from the past twelve years, says something different. Mexico's youth today, say something different.

The question is-- what would a Mexican Spring consist of?

We're coming up on the 2 year anniversary of the Dodd-Frank financial reform law. This was the response to the abuses of the financial industry that resulted in the near meltdown of the global financial system in 2008. Two years after the law was passed and it hasn't made any real difference. I can say that with some certainty because only a small portion fo the law has been enacted; the rest is under consideration and review; and every line in the law is being beaten back by the banks. This means the big part of the law; like bringing transparency to the trading of derivatives and the Volker Rule, which would theoretically eliminate banks making risky trades through their proprietary trading desks, those parts have not been enacted.

And even if Dodd-Frank survives the attacks of the banking lobbyists, there are doubts about its potential efficacy. Recently, there have been complaints that the law is overly complex. This is a good argument because the law runs about 2,000 pages and damn near nobody has read the whole thing, much less figured out the implications. Banking has become incredibly complex. The recent multi-billion dollar trading flop by JPMorgan just underscores how complex banking has become; and their trading activity has become so complex that they don’t' even understand the ramifications of their own actions; the regulators certainly lack awareness and the banks' own efforts at self regulation are laughable. On top of all that we don't know if Dodd-Frank regulations will be effective and we don't know if they will ever be implemented. So, that leaves us facing the same problems we faced in 2008.

You might have noticed there is a strong anti-regulatory sentiment this election year. Maybe you've heard about the “regulatory tsunami of unprecedented force” issuing from Washington. Maybe you've heard about the “vast edifice of regulations” or the “regulatory jihad”. The truth is that the Obama administration has issued slightly fewer rules than George W. Bush did at the same point in his tenure. And the cost benefit analysis has shown fewer costs to business than the previous administration. That restraint means that two-thirds of the rules proposed in Dodd-Frank have not been implemented; four years after the near collapse of the financial world as we know it and we haven't done anything to correct the problem. I understand that nobody likes the burdens of regulations but I also don't like salmonella in my spinach; I don't like cars that have exploding gas tanks; I don't like factories that spew toxic waste into the air or into rivers; I don't like businesses that force children to work on their assembly lines; I don't like businesses that discriminate against people because of the color, religion, gender, or other orientation; and I don't like banks that gamble with deposits and threaten to destroy the economy unless taxpayers bail them out.

What is going to prevent a repeat of 2008? Whether we are ready to admit it or not, Dodd-Frank is dead on the vine. The Senate Banking Committee's ranking Republican, Senator Richard Shelby of Alabama, has vowed to repeal Dodd-Frank altogether. The panel’s chairman, Senator Tim Johnson of South Dakota, and Senator Charles Schumer, a Democrat of New York, have called for looser rules on banks’ international derivatives trades. After JPMorgan’s losses came to light, Senator Johnson said it shows“why opponents of Wall Street reform must not be allowed to gut important protections for the financial system and taxpayers.” He is right. Now he and other committee members, and the regulators, need to show what they have learned. Don't hold your breath. Senator Johnson's biggest campaign contributor – JPMorgan. What is needed are requirements for derivatives to be traded on transparent exchanges — which would have prevented the trades from piling up without notice. Banks should also be required to move any derivatives deals into separately capitalized bank affiliates, which would protect taxpayers, and the banks, from disastrously large losses. Banks fought hard to keep those provisions out of Dodd-Frank, and, even now, they are still pressing to scale them back. The derivatives marketplace has grown to more than $700 trillion in size. It is the wild wild west of finance, and it is ground ripe for tax evasion and other abuses.

The simple solution would be to reinstate Glass-Steagall, the old depression era response to the problem of Too Big to Fail Banks. Split the banks into a traditional bank and an investment bank. The traditional bank takes deposits and makes loans; safe, conservative, and boring. The investment bank can make trades and if they win they keep the profits and if they lose, the depositors accounts would not be affected, and the investment banks could sink or swim based on their own performances. No wonder the bankers are opposed.

Tuesday, May 29, 2012

Tuesday, May 29, 2012 - Dithering About Europe - by Sinclair Noe

DOW + 125 = 12,580
SPX + 14 = 1332
NAS + 33 = 2870
10 YR YLD -.01 = 1.73%
OIL +.08 = 90.84
GOLD – 18.90 = 1555.80
SILV -.55 = 27.98
PLAT – 9.00 = 1432.00

The reason du jour for today's market gains: positive news regarding Greece. Really? I'm not buying it. Make up your own reason for today's gains because we are just as likely to see declines tomorrow. Still, Europe is important.

Philadelphia Federal Reserve Bank President Charles Plosser said Monday that people in the United States have no need “to get all in a dither” over Europe’s debt crisis. Plosser feels that Europe’s economic problems could even benefit the US in the short term. It is “not an unreasonable argument,” he said, that low US interest rates and gas prices in response to the uncertainty in Europe’s financial situation could offset any potential difficulties for the American economy. Plosser said Europe “is just throwing a lot of noise into the system right now. It makes reading the tea leaves particularly difficult right now.” He noted, however, that a “flood of liquidity” into the US seems much more likely than investors running from US financial institutions. But, he added, the Fed will be able to deal with any fallout from Europe’s economic troubles. He believes the Fed has the necessary tools to deal with the situation, no matter what the situation.

So, how is the Euro situation likely to be resolved? Well, the Greek election is June 16, so the Euro probably won't implode before the election, however there will be significant posturing. Most Greeks want to stay in the euro-union; by a wide majority of over 80%. The last election was an opportunity to express anger with the mainstream centrist parties that had made such a mess. The reality is that most Greeks don't like the extreme right wing and left wing parties. Look for a return to the center, maybe the center-left.

Once Greece actually has a government, the most likely solution is for Germany and France to reset interest on Greek debt to zero, and possibly some partial defaults on debt. The Greeks are not likely to accept more austerity without seeing the banksters take a haircut. And this might be the only way for the Greeks to get out of debt, depending on the terms. And there's the rub. The terms of any deal will likely be punitive; in which case, the deal never gets done, or the deal goes sour within a year or so.

The latest plan is actually a plan floated last year by Germany’s opposition parties that involves joint European liability for nations’ sovereign debt. It’s called the European Redemption Pact (PDF). Since fresh thinking on the European debt crisis is badly needed, it’s worth taking a look. Here’s the plan in a nutshell: The debt of the 17 countries belonging to the single-currency euro zone is split into two parts. The portion up to 60 percent of each nation’s gross domestic product stays on the books, unchanged.

The portion of nations’ debt exceeding 60 percent of GDP is transferred into something called the European Redemption Fund. The 17 countries are still liable for the portion of their debt that’s transferred in the fund. They have 20 or 25 years to pay it off.

Legally, however, all 17 nations are jointly liable for the debt placed in the fund. This is a way for low-debt nations such as Germany to backstop high-debt nations like Greece, giving peace of mind to their creditors and lowering interest rates. To make sure countries pay off their debt in the European Redemption Fund, some of their national tax revenue would be earmarked for repayments. They would also have to commit to fixing national finances to free up money for debt service. Having gotten the rest of their debt down to 60 percent of GDP, countries wouldn’t be allowed to run it back up. There would be automatic “debt brakes”.

If this is the best tool to deal with the Euro-debt problem then there is reason to get your dither up; there is reason for the Greeks to spit on such a deal; there is no way they could repay the Redemption Fund while containing debt to GDP ratios.

If the Germans really want redemption, the solution is really quite simple, eliminate usury against the Greeks; cut interest rates to zero; wipe out some of the existing debt; take the hit now and make the future better; give them a fighting chance; treat them with some dignity and stop treating them as lazy thugs.

And this brings us back to the comments from Philly Fed Prez Plosser; he claims there is no reason to get all in a dither over the euro-debt crisis. He may be right but it would require more compassion and more common sense than the ECB, the IMF, and the euro-banksters have demonstrated to date.

Meanwhile, here is another example of why the Greeks voted for the extreme fringe. The Greeks don't have a governmetn, they don't have bandages in their hospitals, and the bailout money from the Euro-union, well that goes to the banks; $22.6 billion for Greeks four biggest banks — via bonds from the EFSF, the European Fubar Slush Fund. The Hellenic Financial Stability Facility was set up to funnel funds from Greece’s bailout program to recapitalize its banks. As long as this is the priority, it is understandable why the Greeks are voting angry.

Of course, the euro-crisis is no longer contained in Greece. Spain is standing on the edge of the financial cliff. Last week, Spain nationalized their fourth largest bank, Bankia. Late today, we learned the European Central Bank has rejected Spain's proposed plan to recapitalize Bankia with government bonds. Spain had proposed putting $24 billion in sovereign bonds into Bankia's parent company, which would then get swapped out for cash at the ECB's three-month refinancing window. The ECB reportedly rejected the plan on the grounds it violated EU rules against central bank funding of governments. Apparently, consistency is not one of the tools in the central bankers' tool belt.

In the latest symptom of Europe’s financial turmoil, the region’s riskier companies are bypassing banks and investors at home and turning to the US for loans. European companies borrowed about $18 billion in the US leveraged-loan market this year, more than double the amount for all of 2011

The S&P/Case-Shiller home price index was unchanged in March; the good news is that it didn't go down; the bad news is that it remains at post-crash lows. Phoenix continues to lead the recovery, up 2.2% in the first quarter. San Diego was up 0.4% for the quarter. LA gained 0.1%. The worst performers in the first quarter: Detroit and Chicago.

The Conference Boards, consumer-confidence index declined to 64.9 in May, the lowest level since January and the third monthly decline. Consumers were less positive about current business and labor-market conditions, and they were more pessimistic about the short-term outlook. To assess how consumers view the employment environment, economists follow a labor-market statistic derived from the Conference Board’s report. The labor differential subtracts the percentage of respondents who said jobs are “hard to get” from the percentage who said jobs are “plentiful.” The labor differential hasn’t been positive since January 2008, near the beginning of the Great Recession. In May the labor differential reached negative 33.1% — the lowest since January — compared with negative 29.7% in April.

On Friday, the Labor Department will report on employment for May, and nonfarm payrolls are generally guesstimated to rise to 168,000, compared with 115,000 in April. Hundreds of thousands of out-of-work Americans are receiving their final unemployment checks sooner than they expected, even though Congress renewed extended benefits until the end of the year.

In February, when the program was set to expire, Congress renewed it, but also phased in a reduction of the number of weeks of extended aid and effectively made it more difficult for states to qualify for the maximum aid. Since then, the jobless in 23 states have lost up to five months’ worth of benefits.

Next month, an additional 70,000 people will lose benefits earlier than they presumed, bringing the number of people cut off prematurely this year to close to half a million.

Some states are making it harder to qualify for the first few months of benefits, which are covered by taxes on employers. Florida, where the jobless rate is 8.7 percent, has cut the number of weeks it will pay and changed its application procedures, with more than half of all applicants now being denied.

Most states offer 26 weeks of unemployment benefits, plus the federal extensions that kicked in after the financial crash. The number of extra weeks available by state is determined by several factors, including the state’s unemployment rate and whether it is higher than three years earlier. So states like California have had benefits cut even though the unemployment rate there is still almost 11 percent. Benefits have ended not because economic conditions have improved, but because they have not significantly deteriorated in the past three years. In May, an estimated 95,000 people lost benefits in California.

Friday, May 25, 2012

Friday, May 25, 2012 – It's Better Than It Looks, Striving For Happiness Amidst the Cow Pies - by Sinclair Noe

DOW – 74 = 12,454
SPX – 2= 1317
NAS – 1 = 2837
10 YR YLD - .01 = 1.75%
OIL -.06 = 90.60
GOLD + 15.90 = 1574.70
SILV +.21 = 28.63
PLAT + 14.00 = 1436.00

For the week, the S&P 500 rose 1.7 percent.  I'm of the opinion that life is better than it appears. We look around sometimes and the world can seem scary. Sometimes we have to look a little deeper to find the good, the decent, the delightful and the potentially pluperfect.

And that brings us to today's topic on the possibility of the Federal Reserve pumping money into the banking system through asset purchases, in other words, Quantitative Easing Part 3. Inflation expectations are falling, if you consider Treasury bonds as a gauge of inflation. The lower outlook for inflation gives the Fed wiggle room to stimulate the economy. Although, right now the Dow looks like a better QE indicator, and it is not indicating QE. The banks can always make a case for QE, but what about the Fed officials who make the actual decisions?

St. Louis Federal Reserve President James Bullard says he expects the U.S. economy to perform better than many forecasters anticipate and that the Fed will therefore need to raise interest rates in late 2013, not late 2014 as its policy committee is currently indicating.

Minneapolis Federal Reserve President Narayana Kocherlakota thinks the current labor market performance is much closer to maximum employment than the data alone would suggest. A few weeks back, Kocherlakota said the Fed should start looking at tightening monetary policy in the next six to nine months. He said he saw inflation at around 2% this year and 2.3% in 2013, numbers that signal the need to start exiting the central bank’s current ultra-easy policy.

New York Federal Reserve President Wiliam Dudley says:“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front.” Dudley thinks economic growth at around 2.4%, is sufficient to keep the central bank from easing monetary policy.

Overall, the chatter from the Fed-heads seems sanguine. That could change before the June FOMC meeting. The monthly jobs report always carries the potential to shake a Fed governor to the core. The next FOMC meeting is June 19. The Greeks vote on June 17. Anything that can happen in 2 days would be addressed with liquidity programs, not easing, and liquidity programs have not needed FOMC meetings to be put into effect in the past. Fed officials know the timing of the Greek vote, and typically want to see the impact of events over time before responding with monetary policy tools.

Still, the Euro-leaders seem determined to impose austerity on the peripheral countries with pure cut off your nose to spite your face sensibility. Things in Euro-land could get nasty fast. The whole Lehman Brothers collapse was nasty fast; it could happen again. The Spanish word for Lehman is Bankia; the fourth largest bank in Spain has been nationalized; trading has been halted; they will be receiving a $24 billion dollar injection of cash recapitalization. And the recent JPMorgan bungle was a vivid reminder that Too Big to Fail banks still pose a very real systemic threat. Plus, it might shut up Jamie Dimon from whining about financial reform. Maybe Dodd-Frank and Glass-Steagall wouldn't have prevented multi-billion dollar losses, and still growing but now Dimon's argument sounds like someone debating we shouldn't have seat belts because they wouldn't have prevented Hurricane Katrina.

Still, absent a big dose of nasty, the situation is fairly good for us. We head into the Memorial Day Holiday with an improving jobs picture, low inflation, plenty of softness in the economy but not enough to warrant QE3 at this precise moment. And with global turmoil, strife, and trouble, money is looking for a safe haven and that not only props up the US economy but also QE3 would spoil the illusion and send money looking for safety elsewhere; that kind of a hit would be worse than the jolt of stimulus from QE3. Of course, the Fed is still accommodative and they still have an implied put in place and they're still printing money at a prodigious clip; but we're not spending with the recklessness of the recent past.

There’s a confused and confusing debate going on over whether President Obama has presided over a “spending binge,” as Republicans claim, or whether, under Obama, “federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.”

The key is fiscal year 2009 -- and who you blame for it. By any measure, spending popped that year. If you’re looking at raw dollars, it rose by $535 billion. And “the 2009 fiscal year,” writes Market Watch’s Rex Nutting, “which Republicans count as part of Obama’s legacy, began four months before Obama moved into the White House.”

That’s true: The federal fiscal year stretches, somewhat weirdly, from October to September. So fiscal year 2009 began in October 2008.

And that’s the point of Nutting’s analysis: if you attribute most of fiscal year 2009 to George W. Bush then, after adjusting for inflation, federal spending under Obama has actually dropped by 0.1 percent. Politifact checked the numbers and agreed: “Using raw dollars, Obama did oversee the lowest annual increases in spending of any president in 60 years,” they write. “Using inflation-adjusted dollars, Obama had the second-lowest increase -- in fact, he actually presided over a decrease.”

The real issue is that 2009 is an anomaly driven by crisis. The Bush Administration screwed it up and drove the spending much higher. Obama stayed the course.

The question is where should spending be now? The Obama administration wanted it to be higher. After all, unemployment rose through 2010, and remains high today. It has proposed a raft of additional stimulus bills since 2009. Republicans in Congress, however, refused to pass most of their plans, and NOT because they had an epiphany on fiscal discipline; past action refutes any non-politicized argument. The lower spending numbers are due to Republican obstructionism but they're afraid to acknowledge the lower numbers, much less take credit for them – which would be an admission of responsibility for failed policy. Instead the Democrats are touting the lower spending numbers when in fact it is numeric proof they've had their legislative agenda and economic plans hoisted on a petard. Washington is so full of cow pies, they are unavoidable. And so the Fed is sitting back waiting to whitewash the lack of fiscal policy. It isn't exactly the checks and balances envisioned by our founding fathers but so far the tapestry is only slightly raveled.

And still, we head into the weekend with the price of oil in a nifty decline, and I don't know who to thank for that but I'll take it. The price at the pump is almost bearable except my long-term memory hasn't faltered completely, and for this I find comfort. The weather looks good for a barbeque. Speaking of long-term memory, this is the first Memorial Day in 10 years that the US hasn't been at war in Iraq. There are approximately 23.4 million US veterans, 1.7 million of whom served in Iraq or Afghanistan. And because of everything they gave, we have the freedom to do whatever we want, more or less. And now our Iraq War vets can spend the holiday at home. That's good. We have the choice to get buried under the negatives or we have the choice to strive for happiness. I'm pretty sure there is empirical evidence that the standard of living is improving. I'll look it up some day but for now I'm of the opinion that life is better than it appears. That's my story and I'm sticking to it. 

Thursday, May 24, 2012

Thursday, May 24, 2012 – Banks Issue Instructions for the Euro-Crisis – by Sinclair Noe

DOW + 33 = 12,529
SPX + 1 = 1320
NAS – 10 = 2839
10 YR YLD +.04 = 1.76%
OIL +.95 = 90.85
GOLD – 4.50 = 1558.80
SILV +.48 = 28.42
PLAT – 7.00 = 1424.00

The Dow Industrials moved lower this morning, then recovered, then dropped, then rallied into the close. Stocks moved down, up, down, up. If you can figure out what it means, send me a note. I'm not sure it means much.

Treasury prices declined a little and yields inched up. The Treasury Department sold 7-year notes at auction. One economic report today showed 370,000 people filed for first-time jobless claims last week. Another report showed durable good orders rose 0.2% in April. Nobody was surprised by the reports.

The euro jumped up against the Swiss Franc on rumors the Swiss government might implement a tax on Swiss franc-denominated deposits. In the past the biggest argument against a tax was that it would drive Swiss banking activity off shore. So, how does a rumor like that get rolling? Well, there are wheelbarrows full of euros being deposited into Swiss banks right now.

Meanwhile, JPMorgan issued a report on the European Central Bank, or maybe they issued instructions; I'm not sure which. The economic downturn will lead the ECB to ease monetary policy even further with a combination of interest rate cuts and another round of the LTRO, Long -Term Refinance Operation, also known as Free Money. Of course, if the ECB lowers rates and injects more liquidity into the banking system, it might be seen as an admission that the Euro-zone is in worse condition than they've led us to believe; it might be seen as a sign of weakness. So, it would be prudent to expect the ECB to change the name of their accommodative monetary policy.

The Murdoch Street Journal has compiled a rundown of various guesstimations of what might happen if Greece exits the Euro-union, or, what Citigroup has coined a “Grexit”. Seriously, I don't make this stuff up.

Capital Economics: Leaving the euro zone could indeed be the only way for these countries to avoid a sustained and damaging period of deflation [and] The repercussions if Italy and Spain left would be immense, causing another deep recession. But for Greece, and possibly for the rest of the currency bloc, the advantage of regaining full control of monetary and fiscal policy is likely to outweigh the costs.

JPMorgan: There’s now a 50% chance of Greece leaving, up from 20% before the country’s politicians failed to produce a coalition government. Regional unemployment could be higher than “anything seen in the past half-century.” A Greek departure is likely to be disruptive and disorderly, pushing the euro to around $1.15-1.10 against the dollar and causing a 2% drop in euro-zone gross domestic product.

Danske Bank: We are in for a long period of uncertainty but we believe that ultimately a deal will be struck between the EU/IMF and Greece that keeps Greece in the euro and austerity will continue. The alternative is too severe for both the EU and Greece.

Deutsche Bank: Leaving the euro altogether would cause economic, political and social chaos, the bank says, whereas a parallel currency would give the authorities the power to stabilize the exchange rate…so as to keep the door open to a future return. They would call the parallel currency the “Geuro”. Other possible parallel names include Eur-rock or possibly Eur-reek.

RBS: There is already likely to be some form of Plan-B… [but] if contagion really kicks off then a thinly veiled form of monetary financing of debts may be on the table. Probably in the neighborhood of $400 billion in bank bailouts.

HSBC: Broadly speaking, it reckons that the “best” outcome for the euro would involve the experience for Greece being as tough as possible. If it’s too easy, the temptation for others to leave would be greater, and the currency would be seen to be easily divisible. Of course HSBC complaining about moral hazard is a bit like Satan complaining about the heat.

Italian Prime Minister Mario Monti said Greece is likely to stay in the euro and a majority of the region's leaders support issuing a joint bond. Monti said: "Europe can have euro bonds soon." Italy can help push Germany to support the idea of collective debt and to embrace the "common good" of Europe.

Of course, euro-bonds are not a done deal, this is just part of the deliberations at yet another Euro-union summit. The idea of euro-bonds is that the countries of the euro-zone would collectively assume some or all of the debts of individual governments. Even if Germany, Finland and Austria dropped their objections, constitutional changes and other interim steps would mean the first euro bond couldn't be issued for years. One council-member of the ECB warned that a Greek exit “would create large, massive shocks, and no-one knows the consequences”; the truth is that the next ECB economic summit is scheduled for late June; the trouble is that Europe doesn't have a month to wait for another summit. I am not confident they even have a week. The Greeks would like to stay in the Euro-union, 85%, but they are sick and tired of the German boot on their throats. Look for some kind of significant movement before the Greeks hold their next election. That whole democracy thing worries the technocrats in the ECB.

Yesterday we told you about hearings on why financial regulators only seem to dole out playful little slaps on the wrists for banksters. Today, the Securities and Exchange Commission announced it has decided to end its investigation of potential fraud at bankrupt Lehman Brothers Holdings without any enforcement actions against the firm or its former executives. The SEC had been examining whether Lehman misrepresented its financial health in the period before filing for bankruptcy in September 2008. A spokesperson for the SEC said investigators had questioned former Lehman executives who proclaimed they did nothing wrong, so that means everything must be copacetic.

Zillow is the online real estate pricing website. They issued a report today that nearly one third of mortgage holders nationwide, or 15.7 million, were underwater; owing more on their mortgages than the property is worth. That brings the nation’s total negative equity to about $1.2 trillion in the first quarter. Las Vegas was the worst, with about 71% of all homes underwater; Phoenix was second worst; southern California accounted for about
$139 billion in negative equity.

Wednesday, May 23, 2012

Wednesday, May 16, 2012 – Admit Nothing – by Sinclair Noe

DOW - 6.66 = 12,496
SPX + 2 = 1318
NAS + 11 = 2850
10 YR YLD -.07 = 1.72
OIL +.62 = 90.51
GOLD – 6.00 = 1563.30
SILV -.36 = 27.94
PLAT – 20.00 = 1430.00

A listener writes: Maybe they should have renamed the company "Two Facedbook" at the IPO for all of the double dealing and back door insider information. One face for Joe public and the other face for Joe privileged... My .02 worth.

We are learning details, and we will learn many more details as the Facebook Fiasco works its way through the courts. Zuckerberg made a boatload of money but he will spend a large part of his life dealing with lawyers and the legal system. At first blush it appears the bankers were behaving badly. Go figure.

The latest revelation is that Facebook officials told the analysts for the banks that were underwriting the IPO to reduce revenue and earnings forecasts. Facebook backed off and said, “hey, get your models down.”

Facebook's advisory came around May 9, the day it published an amended prospectus that included a cautionary note about lower advertising revenue. It isn't known which analysts from the 33 IPO underwriters were contacted by Facebook with the revised guidance. It also isn't clear exactly who from Facebook gave the guidance. The analysts cut their estimates because a Facebook executive told them to. The information about the estimate cut was then verbally conveyed to sophisticated institutional investors who were considering buying Facebook stock, but not to smaller investors. The estimate cut appears to have influenced the investment decisions of at least some institutional investors, dampening their appetite for Facebook stock, and crucially affecting the price at which they were willing to buy Facebook stock. Now, Facebook is reportedly looking to relist with the NYSE because they don't like something about the original listing through Nasdaq. I don't think there is much difference.

Facebook’s tagline ironically is, I believe, to promote a more open, transparent and connected world.

Federal and state regulators are looking into various issues surrounding the Facebook IPO; which is another way of saying nothing will happen.

There was actually a hearing last week that examined the “Settlement Practices of U.S. Financial Regulators” which revealed that regulators almost universally reach settlement without requiring an admission of wrongdoing. The General Counsel of the Federal Reserve admitted during the hearing that in the past 10 years only seven of the roughly one thousand enforcement actions were resolved without consent.

The reason for the slap on the wrist approach? Well the Fed says: “Requiring admission of fact and legal conclusions as a condition of entering into a consent action is likely to have a deleterious effect on our supervisory efforts by causing more institutions and individuals to challenge the requested relief in contested administrative proceedings, which typically takes years to reach final resolution, and which could delay implementation of necessary corrective action.”

So, the Fed will only punish banks who break the rules if those banks agree to be punished, otherwise it's just too much work.

Another regulator, the SEC, finally found some examples where it might not be appropriate for corporate evil-doers to deny wrongdoing. The SEC says that if a company has already admitted guilt in a criminal proceeding, then the SEC will request that they are not allowed to deny wrongdoing in a parallel civil proceeding.

Of course the banksters complain bitterly that they are stymied by regulation and a justice system that treats the banker who steals millions with kid gloves, while the man who steals a loaf of bread is left with no settlement but a guilty plea. Victor Hugo is laughing at us all.

MF Global argued in a December 2010 letter to regulators that futures brokers didn’t need tighter restrictions on how they invest client funds. Ten months later, as MF Global filed for bankruptcy, about $1.6 billion in customer accounts was missing; vaporized.

Within weeks, regulators approved a measure, dubbed the “MF rule,” designed to limit the kinds of transactions firms could make using client funds. The rule had been on the regulatory backburner as lobbyists sought to stall or alter new curbs proposed after the 2008 financial crisis. An army of lobbyists can sometimes succeed in rolling back or delaying rules and regulations to the detriment of investors and depositors, with rippling effects on the broader economy. However those regulations sometimes protect the businesses from self-inflicted damage.

In a few weeks there will be another election in Greece, provided there is still a Greece in a few weeks. The last elections, a couple of weeks ago, produced a hodge-podge of far left and far right politicians, and one left leaning voices by the name of Alex Tsipras, who has traveled to Germany and France to try to negotiate a way for Greece to remain in the Euro-union while not forcing the populace to a draconian austerity plan. Both newly elected president of France, Fran├žois Hollande, and the German chancellor, Angela Merkel, refused to meet with Tsipras, who offered one explanation: “We wanted an exchange of ideas and we realized that those who are afraid of dialogue are not prepared to discuss, perhaps because they have a guilty conscience.”

So, now we are being told to get ready for a Euro-union without Greece. Leniency will not be tolerated. The Eurogroup Working Group, which is a group of experts who work for the Euro-bloc group of finance ministers are advising Euro-countries to come up with contingency plans for a Greek exit. It all looks like a big game of poker, and someone is bluffing. Maybe.

The Belgian Finance Minister said: "All the contingency plans (for Greece) come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid."

The German Bundesbank said a euro exit would pose "considerable but manageable" challenges for its European partners.

Bloomberg reports: “Europe’s banks, sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro. While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.”

I don't know where they came up with the $1.19 trillion dollar figure, but it sounds very official. I think nobody really knows what a big mess it might be. 

Tuesday, May 22, 2012

Tuesday, May 22, 2012 - Bank Scum - by Sinclair Noe

DOW – 1 = 12,502
SPX +0.64 = 1316
NAS – 8 = 2839
10 YR YLD +.06 = 1.79%
OIL - .92 = 91.65
GOLD – 24.10 = 1569.30
SILV - .27 = 28.30
PLAT – 23.00 = 1451.00

Morgan Stanley, JPMorgan and Goldman Sachs are just pure scum. No wait, I shouldn't say that; it's much too kind; they are lying, stinking, thieving, dangerous scum.

Maybe you heard about a little company called Facebook; it went public last Friday. Today, Reuters is reporting Morgan Stanley, JPMorgan and Goldman Sachs all cut their earning forecasts for Facebook in the middle of the IPO roadshow. You didn't hear about that? No, you did not hear about that because the big banksters didn't tell you. Why didn't they tell you? Because they thought it would be much better to screw the public and try to make a quick buck on insider information, which they are required by law to report.

Instead, the banksters passed the information only to a handful of big investor clients. This is a problem because earnings forecasts are material information, especially when they are prepared by analysts who have special access to company information and company management. Everybody who invested in Facebook would consider this material information when making an informed decision. The handful of big investors that did receive the information about reduced revenue forecasts were reportedly shocked.

The change in Morgan Stanley's estimates came on the heels of Facebook's filing of an amended prospectus with the U.S. Securities and Exchange Commission (SEC), in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. Mobile advertising to date is less lucrative than advertising on a desktop.

Now, regardless of why the analysts cut their estimates (and this will be important), estimate cuts of any sort are material information, so if this news was given to some institutional clients, it also obviously should have been given to everyone.
Typically, the underwriter of an IPO wants to paint as positive a picture as possible for prospective investors. Investment bank analysts, on the other hand, are required to operate independently of the bankers and salesmen who are marketing stocks - that was stipulated in a settlement by major banks with regulators following a scandal over tainted stock research during the dotcom boom.
The people familiar with the revised Morgan Stanley projections said the bank's analyst cut his revenue estimate for the current second quarter significantly, and also cut his full-year 2012 revenue forecast. The analyst's precise estimates could not be immediately verified.
That deceleration freaked a lot of people out," said one of the investors.
Scott Sweet, senior managing partner at the research firm IPO Boutique, said he was also aware of the reduced estimates.
"They definitely lowered their numbers and there was some concern about that," he said. "My biggest hedge fund client told me they lowered their numbers right around mid-roadshow."
That client, he said, still bought the issue but "flipped his IPO allocation and went short on the first day."
So, there is at least one hedge fund that sold on what is apparently insider information, and then sold short, which is a nifty trick on the first day. It looks like a naked short sale. The hedge fund guy was selling shares he did not hold. That would be illegal. Maybe it is not coincidental that there were major problems with trade execution the first day; Nasdaq OMX is being sued, possibly a class action, for foul-ups that led to hour long delays in purchase orders and cancellation orders. A bigwig at Nasdaq now says the exchange would not have gone forward with the Facebook IPO if they had known the problems would disrupt a normal trading day. Yes, in retrospect, the current outcome will likely turn out even worse for investors' faith and sentiment in the farce known as the capital markets.
That follows an alert issued by Nasdaq before the first trade, which caused delays and unfilled orders. Nasdaq will pay out somewhere between $3 million and $10 million to people who lost money on Friday because of the delays.
Selective dissemination of this sort could be a direct violation of securities laws. Irrespective of its legality, it is also grossly unfair. The SEC should investigate this immediately. And late this afternoon is word that the state of Massachusetts has subpoenaed Morgan Stanley for more information. The head of the Financial Industry Regulatory Authority, or FINRA, said: “If true, the allegations are a matter of regulatory concern” to the industry-funded brokerage watchdog and the U.S. Securities and Exchange Commission. You think? How about this – if true, the way we find out the truth is by having the industry funded brokerage watchdog investigate and learn the truth.
Depending on how this shakes out, there will be lawsuits for years and years. Facebook can sue the underwriters, and the naked short sellers, and there will be counter-suits. And every schmuck who bought a share that lost value has now bought a ticket to the class action law suit. And even if Morgan Stanley, JPMorgan and Goldman Sachs do eventually weasel out of this, one thing is abundantly clear – they do not give a damn about you; they are lying, cheating scum and they consider you and me as nothing but Muppets.

And that brings us back round to Jamie Dimon, the CEO of JPMorgan Chase. You remember about a week ago, Dimon announced that the proprietary trading desk of JPMorgan had some hedged positions that didn't work out so great. Well Dimon called them hedges but the truth is that they were speculative trades. And the Chief Investment Office, or CIO lost $2 billion dollars. And then a couple days later Dimon said he was suspending plans to use bank funds to buy back up to $15 billion worth of shares in the bank. Buybacks are a popular way for firms to use up cash sitting on the balance sheet and prop up the share price. Buybacks and dividends are only allowed for banks that have certain levels of capital reserves as determined by stress tests conducted by the Federal Reserve. The immediate concern was that losses were big enough to affect the reserve levels. Mr Dimon insisted that the decision to cancel the buyback was not linked to fears about a possible increase in losses. "You should not interpret this as anything about the size of the loss," he said.
Then we learned the losses were a little bigger than expected; 50% bigger; $3 billion not $2 billion. The trading losses have occurred in a credit default index, which is fairly thinly traded. Dimon originally said the bank would deal with the positions to "maximise economic value". But there is a danger in taking the long view.  And now the trading in this thinly traded market has really gone quiet, suggesting that JPMorgan has decided to trade out of its positions gradually rather than take a big hit. Traders in these markets believe the losses could be as high as $7 billion. As one trader explained: "The markets know pretty much what JP Morgan has and in what sizes."  So, how big a hit could JPMorgan take? Well, it could just be $7 billion, or it could be $15 billion. And then there might be other positions that are affected, and there might be collateral fallout. For example, could JPMorgan maintain its credit ratings in the face of $15 billion in losses?
And then there are repercussions; today, the Senate Banking Committee started hearings into the JPMorgan losses. Committee Chairman Tim Johnson said: "The company's massive trading loss is a stark reminder of the financial crisis of 2008 and the necessity of Wall Street reform.”
JPMorgan is the biggest player in the derivatives markets. The CIO was betting on derivatives, which were bets on other derivatives. When things went well, the bank made big profits. If regulators stop the gambling it would take away a major profit center as well as eliminating a source of risk that threatens to destroy the global financial markets on any given day. Three years ago we faced this risk – nothing was done. If we don't stop this risk now, it's just a matter of time until the derivatives time bomb explodes.