Thursday, May 3, 2012 - Jobs More or Less, Europe More or Less, HSBC Mess

DOW – 16 = 13, 206
SPX – 10 = 1391
NAS – 35 = 3024
10 YR YLD unchanged = 1.92%
OIL +.09 = 102.63
GOLD – 17.90 = 1636.80
SILV - .58 = 30.17
PLAT – 28.00 = 1540.00

Tomorrow the government releases the employment report for April. Economists predict the U.S. gained 160k to 175k jobs last month, up from a disappointing 120,000 in March. The preliminary increase in March was the lowest in five months and fell well short of the 246,000 average from December to February.

We've seen several reports on jobs that might give a hint on tomorrow's report:

The four-week average of initial jobless claims was 383,500.Jobless claims declined by 27,000 to a seasonally adjusted 365,000 in the week ended April 28.

The Labor Department said continuing claims decreased by 53,000 to a seasonally adjusted 3.28 million in the week ended April 21. Continuing claims reflect people already receiving benefits. ADP’s report on private-sector payrolls slowed to 119,000 from 201,000 in March. The employment component of the Institute for Supply Management’s manufacturing report rose to 57.3% from 56.1%, on a scale where readings over 50% indicate expansion. The employment component of the Institute for Supply Management’s services report slowed to 54.2% from 56.7%, on a scale where readings over 50% indicate expansion. Planned layoff announcements rose 7% to 40,559, according to Challenger, Gray & Christmas.

What does it mean? It means wait until tomorrow's report and we'll find out. This is not the kind of report that you bet on. This is a report that calls for caution. There is a good chance the report could disappoint the market, no matter what the number. I say that because the market looks like it's ready for a sell-off. We've talked about the seasonality of the market, and for the past month I've been telling you to sell in May and go away. It's May already.

The Labor Department estimated productivity fell at an annual rate of 0.5% in the first quarter, down from a revised gain of 1.2% in the fourth quarter. The fourth-quarter increase was previously reported as 0.9%. All of the decline took place outside the manufacturing sector. Manufacturers, which have led the recovery since the U.S. exited recession in 2009, boosted productivity by 5.9%, as output jumped 10.8% and hours worked increased by 4.6%. Much of the gain likely stemmed from a big pickup in auto sales.

Excluding extraordinary items, GM reported a profit of 93 cents a share. That’s 8 cents more than Wall Street expected. GM’s North American operations made money. The company is relying less on incentives than it did a year ago. That means its unit margins are much healthier. GM saw record first-quarter demand for its cars in China, helping to boost revenue 4% to $37.8 billion. Even though GM posted a profit of more than $1 billion dollars, GM's European operations lost money.

In Europe, ECB President Mario Draghi did not offer any indications that further monetary stimulus is on the horizon. Speaking at a Euro-zone conference, Draghi said the most recent economic indicators “are not enough to change our baseline scenario, which foresees a gradual recovery in the course of the year.” At the same time, Draghi said it remained “premature” to begin discussing “exit strategies” from the central bank’s efforts to shore up liquidity across the euro zone. He said policy makers felt monetary policy remained “accommodative” given historically low nominal interest rates and negative real interest rates—interest rates minus inflation—across much of the euro zone.

The ECB’s Governing Council, meeting today in Barcelona, left the bank’s key lending rate unchanged at 1%, as expected. At least 11 euro-zone countries have seen at least two consecutive quarters of shrinking gross domestic product, meeting the widely-used definition of a recession, and more data in the next few weeks is likely to show the broader Euro-zone is in a recession, even while some countries appear to be in a full blown depression. Unemployment in March topped 10.9% for the Euro-zone, that's up from 9.9% one year ago. Even Germany, could feel the ill-effects.

Draghi stirred the growth-versus-austerity debate himself last week by urging European leaders to adopt a “growth compact” alongside the recently adopted “fiscal pact,” which aims to enshrine tough budget rules. Today, Draghi said he saw “no contradiction” between the pair. We'll see about that.

Francoise Hollande looks to be the next President of France. He leads the incumbent, Sarkozy, by several points in the polls. Sarkozy has been loyal to German Chancellor Merkel, praising the German economy as a model for France and rejecting the possibility that strong countries such as France and Germany would provide guarantees for joint euro bonds.

Hollande pledged to renegotiate the new fiscal pact if he is elected, Merkel wants none of that, saying: “The fiscal pact has been negotiated, it was signed by 25 government heads and is already ratified by Portugal and Greece. It is not renegotiable.”

Hollande responded immediately in a television interview, indicating he was not alone in rejecting the pact as it stands: “It is not for Germany to decide for the rest of Europe. I’m getting lots of signals, direct and indirect, from other governments, even if they are conservative.”

In his debate with Sarkozy, Hollande noted that it is the two countries that have not adopted severe austerity measures — Germany and the United States — that have shown stronger economic growth in the wake of the financial crisis and recession. Who will buy German manufactured goods when nobody else in Europe has any money? You could ask the same question about who will be left to buy US exports.

Germany, which benefited from 10 years of highly favorable terms of trade under the euro, has not needed to run up its debt or cut its government spending. The U.S. under the Obama administration opted for fiscal stimulus to counter the deflationary impact of the crisis. Hollande appears to be on the same page and his election could tip the balance in favor of those who see growth as necessary to save the euro, not unmitigated austerity. Of course, there is still the matter of an election this weekend.

Mortgage rates hit new record lows last week. Now we question the why and wherefore. Are low rates symptomatic of underwhelming growth and economic concerns? Are low rates signaling that we haven't really hit a bottom in the housing market? Or , are the low rates providing the fuel that is indeed lifting the housing market? Freddie Mac said the 30-year mortgage rate fell for a second week, to 3.84%, down from its previous all-time record low of 3.87% on February 9. The 15-year fixed average also fell to a new all-time low of 3.11%.

The Boston Fed has released a research paper on the cause of the housing crisis. They conclude the financial industry did not deceive mortgage borrowers and investors but instead everybody was just overly optimistic about house prices. There was no problem with the mortgages, no problem with the synthetic derivatives, no problem with transparency and disclosure. I think I'll file that one under “self serving bull”.

In 2003, the Federal Reserve Bank of New York and New York state bank regulators ordered HSBC Bank USA to do a better job of policing itself for suspicious money flows. The bank promised to beef up its anti-money laundering division. HSBC told regulators that it would fully address all deficiencies in the bank's anti-money laundering policies and procedures. Now Reuters is reporting that HSBC has fallen short. They reviewed documents from law enforcement officials that show that from 2005, the bank violated the Bank Secrecy Act and other anti-money laundering laws on a massive scale. HSBC did so, they say, by not adequately reviewing hundreds of billions of dollars in transactions for any that might have links to drug trafficking, terrorist financing and other criminal activity.

In some of the documents, prosecutors allege that HSBC intentionally flouted the law. The bank created an operation that was a "systemically flawed sham paper-product designed solely to make it appear that the Bank has complied" with the Bank Secrecy Act and is able to detect money laundering

In the Miami office - an important center for HSBC's private-banking and retail operations - a longtime private banker was fired for alleged sexual harassment after he warned compliance officers that clients were engaged in shady dealings.

In one email exchange submitted as evidence in that case, employees debated whether the bank should help a Miami client get around U.S. sanctions by moving the client's business to HSBC's Hong Kong office. 

The revelations come as HSBC confronts multiple investigations into its internal policing abilities. The Justice Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Manhattan district attorney, the Office of Foreign Assets Control and the Senate Permanent Subcommittee on Investigations are scrutinizing client activities such as cross-border movements of bulk cash, and transactions linked to Iran and other parties under U.S. economic sanctions. HSBC said in its February filing that it was likely to face criminal or civil charges related to the probes.

To date, the only enforcement action detailing any anti-money laundering shortcomings at HSBC was a 2010 consent order from the Office of the Comptroller of the Currency, the Treasury agency that is HSBC's chief regulator. The OCC, calling HSBC's compliance program "ineffective," told the bank to conduct a review to identify suspicious activity. This "look-back" was expected to yield a report to HSBC and regulators. The status of the report isn't known.

Some of the problems uncovered in the investigation: The bank understaffed its anti-money laundering compliance division and hired "gullible, poorly trained, and otherwise incompetent personnel." HSBC failed to review thousands of internal anti-money laundering alerts and generate legally required suspicious activity reports, or SARs, on transactions picked up by the bank's internal monitoring system.   In May 2010, the bank's backlog of alerts was nearly 50,000 and "growing exponentially each month."  Hundreds of billions of dollars moved unchecked each year through various bank operations because of lax due diligence and monitoring of accounts with foreign correspondent banks.

 In some instances, "management intentionally decided" not to review alerts of suspicious activity. An investigation summary also says, "There appear to be instances where Bank employees are misrepresenting" data sent to senior managers, and where management altered risk ratings on certain clients so that suspect transactions didn't set off alarms.

Since 2005, the bank has filed only 19 suspicious activity reports relative to the receipt of bulk cash and banknote activities. People familiar with HSBC and the reports said 19 is a low number given the risk of the clients. Between 2005 and 2010, banks and other depository institutions filed more than 3.8 million SARs, according to the Financial Crimes Enforcement Network, a bureau of the Treasury Department.

HSBC is the fifth-largest bank in the world in terms of market value, HSBC had $2.6 trillion in assets at the end of 2011 and operations in 85 countries and territories. Its North American business, which includes HSBC Bank USA and a consumer finance unit, accounts for about 5 percent of HSBC's profit.

There is a tendency for cases like this to end up in settlement, a possible fine, and no admission of wrongdoing. You have to wonder what it would take for a big bank like HSBC to lose its bank charter. But for now, the banks act as if they are entitled to do whatever they want, and since they have big political influence – they get away with it. What does it take to destroy a bank charter? Money laundering, tax evasion, supporting terrorists, drug trafficking – that's just business as usual.