Tuesday, May 15, 2012 - JPMorgan is Scary, the California Budget is Easy - by Sinclair Noe

05152012 Script

DOW – 63 = 12,632
SPX – 7 = 1330
NAS – 8 = 2893
10 YR YLD =.01 = 1.78%

OIL - .57 = 93.41
GOLD – 12.20 = 1545.30
SILV -.46 = 27.82
PLAT – 5.00 = 1437.00

So, JPMorgan shareholders held their annual meeting. They decided to pay Jamie Dimon $23 million. They can still afford it; despite a $2 billion dollar loss, JPMorgan is still the largest publicly traded company, the largest bank in the US, and the largest derivatives dealer in the world. JPMorgan invented credit default swaps, they wrote the legislation to reform the derivatives markets, and when JPMorgan went insolvent in the 1980s and in 2007, they were bailed out by taxpayers.A $2 billion dollar loss is not the end of the world, JPMorgan is not in imminent danger, but I don't think this will end well. The really scary part isn't the loss, but that it only represents one-tenth of the annualized profit. What are they doing to make that kind of money? And if these are supposed to be the best and brightest bankers, what does it say about the others?

The FBI has opened an investigation into the trading losses. We don't know what the FBI is looking at and I won't hold my breath waiting. The SEC has opened an inquiry into JPMorgan's disclosures and accounting practices. JP Morgan maintains that the purpose of the trades that resulted in the $2 billion loss was to hedge exposure elsewhere, as opposed to being proprietary trading intended to generate profits. That’s contradicted by a report citing current and former employees of the chief executive office, including its former head of credit trading. Dimon is claiming even now that this qualifies as a hedge under the current version of the Volcker rule. And the Volcker rule was put in as part of Dodd–Frank at the suggestion of Paul Volcker for the explicit purpose of preventing exactly this kind of transaction. The banks and the leader in the banks' campaign against the Volcker rule has been JPMorgan and Jamie Dimon in particular, who has been brutally rude to Paul Volcker and incredibly arrogant, saying Volcker doesn't understand anything about what he's talking about.

"You can't legislate away stupidity and risk-taking and greed and recklessness. What you can do is make sure when it happens it does not cause too much damage and to do that you have to make sure you have good rules against fraud and abuse, better protections and you force banks to hold more capital against their risk," so says Treasury Secretary Timothy Geithner. He is wrong. You can legislate away quite a bit of stupidity and risk-taking and greed and recklessness. If you can have government creating a fractional reserve system which allows banks to create money out of thin air, then you can legislate how they gamble with that money. The solution is incredibly simple – reinstate Glass-Steagall. Let commercial banks be commercial lenders and the investment bankers can still gamble with their own money. Of course, any meaningful reform is nearly impossible considering the banks have purchased the politicians.

Francoise Hollande has been sworn in as the new president of France. In his inauguration speech he promised a “new path” for France, and then, in his first act as president, he followed the well worn path to Berlin to meet with German Chancellor Merkel. It wasn't easy; his plane had to turn around after being struck by lightning. Seriously. He's never heard of an omen?

Greece can't form a government, and so they will vote again in about one month. Meanwhile, stocks, precious metals, oil, gasoline, and the kitchen sink have all been slipping in price and the reason, from everything I read - is because of Greece. You probably never realized the amazing economic control Greece is able to exercise on world markets. It's reported that Greeks withdrew nearly $900 million dollars from Greek banks yesterday; kind of a run on the banks.

I keep getting the feeling that what we've been watching play out in Greece will eventually play out in the US, an if so, it might start in California. Governor Brown announced an ugly budget, featuring cuts in Medi-Cal payments to hospitals and nursing homes, (remember the talk about health care “death panels”? Eliminate Medi-Cal and see what happens) cuts to those who care for the disabled, cuts to state courts and cuts in hours and pay for state employees. Construction on courthouses, will be stalled and the court system will be even more underfunded. And although few Californians have much sympathy for state workers, they are struggling to fill the gaps in agencies that are experiencing layoffs and, if Brown gets his way, will be rewarded for their extra work with a 5% pay cut. So far schools have been largely spared from this grisly exercise, but that will probably change in November if voters fail to approve a tax-hike initiative.

Brown's proposed budget presumes that voters will approve the tax-hike initiative in November, which would increase the state sales tax by a quarter of a percent and raise income taxes on the wealthy. These taxes would generate an estimated $8.5 billion through the end of the budget year, and voters would blow another gaping hole in the budget if they reject them. Brown addresses this possibility by including "trigger" cuts in his budget proposal that would reduce funding for schools and community colleges by a whopping $5.5 billion and higher education by $500 million, while cutting game wardens, park rangers, lifeguards and other popular positions and services. There is a word for these kinds of cuts, it's a Greek word – austerity.

Facebook is expected to increase its offering price from its initial range, giving the company a valuation possibly as high as $104 billion. Governor Brown is expected to announce a 15% tax on IPO valuations on Saturday. Problem solved. This budget stuff is easy.

So, do you think the economy has slowed enough to warrant the Fed stepping in with another round of stimulus?

Home builder sentiment improved in May to the highest reading since the depression. The National Association of Home Builders/Wells Fargo housing market index rose to 29 from 24 in April. The April index was initially reported to be 25. The reading, though the best since May 2007, is still well short of the 50 level that indicates that more builders view conditions as good than poor. Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April.

The Commerce Department said April retail sales growth slowed to 0.1% Taking the first four months of 2012 together, the U.S. economy appears to be growing at a modest 2% to 2.5% clip. In April, online retailers, furniture outlets, auto dealers, pharmacies, and sports and leisure stores all posted solid sales increases. Internet and catalog retailers got a 1.1% boost while spending on autos climbed 0.5%.

Consumer prices were unchanged in April as lower gasoline prices offset rising food, apparel and car prices, The Labor Department said prices didn’t change on a seasonally adjusted basis and that so-called core prices, which exclude food and energy, rose 0.2%. Gasoline prices dropped 2.6% on the month, while food prices dropped were up 0.2%. For the past 12 months, consumer prices are up 2.3%.

So, do you think the economy has slowed enough to warrant the Fed stepping in with another round of stimulus? The economy is actually in much better shape than the past couple of weeks in the financial markets, nothing exciting but shuffling along while the markets stumble. The broader economy can crash and burn and the Fed would be frozen but when the markets whine, it usually gets the Fed to take action. Not this week, but it is a setup for next month's FOMC meeting.