Friday, June 29, 2012

Friday, June 29, 2012 - It's Almost Like Free Money, Woohoo!

It's Almost Like Free Money, Woohoo! - 
by Sinclair Noe


DOW + 277 = 12,880
SPX + 33 = 1362
NAS + 85 = 2935
10 YR YLD + .08 = 1.66%
OIL + 7.18 = 84.87
GOLD + 47.10 = 1600.10
SILV + 1.17 = 27.59
PLAT + 58.00 = 1454.00


All right gang – what do the markets love? 


Free money. 


When central banks give free money to the banks (and let's be clear, they only give free money to banks not to regular people) the bank traders grab the loot and scamper off to the casino or to the trading desk (same difference), and it's risk on.  Next thing you know the Dow is up 277. Woohoo, this economics stuff is easy. 


Sometimes, just the promise of free money is enough.


The past couple of days the big wigs in Euro-land held an emergency summit in Brussels. This was their 20th emergency summit, so expectations were diminished. And just when it looked like an unproductive weekend full of waffles and chocolates; they announced a blockbuster deal (think John Carter, not Avatar). 


They have a plan for long term fiscal union, and a plan to save Spain and Italy from contagion. They’ll use the ESM, the European Slush Mechanism to directly inject capital straight into the banks, just like junkies on the mainline. And this bailout money would not be senior to existing debt. You may remember that caused  a problem for the Greek bailout, when the ECB forced Greek bondholders to take big haircuts but the ECB debt was not discounted at all. This should result in a more integrated fiscal union, they might even start buying up some bonds; and the ECB would be in charge of the new banking union. 


The ECB meets next week, and they might cut their target for interest rates from 1 percent down to three-quarters. German Chancellor Angela Merkel reaffirmed her opposition to common euro zone bonds. French President Francoise Hollande demanded a renegotiation of the fiscal pact to switch Europe's focus from austerity to promoting growth. Everyone was happy. The bank traders scampered off to place their bets, and nobody seemed to notice they haven't actually passed out the free money just yet, but the concept of free money was good enough for today.


What could go wrong?


Which may or may not be a direct quote from Jamie Dimon. Actually, Dimon is quoted as called the trading losses of the CIO, the London based trading unit of JPMorgan, Dimon called the losses a “tempest in a teapot”. That was back before he realized it was $2 billion in losses, then it was estimated that it might be $3 billion. Now the losses have grown to $9 billion. He's going to need a bigger teapot.


You may have noticed that Congress is a bunch of dysfunctional, corrupt, pathetic bums controlled by their corporate puppet masters and incapable of accomplishing anything beyond stuffing campaign contribution checks in their pockets. And while this is the rule, there is always an exception to the rule. Today, both houses of Congress approved measures authorizing transportation funding for the next two years, kept interest rates low on federal student loans for another year, and reauthorized a flood-insurance program for five years. In the House, the combined measures passed 373 to 52. Only Republicans, spurred on by fiscally conservative activist groups, voted "no." In the Senate, the measure passed 74 to 19, again with only Republicans in opposition.


Interest rates on student loans will hold steady at 3.4% and not double to 6.8%. This was just a fun way to pillage from students. On flood insurance, the Federal government is the only flood insurance provider; Congress has let the program lapse 6 times in the past four years. Rand Paul  wanted a flood-insurance vote to include a vote on an amendment regarding a so-called “personhood” measure, defining life as beginning at conception. Somehow, they managed to agree on a 2 year, $109 billion transportation bill; I'll spare you the details of negotiations but it is paid for by baking in 10 years of new revenues and spending cuts to pay for only two years of highway construction. At the end of the two years, Congress must face the question anew: How do we pay for transportation in the long term?






And there will be an election in Mexico this Sunday. The PRI, the old Institutional Revolutionary Party has a good shot at winning back the presidency. The conservative National Action Party, or PAN, pushed the PRI out of power in a 2000 election but its two presidents have struggled to get reforms passed and growth has been weak. Now PAN is running in third place, and Lopez Obrador, considered a leftist is polling in second place and already accusing PRI of voting fraud. Poor Mexico, so far from God, so close to the United States.






The Bank of International Settlements (BIS) is the central bank for central banks; kind of like the clearing house for the Federal Reserve, The European Central Bank, the Bank of Japan, and pretty much all the other central banks. The BIS is recommending that the different central banks, can consider gold, held in their vaults, physical gold, not allocated or hypothecated,  can be treated as cash and therefore risk-weighted at 0%.


Basically, this would put gold on the same level as cash and treasuries; in other words, it could lead to significant purchases of gold by major financial institutions and it would lead to a reappraisal of golds value with respect to other Tier 1 capital such as quality sovereign debt. Under the new rules gold could become a very significantly larger proportion of a reserve pool which is about to grow very much larger. Banks would not be penalized for holding gold.  It would be a major endorsement of its role in preserving wealth and as a store of value, and gold would be a baseline for establishing value.  Essentially gold would be treated the same as it has been for the past 5,000 years, excluding the past 40 years. 

Thursday, June 28, 2012

Thursday, June 28, 2012 – Adverse Selection, Asymmetric Information, Large Numbers, and Healthcare

Adverse Selection, Asymmetric Information, Large Numbers, and Healthcare 
– by Sinclair Noe


DOW – 24 = 12,602
SPX – 2 = 1329
NAS – 25 = 2849
10 YR YLD - .04 = 1.58%
OIL +.79 = 78.48
GOLD – 22.20 = 1553.00
SILV -.62 = 26.42
PLAT – 19.00 = 1396.00


If you had gone to Las Vegas and put down $5 dollars on Obamacare with John Roberts as the swing vote, your odds would have been about a million to one. According to Vegas bookmakers, nobody placed that bet; it was just too outrageous. This morning, a majority of the Supreme Court upheld the constitutionality of the Affordable Care Act, otherwise known as Obamacare. The big surprise, was the vote by the Chief Justice of the Court, John Roberts, to join with the Court’s four liberals.


On the crucial issue in the case – whether the “individual mandate” requiring almost all Americans to purchase health insurance was a constitutionally-permissible extension of federal power under the Commerce Clause of the Constitution – Roberts agreed with his conservative brethren that it was not. If that was the end of the decision, it would have killed Obamacare, instead, it just tripped up the reporters at CNN and Fox who were so intent on trying to deliver “breaking news” that they forgot to read before speaking.  Roberts upheld the law because, he reasoned, the penalty to be collected by the government for non-compliance with the law is the equivalent of a tax – and the federal government has the power to tax. What's in a name?


Roberts wrote for the court's 5-4 majority: The law's "requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax." The Republicans actually introduced the idea of the individual mandate in the 1990's. Remember? Maybe Roberts recognized the irony and decided to give the GOP something to oppose – taxes.  Actually, the whole concept of insurance falls apart under the weight of adverse selection; more on that in a moment. 


Roberts was joined by justices Ginsburg, Breyer, Kagan and Sotomayor  and he wrote in the majority decision that in the end it did not matter whether the law called it a penalty. "That label cannot control whether the payment is a tax for purposes of the Constitution," he wrote. "Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness," he wrote,.


The Supremes ruled that the penalty that must be paid if someone refuses to buy insurance is a form of tax that Congress can impose under its taxing power. That is, of course, good news for supporters of health care reform since a mandate, or something like it, is needed to stop health care markets from breaking down due to what is known as "adverse selection".


The intent of the mandate is to overcome this adverse selection problem. 


Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer; in particular, insurance will not be profitable when buyers have better information about their risk of claiming than does the seller. Asymmetric information means one party to a transaction knows more than the other party, and that gives the more informed party an advantage. When there is adverse selection, people who know they have a higher risk of claiming than the average of the group will buy the insurance, whereas those who have a below-average risk may decide it is too expensive to be worth buying.


Health insurance companies try to overcome this by demanding health histories, and by refusing insurance for pre-existing conditions, or just denying coverage when you get sick, or by charging older people more than young people. The young and healthy have knowledge they are young and healthy and so they demand a lower price for the most part; the breakdown starts when some people are willing to take a chance and go without insurance. With the relatively healthy people dropping out of the insurance pool, the price of insurance must go up, and when it does, more people drop out, the price goes up again, and this repeats until the market breaks down and insurance becomes unaffordable.


Insurance spreads out the cost over a wide pool of people; it is a redistribution of wealth, from the old and sick to the young and healthy; think of it as a tax on the young and healthy. Meanwhile, when the uninsured require health care it increases the costs of health care, it's like a tax on the old and sick that do pay for insurance. Under the current system, hospitals are required to treat patients who show up at the emergency entrance.  The hospitals have to pass the costs on, and the rest of us end up footing the bill.   


The universal mandate or tax is designed to fix that, by making everyone pay for the health care they get (and perhaps even encouraging them to see a doctor who will advise them to adopt a healthy life style). 


The bottom line is that the only way to get around adverse selection is to have full participation. You must rely on the laws of large numbers – this is the only way insurance can work; and whether you want to call it a mandate or a tax, everyone is going to need to participate and everyone is going to have to pay for it and receive benefits.


The alternative, the old way of doing things, involving adverse selection and asymmetrical information will eventually lead to a breakdown of the healthcare system; that was the path we were on. Obamacare is nowhere near a perfect solution but it was one attempt to address the problem (and something is better than nothing).  There will be revisions. And one thing we can count on with certainty, as I said yesterday, is there will be unintended consequences. For example, since money strapped states are not likely to expand Medicaid, another flukish part of today's ruling which means putting the law into effect will be tricky; the unintended consequences may result in failure or they may lead us to a better solution; the most likely outcome is that it will lead to universal health care. 


The United States is a holdout for universal care. In countries that have universal care, the cost is relatively low; less than 6% of GDP for Canada, France, the UK, Germany, Sweden, Denmark, and Taiwan for example. In the United States, the cost of healthcare is 18% of GDP – triple the cost of universal care. And what do all these countries with lower health care costs get for one-third the price? The have higher life expectancy rates and lower infant mortality rates and everyone has health care. 


Yeah, I know, you still don't want the government telling you that you have to pay for healthcare; you don't want anyone telling you that you have to pay for someone else's healthcare. That argument holds up until your wife or your kids get sick.

Wednesday, June 27, 2012

Wednesday, June 27, 2012 - To Your Health; Spanish Junk; Barclays Bad; Falcone Flunks; Bhopal Veggie Garden; Goodnight Stockton



To Your Health; Spanish Junk; Barclays Bad; Falcone Flunks; Bhopal Veggie Garden; Goodnight Stockton 
– by Sinclair Noe


DOW + 92 = 12,627
SPX + 11 = 1331
NAS + 21 = 2875
10 YR YLD -.01 = 1.62%
OIL +.27 = 80.48
GOLD + 1.60 = 1575.20
SILV - .17 = 27.04
PLAT – 18.00 = 1415.00


According to the Centers for  Medicare and Medicaid Services, health spending accounts for about 18% of the GDP of the United States. So, tomorrow's ruling by the Supreme Court on President Obama's health care plan is pretty important, but so far the economists can't seem to figure out the implications. This is not to say I have any advance info on the Supreme Court decision. 


They might say the Act is fine as it is, they might say they will eliminate the mandate but leave the rest unchanged, they might throw out the whole thing.  If they vote against Obamacare it will be seen as a highly partisan act. What better way to show the Court’s impartiality than to affirm the constitutionality of legislation that may be unpopular? That might be a stretch; I think I'll stick with the idea that we'll have to wait till tomorrow.


The only safe bet is that there will be unintended consequences. For example, what if the Supremes strike down the mandate portion but leave the rest intact? The Obama administration put a mandate in the Affordable Care Act because the law requires insurers to charge the same premium regardless of health status. Without a mandate, it would make sense for the healthy to drop their insurance until they got sick and needed it. But if only the unhealthy bought insurance, premiums could rise sharply to cover insurance companies’ higher costs. At the extreme, this could blow up the insurance market altogether. 




The National Association of Realtors Pending reports home sales climbed 5.9% in May, with an index reaching 101.1. The index was 13.3% above May 2011 levels. Earlier this week, the Commerce Department reported sales of new homes at two-year highs. Also, S&P/Case-Shiller reported that home prices climbed in April. Also today, the Commerce Department reported durable-goods orders rose a seasonally adjusted 1.1% last month.




Spain is poised for a downgrade to junk by Moody’s Investors Service. Moody's cut  28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. Spain remains on review for another cut by Moody’s after they requested a $125 billion international bailout for its banks and on speculation losses from its real estate industry will worsen. A one-notch move to Ba1 will likely see all the country’s banking system in junk territory, with the possible exception of Santander. Spain’s short-term borrowing costs nearly tripled at auction, underlining the country’s precarious finances as it struggles against depression and juggles with a debt crisis among its newly downgraded banks.


So, it's not just the Spanish banks that are begging for a bailout, it is looking like the nation will also be looking for a bailout. To put it another way; Greece has collapsed; the contagion has spread. Spain is on the edge of collapse. Italy is next.


Oh yeah, French bonds look shaky, and Germany was downgraded yesterday. 


No worries, the Euro-big wigs will have another emergency summit in Brussels starting tomorrow. Maybe it was always a choice between orderly, or disorderly breakup. The idea of European countries working together in harmony sounds good; the idea of European countries bailing out Euro-banks is just stupid. The death certificate for the EU will likely read: “Cause of death: procrastination”. The European Union is crumbling. Have a waffle. 


Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank didn’t provide enough stimulus last week and called for new easing including more asset purchases to spur economic growth. Evans said: “We should be doing more accommodation than what was adopted under the Twist.” While the move “has small effects,” Evans said, “its larger effect is that it indicates the Fed is continuing to think more accommodation is important and worthwhile.”


The FOMC expanded Operation Twist, its maturity- extension program, by $267 billion through the end of the year. Chairman Ben S. Bernanke said at a press conference the Fed is prepared to do more. Evans said: “Right off the bat, I’d be willing to do more on the basis of the current data”. He doesn’t vote on policy this year.




Last week Microsoft introduced a new tablet computer, called Surface, it has a kickstand and a cover that folds out to serve as a keyboard. Very clever. It will be available for sale in a couple of months. Today, Google revealed its own tablet and it is priced at a sharp discount compared to Apple's iPad. The new tablet will run on the latest version of Google's operating system Android 4.1, called Jelly Bean. The Nexus 7 will sell for $199 and will be available in mid-July. The line between software and hardware has now been breached in the face of total domination by Apple.  


British bank Barclays says it will pay around $452 million in penalties to US and UK regulators to settle a probe into attempted manipulation and false reporting relating to two global benchmark interest rates that form the basis for hundreds of trillions of dollars of transactions. Libor, or the London Interbank Offered Rate, and Euribor, or the Euro Interbank Offered Rate, are benchmark reference rates that indicate the interest rate that banks charge when lending to each other. Almost all other rates are at least partially based upon the Libor or Euribor as a baseline. The CFTC said that Barclays traders and employees attempted to manipulate and made false reports concerning Libor and Euribor in order to benefit their derivatives trading positions. This misconduct took place on many occasions and sometimes on a daily basis over a period of four years, starting in 2005. What does it take for these people to end up in jail? 


Apparently the trick is to have the backing of a major bank, the individual traders  are easy prey for the regulators, but the traders for the big banks have “Get Out of Jail Free” cards. Phillip Falcone, the founder of hedge fund Harbinger Capital Partners LLC, was sued by the Securities and Exchange Commission. The SEC said in its lawsuit that Falcone misappropriated client assets, favored selected investors and manipulated bond prices. 


Robert Khuzami, the SEC’s enforcement director, said in a statement: “Today’s charges read like the final exam in a graduate course in how to operate a hedge fund unlawfully. Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others and violated trading rules intended to prohibit manipulative short sales.”


The SEC is seeking disgorgement of ill-gotten gains, unspecified financial penalties and a bar prohibiting Falcone, 49, from serving as an officer or director of any public company.




The SEC action is the second blow in less than two months for Falcone, who built a $26 billion hedge fund by 2008 with a successful bet against subprime mortgages. LightSquared Inc., Harbinger Capital’s biggest investment, filed for bankruptcy in May.


Falcone in 2009 took out a $113 million loan from his Special Situations fund to pay personal taxes. The loan was disclosed in the fund’s annual financial statement the following March. At the time he borrowed the money, clients were barred from pulling money from the fund. Falcone subsequently repaid the loan with interest. That same year, with client capital locked up, Harbinger allowed Goldman Sachs Group, which at the end of 2008 had $1 billion invested in two Harbinger funds, to redeem some money from the firm.


Dow Chemical's ’s Union Carbide won dismissal of a lawsuit alleging polluted soil and water produced by its former chemical plant in Bhopal, India, injured area residents, one of at least two pending cases tied to the installation known for the 1984 disaster that killed thousands.


U.S. District Judge John Keenan in Manhattan yesterday ruled Union Carbide and its former chairman, Warren Anderson, weren’t liable for environmental remediation or pollution-related claims made by residents near the plant, which had been owned and operated by a former Union Carbide unit in India. Sure, a chemical spill that killed thousands of people, no need for further cleanup. I'm sure everything is nice and clean. I'm sure that Judge would want his children planting a nice little vegetable garden in the shadows of the Bhopal chemical factory.


Exxon Mobil Chief Executive Officer Rex Tillerson says supplying electricity to the “billions of people living in abject poverty” is a more important goal than curbing greenhouse-gas emissions. Tillerson says electricity will do more to improve the quality of life for people who still cook food by burning animal dung than trying to prevent climate change, which will be “manageable.” And even if global warming destroys the planet, maybe ExxonMobil can get the same judge that ruled in favor of Union Carbide. 


Stockton is broke. They will file for bankruptcy. Talks with bondholders and unions failed. Stockton California will now become the biggest US city to seek court protection from creditors. The City of  Stockton released a statement yesterday after its council voted 6-1 to adopt a spending plan for operating under bankruptcy protection. The statement says: “The city is fiscally insolvent and must seek Chapter 9 bankruptcy protection. In addition to the bankruptcy petition, the city will file a motion with the courts to share information from the confidential mediation.”


In the past three years, Stockton was slammed by the collapse of the housing market and city officials dealt with $90 million in deficits through a series of drastic cuts. They eliminated one-fourth of the city's police officers, one-third of the fire staff, and 40 percent of all other employees. They also cut wages and medical benefits. To plug next year's anticipated $26 million budget shortfall, they couldn't find more cuts, and so they turned to the courts to avoid chaos. The budget for the fiscal year beginning July 1 calls for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits under union contracts that could be voided by the bankruptcy court. Stockton’s bankruptcy might resemble the 2008 case of another California city, Vallejo, which exited court protection last year. It is expected that Stockton City workers who have retired will see a sit to health care benefits, possibly a cut to zero. Bondholders and current employees will probably also have to take less. 


The Stockton bankruptcy is not expected to create a sell-off in the $3.7 trillion dollar muni-bond market. The BK was anticipated. The average cumulative default rate in the past four decades was 0.13 percent for municipal bonds versus 11.2 percent for corporate debt. The overall default rates in municipal bonds are extremely low and Stockton is a small participant in the $3.7 trillion market.


A taxable Stockton pension bond sold in 2007 and due September 2037 traded June 25 as high as 80.68 cents on the dollar, down from when it traded as high as 102.03 cents on the dollar on Feb. 15. 


Bankruptcy would allow the city to break contracts with creditors without the threat of lawsuits, though it won’t assure the city’s recovery. Chapter 9 BK does not wipe out debts but merely allows for restructuring. In February, the city began a process during which it is required by state law to review its finances with help from a “neutral observer” who is picked in cooperation with creditors. That review is similar to a mediation process in which creditors have a right to participate. Stockton was the first city to test a new state mediation law, Assembly Bill 506, which is less than six months old. The results have been called tedious, at best; policy analysts issued a report on the use of the new law, titled “Death by a Thousand Meetings”.


According to a June 5th fiscal report, the city has cut services so much the past two years that “public safety is at a crisis level”. Unemployment, at 15.4 percent in April, was almost double the national average; Stockton ranked third in murders last year among large California cities, behind Los Angeles and Oakland; One in every 195 homes in Stockton’s metropolitan area received a foreclosure filing in May, the fifth-highest rate in the nation.


When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees. Multi-year labor contracts for city workers carrying escalating costs and generous retirement plans added to the burden. In addition, expensive city investments - a promenade, sports arena and hotel - failed to produce an economic boon. There is a state investigation into whether Stockton's financial devastation was entirely due to shortsighted optimism or if there was corruption. The state mediation law requires assigning blame. It will make interesting reading, and I'll lay dimes to donuts, the assignment of blame will be misplaced.

Tuesday, June 26, 2012

Tuesday, June 26, 2012 - Grapes of Wrath

Grapes of Wrath 
by Sinclair Noe


DOW + 32 = 12,534
SPX + 6 = 1319
NAS + 17 = 2854
10 YR YLD +.02 = 1.63%
OIL +.23 = 79.59
GOLD – 12.70 = 1573.60
SILV - .43 = 27.21
PLAT – 17.00 = 1433.00




The S&P/Case-Shiller reports shows home prices rose 1.3% in April.  The Conference boards Consumer Confidence Index fell for a fourth straight month; the index hit 62 last month, which is still above average and better than last year at this time. We are not officially in the Dog Days of Summer; it just feels like it. 


The European Union has released a road map outlining the path to tighter fiscal integration. Nothing too flashy and it might take a year or more to implement. German Chancellor Angela Merkel  had played down large moves such as the issuance of common debt until euro-area countries agree to broad oversight of their budgets.  Egan Jones downgraded Germany from A+ to AA-. 


Today, Reuters reported Merkel told politicians in her ruling coalition that Europe would not have shared total debt liability “as long as I live.” So, that pretty much kills any idea of a euro-bond. Mario Monti, the technocratic non-elected Prime Minister of Italy now denies he said: “Eurobonds or I resign.” 


Meanwhile, Spanish and Italian bonds aren't feeling healthy as yields rose again. Spain had to pay the highest yields since last November to sell 3.08 billion euros in short-term debt as demand from its ailing banks dwindled. Spain has officially requested a $125 billion dollar bank bailout. Details are being worked out. There are calls to just directly inject the money straight into the banks. Nobody is calling it theft. I don't know why not. Bondholders would be forced to take haircuts. 


Cyprus is bust and they need 10 billion euro but nobody is rushing in because it might set a bad example for those pushing the idea that suffering is good and mitigating pain might somehow be a bad thing. 


Another emergency Euro-summit starts on Thursday in Brussels. France will push a growth package. Germany will push for more pain. The United States will push for something, anything that looks like progress, and everyone will mildly disappointed except for the waffles and chocolates and beer. I'm not suggesting the players are taking this lightly. Deep economic collapses are dangerous. I think that is accepted. 




 In Europe, whether it’s Greece or Spain or Italy, they have insolvent banks that are in a deadly embrace with insolvent states. So, the states borrow money from the Euro-institutions in order to give to the banks and banks borrow to give to the state and both banks and states are sort of locked into a deadly embrace and they are sinking, unable to even tread water. 


So what can be done to break this  death bond  between insolvent banks and insolvent states? It will go one of two ways: either, to unify the banking system, and have it being funded directly not through national governments. Or, allow the banks to fail.  As for Greece, it has failed. Greece is in a depression. Think Oklahoma, circa 1931, Tom Joad- opoulous. Grapes of Wrath. 




The quote of the day: "An imbalance between rich and poor is the oldest and most fatal ailment of all republics." -Plutarch


A new book by Joe Stiglitz on Inequality. He wrote a piece for the Financial Times, and I'm sure the editors at the FT didn't quite comprehend the import. Here are the key ideas via Economist's View:


US inequality is at its highest point for nearly a century. ... One might feel better about inequality if there were a grain of truth in trickle-down economics. But the median income of Americans today is lower than it was a decade and a half ago... Meanwhile, those at the top have never had it so good. ...


Markets are shaped by the rules of the game. Our political system has written rules that benefit the rich at the expense of others. ... There is good news in this: by reducing rent-seeking ... and the distortions that give rise to so much of America’s inequality we can achieve a fairer society and a better-performing economy. …


America used to be thought of as the land of opportunity. Today, a child’s life chances are more dependent on the income of his or her parents than in Europe, or any other of the advanced industrial countries for which there are data. …


We can once again become a land of opportunity but it will not happen on its own... The country will have to make a choice: if it continues as it has in recent decades, the lack of opportunity will mean a more divided society, marked by lower growth and higher social, political and economic instability. Or it can recognize that the economy has lost its balance. The gilded age led to the progressive era, the excesses of the Roaring Twenties led to the Depression, which in turn led to the New Deal. Each time, the country saw the extremes to which it was going and pulled back. The question is, will it do so once again?


I promised I would follow up on a question from a listener on Friday. 


Hong Kong Exchanges and Clearing agreed on Friday to buy the London Metal Exchange for $2.14 billion, The deal will be presented to the London exchange’s shareholders by the end of July. The deal requires approval of at least 50 percent of the L.M.E.’s shareholders, who hold more than 75 percent of the firm’s stock. It also requires approval of British regulators.


The acquisition could provide a windfall for JPMorgan Chase and Goldman Sachs, which collectively own a 20 percent stake in the London-based exchange. The banks could pocket a combined $436 million through the transaction. This seemed to be the focus of the Financial Times' reporting on the story; they seemed entirely focused  on the sale as a liquidity event for the shareholder-members of the LME; indeed, they will have a nifty payday. They will collect their lucre and be long gone before there are any consequences. 


For the Asian investors, there is a longer term view. This represents another sign of Asia’s importance to the world’s commodities industry. The Asian bourse, one of the world’s biggest financial exchanges based on market capitalization, outbid several American rivals for control of the 135-year-old London firm.


Despite concerns that the Chinese economy may be slowing down, the country and other emerging markets in the region now are the largest buyers of a number of commodities, such as iron ore and coal, as their domestic markets continue to report high levels of growth. The latest acquisition will help the Asian bourse take advantage of this demand. 




The Fed last week decided to extend through the end of the year a bond maturity-extension program called Operation Twist, in which the central bank replaces short-term debt it holds with longer-term securities. Operation Twist had been due to end this week. Dallas Federal Reserve Bank President Richard Fisher says:
"My suspicion is Operation Twist is having a very minor effect and I have argued that the benefits do not exceed the costs; the costs exceed the benefits, and that's why I personally didn't support the program. But I was in a minority." 


I’m not sure what the costs are because it is basically a wash. Sell short buy long.


Fisher, an inflation hawk, has been a staunch opponent of further Fed easing. Though he does not have a vote on the Fed's policy-setting panel this year, he participates in the committee's deliberations. All but one voting member on the panel supported last week's extension of Operation Twist.


"In practical terms, there's a limit to what we can do without distorting the marketplace," he said. "And that's a subject of much debate at the committee."

Jeffrey Lacker, the president of the Richmond Federal Reserve Bank says it is doubtful that another round of bond buying would boost economic growth. "The impediments to growth are things that monetary policy is really not that capable of offsetting," Lacker was the one dissenting vote against the extension of Operation Twist. 


Lacker said he expects inflation to stay close to the Fed's 2% target despite the recent softness in oil prices. Lacker said he favors steady policy and now sees the first rate hike coming in "late" 2013 due to the recent slowdown, later than the "mid" 2013 projection he made last month.

So, we have a couple of Fed heads saying they’ve hit the 2% inflation target actually, the core number is below 2%, and they are impotent to use monetary policy to boost growth, or they just don’t give a damn about their mandate to achieve maximum employment. 


What does the Fed propose doing about the situation? Almost nothing. Last week the Fed announced some actions that would supposedly boost the economy, extending the Twist. This helps a little with housing and mortgage rates but it does nothing for employment; it was the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.


Why won’t the Fed act? The Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else's responsibility.  The fundamentals of the world economy aren’t, in themselves, all that scary; the building blocks for providing food and jobs and housing and care for the world's population – that's all within our reach – we can do it; but there has been a shift from those in positions to make a difference and those in positions of power that don’t want things to change for the better. It’s the almost universal abdication of responsibility that should scare the beejeesus out of you. 









Monday, June 25, 2012

Monday, June 25, 2012 - Spain and Cyprus Fall - US Banks Insure Bets - Goldman Behaves Badly - Congressional Insider Trading - by Sinclair Noe

DOW – 138 = 12,502
SPX – 21 = 1313
NAS – 56 = 2836
10 YR YLD -.06 = 1.61%
OIL -.06 = 79.15
GOLD + 13.00 = 1585.30
SILV +.64 = 27.64
PLAT + 9.00 = 1450.00


So, the good news is that the Dow only dropped 138.


It could have been worse; or better, depending on your perspective. Back in April we advised heeding the old advice to sell in May and stay away. May was a horrible month. The first couple of weeks in June, we bounced back just a little, then we continue the declines.


This Euro-problem just never dies. There will be another emergency two day Euro-summit starting Thursday.  This appears to be the one area of relentless growth in Europe – the emergency summit business. I'm guessing that the caterers and event planners in Brussels are posting nifty profits. Expectations are low after Germany resisted pressure for common euro zone bonds or a flexible use of Europe's rescue funds at a meeting of the region's four biggest economies last week. Austerity measures pushed forward by Germany have tested the patience of the Greeks. The Greek government had to begin a search for a new finance minister after the nominee for the post said he could not serve because of health reasons. The situation in Greece sometimes seems it is never-ending. 


Cyprus announced it was seeking a bailout for its banks and its budget. Cyprus joins Greece, Ireland, Portugal and Spain in seeking EU rescue funds, meaning more than a quarter of the 17 euro zone members are now in the bloc's emergency ward. Italy's funding costs have soared too, which means it could be next. 


 Cyprus suffered a further sovereign credit rating cut on Monday by Fitch, to the junk BB+ grade. It is already shut out from raising new funds on capital markets, with yields on existing bonds well into double digits.  An island with just 1 million residents, Cyprus has a disproportionately large financial sector that is heavily exposed to Greece, a neighbor more than 10 times the size with which it shares a language, culture and close political links. Cyprus will find the bailout money. The reason? A few months back they found huge deposits of natural gas. 


Meanwhile, Spain is running on fumes. Moody's Investors Service downgraded the long-term debt and deposit ratings for 28 Spanish banks and two issuer ratings, following on the heels of a cut to Spain's sovereign rating to just above junk status earlier this month. Spain formally submitted its request for up to 100 billion euros of funds to bail out its banks, agreed on June 9. Spanish government bonds came under pressure with the 10-year bond yield up almost 30 basis points at 6.64 percent, near the 7-percent mark that forced other indebted European countries to ask for bailouts. 






Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup all suffered credit ratings cuts on Thursday. The rating agency Moody’s Investors Service said the banks had moved to strengthen their operations, but their core trading businesses contained structural weaknesses. And some of the problems that lead to the credit downgrades may actually be exacerbated by the cuts. 


One of those trouble spots is short-term borrowing. Wall Street firms need to finance their operations at a low cost to make profits, so they make heavy use of short-term loans that last from a few days to a few months; the downgrades could push up the costs of these loans. 


Another trouble spot is their derivatives business. Derivatives can be a lucrative for banks, but derivatives clients, to protect themselves, may now demand better terms with downgraded banks, like increased collateral. A derivative is less appealing when the counterparty looks weak. Wall Street banks would then have to decide whether to give up the business, or go along with client demands and face weaker profits. Some banks may have to relax their terms in order to win business.


To help insulate their profits from a downgrade, many Wall Street banks locate derivatives trades in bank subsidiaries backed by government-insured deposits. So, the units that took the risks messed it up so bad that their credit rating is cut, the banks just shift the risk of bets in derivatives over to the FDIC insured side of the ledger, and since they are FDIC insured, these subsidiaries have higher credit ratings than the parent companies. Citigroup, Bank of America and JPMorgan Chase have more than 90 percent of their derivatives in such subsidiaries. Morgan Stanley only has 5 percent. 


Incredibly, there has been very little mention of this by the bank regulators. I think the FDIC should be screaming bloody murder, but they are not. The banks are now lumping together massive bets on derivatives with deposits from widows and orphans, and if the bets fail (and really given enough time, all gamblers are bound to hit a losing hand), when the bets fail, the first payoff comes to the gamblers. You may not want a bank bailout, but you probably want to guarantee FDIC insured deposits. This is the banksters sneaky new backdoor bailout. You've been warned.


Moody’s didn’t warn of possible future downgrades for these bank holding subsidiaries, but it did say the parent companies had a negative outlook, the agency’s way of saying it still had doubts about their creditworthiness. Given that threat, the banks may try to do as much business as they can in these higher-rated subsidiaries. That could face resistance from regulators, if the regulators ever wake up and smell the rot. 




Goldman Sachs lost a bid to dismiss a shareholder lawsuit alleging it made material misstatements in its own securities filings about its conflicts of interest in several complex securities transactions, including the now-infamous Abacus 2007 deal.


Every now and then a Judge wakes up and sees the light, and so we must say hallelujah and recognize a new convert: In a 27-page opinion, Hon. Paul Crotty of the U.S. District Court in the Southern District of New York said the shareholders, led by the Arkansas Teacher Retirement System and other pensions, sufficiently argued that Goldman made material misstatements about its business practices and conflicts in its roles in collateralized debt obligations like Abacus, and similar deals named Hudson, Anderson and Timberwolf.


Goldman’s arguments are “Orwellian,” the judge wrote in the opinion. “Words such as ‘honesty,’ ‘integrity,’ and ‘fair dealing’ apparently do not mean what they say; they do not set standards; they are mere shibboleths.”


At issue are disclosures in Goldman’s annual securities filings and its annual report related to how it addresses conflicts of interest, and more generally, how it conducts its business, including a line that it is dedicated to complying with the letter and spirit of the laws. Fraudulent conduct hurts a company’s share price, the judge wrote in his opinion; and concealing such conduct caused Goldman’s stock to trade at artificially high prices, the opinion said.


A spokesman for Goldman declined to comment.


In the Abacus deal, for which Goldman paid a $550 million SEC enforcement settlement two years ago, Goldman allegedly allowed hedge fund Paulson & Co. to select assets for the security that would perform badly or fail and hid the hedge fund’s role from investors.  In the Anderson, Hudson and Timberwolf 1 deals, Goldman said it held a long position in the equity portions without disclosing its substantial short positions in each, the shareholders allege.


The judge wrote that the shareholders have plausibly argued that Goldman knew its statements about holding long positions and being aligned with investors were inaccurate because of its substantial short positions. The judge also wrote: “If Goldman’s claim of ‘honesty’ and ‘integrity’ are simply puffery, the world of finance  may be in more trouble than we recognize.”




A new investigation from the Washington Post reveals 130 members of Congress or their families have traded stocks collectively worth hundreds of millions of dollars in companies lobbying on bills that came before their committees, a practice that is permitted under current ethics rules.


The lawmakers bought and sold a total of between $85 million and $218 million in 323 companies registered to lobby on legislation that appeared before them, according to an examination of all 45,000 individual congressional stock transactions contained in computerized financial disclosure data from 2007 to 2010.


Almost one in every eight trades — 5,531 — intersected with legislation. The 130 lawmakers traded stocks or bonds in companies as bills passed through their committees or while Congress was still considering the legislation. The party affiliation of the lawmakers was almost evenly split between Democrats and Republicans.


Earlier this year, Congress responded to criticism of potential conflicts of interest by passing the Stock Act, which bars lawmakers, their staffs and top executive branch officials from trading on inside information acquired on Capitol Hill; but the act failed to address the most elemental difference between Congress and the other branches of government: Congress forbids top administration officials, for instance, from trading stocks in industries they oversee and can influence. The lawmakers, by contrast, can still invest in firms even as they create laws that can affect the bottom line of the companies.


It sounds like common sense and basic propriety that if you have major responsibility for drafting legislation that directly affects particular companies, then you shouldn’t be trading in their stock. Your wife isn’t a blind trust. Your financial adviser isn’t either. At some point the lawmakers need to learn how to just say no.

Friday, June 22, 2012

Friday, June 22, 2012 - Something About Mary - by Sinclair Noe

DOW + 67 = 12,640
SPX + 9 = 1335
NAS + 33 = 2892
10 YR YLD+.05 = 1.67%
OIL + 13.92 = 92.12
GOLD + 7.10 = 1573.30
SILV +.02 = 27.00
PLAT – 4.00 = 1441.00




Over the past couple of weeks, we've paid attention to Jamie Dimon's testimony on Capitol Hill. You might not have noticed the testimony of Mary Schapiro before the Senate before the Committee on Banking, Housing, and Urban Affairs. Schapiro is the Chairwoman of the SEC. Her testimony was a frank warning on the vulnerabilities of the money market fund system. You may remember that in September 2008, money market funds broke the buck; there was a run on funds held in money market accounts that was only staunched by a $3 trillion dollar guarantee from the Treasury and the Federal Reserve. Breaking the buck was a key part of the financial crisis. There were profound implications for a reputedly rock solid investment. The effects rippled throughout the economy as investors were shortchanged and sponsors were squeezed as they were forced to shore up valuations. 


Could we see another run on money market funds? We already have. It happened one year ago, a small scale run. And yes, it could happen again. And just because the run was stopped in 2008 and 2011, it is no guarantee another run could be contained in the future. There has basically been no reforms to prevent or control a future money market fund run. Here's part of Schapiro's testimony:


“Given the role money market funds play in providing short-term funding to companies in the short-term markets, a run presents not simply an investment risk to the fund’s shareholders, but significant systemic risk. No one can predict what will cause the next crisis, or what will cause the next money market fund to break the buck. But we all know unexpected events will happen in the future. If that stress affects a money market fund whose sponsor is unable or unwilling to bail it out, it could lead to the next destabilizing run. To be clear, I am not suggesting that any fund breaking the buck will cause a destabilizing run on other money market funds—it is possible that an individual fund could have a credit event that is specific to it and not trigger a broad run—only that policymakers should recognize that the risk of a destabilizing run remains. Money market funds remain large, and continue to invest in securities subject to interest rate and credit risk. They continue, for example, to have considerable exposure to European banks, with, as of May 31, 2012, approximately 30% of prime fund assets invested in debt issued by banks based in Europe generally and approximately 14% of prime fund assets invested in debt issued by banks located in the Eurozone.”


Schapiro talked about possible solutions, at least solutions for the institutions; such as allowing the funds to float and not requiring a hard peg to the dollar on Net Asset Value, requiring more cash as a buffer, and limiting redemptions. Of course, limiting redemptions destroys the meaning of money market funds as a safe place to park cash. And while Schapiro is to be commended for issuing a stark, honest warning; the idea that it is acceptable to limit redemptions is unacceptable; it is a sign of the times; it just isn't acceptable. And while we've heard warnings about Europe being a major trading partner and any Euro-slowdown could hurt the US economy, the greater danger may be from this kind of credit freezing threat.


Rep. Darrell Issa of California, of the House Oversight and Government Reform Committee (yes, the same guy who holds AG Holder in contempt); Issa wrote a 15 page letter to Mary Schapiro at the SEC,  demanding the SEC address how egg got on the face of our capital markets thanks to Facebook's underwriters fleecing unsuspecting retail investors who bought the IPO.  The oversight committee expressed fears of a crumbling capital markets system if laws continue "to protect, over-regulate, and coddle our financial institutions." Financial institutions are screwing up everything because they're being protected and coddled. 


Which is a long way of getting around to a correction. The other day I said 88% of all Americans held Congress in contempt. That is not correct. I was referring to the disapproval rating, and you can disapprove of Congress without going all the way to the harsher feeling of contempt, also the number was incorrect, it is not 88%; actually, 91% of all American's disapprove of Congress.


We always hear there's too much regulation and too many taxes; maybe for small businesses, but the big companies don't seem to be suffering. Corporate profit margins  have hit an all time high. One reason for the profitability might be that corporations are not employing as many people as they used to. As a percentage of the population, fewer Americans (less than 59%) are working than at any time in the past 30 years; also, wages as a percent of the economy are at an all time low. Seems to me this divergence might be problematic in the future. I'm just not seeing the long term wisdom in destroying your market. 




That brings us to our next story, also involving Capitol Hill and Mary Schapiro. NYSE Euronext and Nasdaq OMX Group – the corporate parents of the New York Stock Exchange and the Nasdaq – headed to Capitol Hill this week to lobby regulators about dark pools. Dark pools are off-exchange forums where traders can buy and sell securities privately, without reporting to the broader market as the exchanges are required to do. Retail investors almost never trade through dark pools, but the big institutional investors such as pension funds, hedge funds, and mutual funds do quite a bit of business off exchange; up to 40% of all trades now take place off exchange. The  NYSE and Nasdaq sent lobbyists to Capitol Hill because they just want to cut out their competition. 


There hasn't been any updates to regulations on dark pools for 13 years, back before high frequency trades and flash crashes. Back in 2009, SEC Chairwoman Mary Schapiro said: “We should never underestimate or take for granted the wide spectrum of benefits that come from transparency, which plays a vital role in promoting public confidence in the honesty and integrity of financial markets.” That was three years ago, and we have even less transparency. 


Regular retail investors don't have access to price discovery of trades on the dark pool exchanges, however high frequency and algorithmic traders have been granted access to many broker-dealer owned pools and they are able to lock in price differences between exchanges and dark pools. The perception today, and in fact the reality, is that the retail investor comes in at a disadvantage.


The big institutional investors should not be given preferential treatment to hide trading activity. When you don't know the price you can't even begin to claim that you have capitalism; you can't have honest markets; you only have rigged markets. It's not a matter of competing with the NYSE and the Nasdaq; competition is good; it's a matter of transparency. If they can't stand the light of day, they shouldn't make the trade, and just because they are institutional investors doesn't mean they should have a license to screw over the retail investor. They do. But it shouldn't be that way. But it is. 


And that brings us round to yesterday afternoon's big bank rating downgrade. Moody's cut ratings on 15 big international banks. Low ratings can be detrimental for banks with large capital markets operations because they can reduce the number of counterparties willing to trade with the firm and also increase the amount of collateral banks need to back trades.


Not only will funding costs rise for the worst-rated banks, but trading partners are bound to ask for more collateral - and steer business to those perceived to be financially stronger. The big get bigger (maybe too big to fail). The weak get smaller.


The ratings cut also gave a competitive advantage to "safe-haven" banks that fund themselves with stable, low-cost customer deposits, while worsening the outlook for weaker banks that rely more on capital markets for their funding. Morgan Stanley figured it out a while back; starting in March 2011, Morgan Stanley started transferring derivatives into its higher-rated bank unit to reduce the impact of ratings downgrades. 


The bank increased its notional derivatives positions at its bank unit to $2.5 trillion at the end of March from $1.7 trillion at the end of December. The portfolio has increased from $1.2 trillion at the end of March 2011. So, I know the ratings downgrade made people nervous. Can we trust Morgan Stanley?   Their risky trades in the derivative markets are now insured by the FDIC and just as soon as those bets are paid off, your deposits would also be paid off, if there's anything left.




The leaders of the euro zone’s four largest economies vowed on Friday to defend the common currency with all means necessary. They just haven't figured out how to do it. They'll hold another key summit meeting in Brussels next week.   In a news conference with German Chancellor  Merkel, President Fran├žois Hollande of France and the Italian prime minister, Mario Monti, Spain’s new prime minister, Mariano Rajoy said: “There was an agreement among all of us to use any necessary mechanism to obtain financial stability in the euro zone.” Mr. Monti said: “The euro is here to stay, and we all mean it,” but he added that while much had been done to stem the euro crisis, it was still insufficient. The whole euro-crisis is turning into the never-ending nightmare.






Bank of America’s Merrill Lynch wealth-management unit was fined $2.8 million by the Financial Industry Regulatory Authority for overbilling customers by $32.2 million over an eight-year period. Merrill Lynch charged the fees to about 95,000 accounts between April 2003 and December 2011. The average amount pilfered per customer was under $400. BofA says it was just a mistake, you know, or maybe it was just 95,000 mistakes. There is no question that BofA and Merrill Lynch are guilty, even though the settlement does not require an admission of guilt, but seriously, FINRA has got to stop giving out sweetheart deals to the banksters. Steal $32 million, keep 90 cents on the dollar, no admission of guilt. It is a brilliant business model, at least if you've abandoned morality.






Wells Fargo was the one major US bank to escape a ratings cut by Moody's Investors Service this week. Wells is a little ahead of the pack; ten years ago they were a big player in subprime mortgages but they got out of the subprime game in 2004. They got out of subprime mortgages but they still remained active in payday loans, but they were largely out of the subprime mortgage game before the housing crash. That move, and the bank's lack of exposure to investment banking and Europe is why they avoided a ratings cut. 


Wells ramped its mortgage business in 2008; their timing seems good. Now, they are ramping up even more. Wells  is sticking to traditional commercial and consumer banking while de-emphasizing riskier undertakings like credit derivatives trading. Delinquency and foreclosure rates are half what they are at Bank of America. That should really make you nervous about BofA, but what about Wells Fargo?


If the economy strengthens and rates suddenly rise, mortgages will suffer more than most other loans and the bank's income could be clobbered. Another recession would also hurt the bank, because defaults would rise. For now, it just looks like they're trying to corner the market for mortgages. 




You may have heard that Larry Ellison is buying the island of Lanai, the sixth largest island in Hawaii. For an estimated price of $500 to $600 million, Ellison will hold a 98% stake of the tropical 141-square mile island nine miles off the coast of Maui. $500 million might sound like a lot but Ellison has net worth estimated at $36 billion and so for him it's like a typical family buying a bicycle. 

Thursday, June 21, 2012

Thursday, June 21, 2012 – Like Crack for Bankers – by Sinclair Noe

DOW – 250 = 12,573
SPX – 30 = 1325
NAS – 71 = 2859
10 YR YLD - .02 = 1.62%
OIL – 3.20 = 78.25
GOLD – 41.60 = 1566.20
SILV – 1.24 = 26.98
PLAT – 19.00 = 1445.00


Here is the bottom line on today's declines; Wall Street has become addicted to free money from the Federal Reserve. Stimulus from the Fed is like crack for the Wall Street bankers. Yesterday, the Fed refused to pass out more free money. Today, Wall Street got a bad case of the shakes.


One of the concerns when Bernanke and pals fail to act is that they can't really think of anything they might do that would have any real effect, or maybe they're satisfied with 2% inflation and 8.2% unemployment. So what if Bernanke doesn't have any more ammo?


Then we are left to the devices of fiscal policy, in other words; what can the politicians in Washington do to stimulate the economy? The most likely answer is that the politicians can drive the economy over a cliff. While that might seem cynical, it's really just pragmatic. 


And then, of course there is the Lehman Brothers event with subtitles looming in Europe. If Europe collapses, the thinking is that Bernanke will find a few more bullets in the form of QE3, and he will once again toss money at the Wall Street bankers. The Wall Street crack whores will fire up their pipes and place “risk-on” trades with the certainty that the Fed will place a put against any losses. The problem with this scenario is that Wall Street won't be ready to go risk-on in the event of a Euro-collapse, they'll just hoard the money and arbitrage against the Fed. 


And the bigger problem is that QE3 won't find its way into the broader economy; at least if past performance is any indicator of future results. QE1&2 were abysmal failures for Main Street. The money never went out into the broader economy and never developed any velocity; Operation Twist might have pushed down long term interest rates but it didn't make it easier to get an actual lower rate on your mortgage – that involved fiscal policy and it has be less than satisfying. the money was sucked into that black hole of bad bankster bets; and the banksters can bet more than Main Street can ever produce. 


If you forget your history, you can just refer to the playbook as it is happening right now in Europe. A new audit shows Spain's banks would need $64 to $78 billion in extra capital tow survive a serious downturn in the economy, less than the $125 billion aid package offered by the Euro-zone, but far more than the $$27 billion actually allocated for the ESM bailout fund, which has not yet been funded. Spain said it will make a formal request in the next few days but details on how much each bank will need won't be known until September. The important point here is that  the money is not going to the Avenida Central, it doesn't create jobs to alleviate the 25% unemployment rate in Spain; the money goes to the banks, and it disappears. Spanish banks need a $64 to $78 billion dollar bailout – for now. How long do you think it will take before they come back and demand more?


I read recently that the bailout money already sent to Greece is more than the amount Germany received under the Marshall Plan. That's an alarming statement, except Greece didn't receive the bailout money; it went to the banks. They didn't build roads and bridges and factories. And it is wrong to imagine Germany can bail out the Euro. The crisis has engulfed three small countries – Greece, Ireland and Portugal – and is now on its way towards Spain and Italy. France might well be next. These six countries’ public debts amount to 200% of German GDP. With its own debt of 80% of GDP, Germany can't stop the inevitable.


It's important to understand which countries were fiscally reckless. In 2007, Greece and Italy both had high debt to GDP (over 100%), Portugal, France and Germany had debt to GDP of a little more than 60%; Spain was in the 30% range; Ireland in the 20% range. The numbers should prove that the crisis is not a debt crisis but a banking crisis. The Greek bailout was a banking bailout and several of the banks were from France and Germany and even the US. 


Here in the United States we bailed out the banks to the tune of hundreds of billions and a couple of rounds of QE and the Twist and we still have big problems. Bernanke claims he still has some ammo left. Maybe he is holding it for a Euro-collapse but while he's waiting the US economy might go over the monetary cliff and he'll figure the only thing to do is another round of QE. Maybe the mistake the banksters really made was to have a pleasant little Wall Street rally to start the month of June; maybe Bernanke, in a flash of probity, didn't feel comfy passing out free money during a rally. Maybe he knows that after QE3 he really is running out of bullets.


Moody’s Investors Service downgraded the debt ratings of 15 major international banks and securities firms after the close of trade. The downgraded banks include: Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, Royal Bank of Canada, Deutsche Bank, BNP Paribas, Credit Suisse, RBS, HSBC, and Barclays. Morgan Stanley and UBS each took a two-notch cut, not as bad as anticipated. Credit Suisse took a three-notch cut. The downgrades may affect derivatives that aren’t centrally cleared, some policies require the counter-party to maintain an A-rating. The downgrades also may hasten obligations to post additional collateral and termination payments. Moody's said: “All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities.”In after hours, Morgan Stanley moved higher because the hit could have been worse. Is this the canary in the coalmine? It's hard to imagine the financials don't take a hit.


The global economy is slowing.  In China, the preliminary HSBC manufacturing purchasing managers’ index dropped to 48.1, the eight straight month of contraction. In Europe, the flash manufacturing PMI fell to 44.8, the lowest in three years. In the US, the flash manufacturing PMI remained in positive ground at 52.9, but the pace of the expansion in the factory sector slowed from May. The Philadelphia Fed said its manufacturing index plunged to negative 16.6 in June. Sales of existing homes dropped 1.5% in May. Oil prices down below $80 is a clear indication of a slowing economy. The number of Americans who applied for unemployment benefits fell slightly last week but remained at a level indicating virtually no improvement in hiring trends or labor market conditions.


It wasn't total gloomy economic news; the index of leading indicators rose 0.3% in May; the FHFA house price index inched up 0.8%; the data points toward a slowing economy, grinding lower without severe contraction. 


There are plenty of reasons we can attribute to today's declines, if you need a motive to deal with the move, pick one and wallow in it. We'll probably grind lower through the summer. There will likely be some rallies, like the first half of June, and there will likely be some nasty falls, like the month of May and today. And there will be the overhanging threat of a global financial meltdown, but most likely it will just be a grind it out summer. 


Some people think the US economy has pulled out of the recession and the recovery just isn't robust. Some people think the US economy might be headed for a double dip recession. Some people think we came out of a recession and now we're headed for a depression. I've been telling you for a long time that we have been and continue to be in a depression. We've seen some signs of life but not enough to pull us out of the depression. In a depression, even the good times feel like a grind. Enjoy. 

Wednesday, June 20, 2012

Wednesday, June 20, 2012 - A Twisted World - by Sinclair Noe

DOW  - 12 = 12,824
SPX – 2= 1355
NAS +0.69 = 2930
10 YR YLD +.02 = 1.64%
OIL – 3.25 = 81.10
GOLD – 11.10 = 1607.80
SILV - .30 = 28.22
PLAT – 23.00 = 1464.00


Quite frankly the Federal Reserve FOMC meetings have become a bit too predictable. They didn't lower interest rates because rates are already at zero. They didn't raise interest rates because that would be a total freak out and the financial markets would collapse. The Fed does not have an exit plan from their zero interest rate policy. They didn't announce QE3 because that would be a blatant destruction of the currency which would send the price of gold soaring; also because they are holding back and waiting just in case Europe hits the self destruct button. 


The Fed expanded Operation Twist by $267 billion, meaning it will sell short-term securities and buy long-term ones in an effort to keep borrowing costs down. The program, which was due to expire this month, will now run through the end of the year. Operation Twist is a wash; it really doesn't cost anything; they buy, they sell, it all equals out. The next question is whether Operation Twist actually does anything. Here the results are inconclusive. Long term rates are at historic lows but we don't know if rates would have been low even without Operation Twist. 


Perhaps the most pathetic part of the FOMC statement was this: “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.”


Specifically, the Fed expects unemployment at around 8% or higher for the remainder of the year. This is not a decline that is consistent with their statutory mandate. This is the Fed admitting that they are impotent to fulfill their mandate. According to their calculations, inflation will run right around the target of 2%; so inflation is not an impediment to policies which might improve employment. So, what is the Fed doing about unemployment? Not much. 


The Fed also released economic projections, estimating US economic growth this year to a range of 1.9 percent to 2.4 percent, down from an April projection of 2.4 percent to 2.9 percent. They also cut forecasts for 2013 and 2014. And so the question again is – what is the Fed doing to reduce unemployment? Their policies are not growing the economy, and there doesn't appear to be any specific action to target unemployment. This is the new normal. 


I told you yesterday that the reaction to the Fed meeting might be mild disappointment. It was. It should have been outrage, but it wasn't. 


Elsewhere, let's review Jamie Dimon's dog and pony show before the House Financial Services Committee. You may recall that last week Dimon went before the senate where he received many thanks for his many campaign contributions. The senators were such a pathetic, fawning group of quislings that the house counterparts recognized the necessity of acting like they weren't bought and paid for. 


House lawmakers demanded answers. At one point, Representative Barney Frank, the Massachusetts Democrat who helped write the Dodd-Frank financial regulatory overhaul, told Mr. Dimon to “stop filibustering” and said that he was frankly “disappointed” with some of the banker’s answers.


Dimon stuck to the script; he kept repeating that despite all the bad stuff  it would be even worse if there was more regulation. I think this should be allowed as a new defense in criminal cases: “Yes your honor, I stole the money out of the store's cash register but if you put more cops on the street, then some other thug would probably do worse than that, so you should let me go.”


One idea is to extend Dodd-Frank regulations to the foreign branches and subsidiaries of Wall Street banks. Jamie Dimon warned that would be very bad: “If JPMorgan overseas operates under different rules than our foreign competitors,” and  Wall Street would lose financial business to the banks of nations with fewer regulations, allowing “Deutsche Bank to make the better deal.” 


So Dimon argues for less regulation no one knows how badly JPMorgan or any other Wall Street bank will be shaken if major banks in Spain or elsewhere in Europe go down.  One advantage of being a huge Wall Street bank is you get bailed out by the federal government when you make dumb bets. Another is you can choose where around the world to make the dumb bets, thereby dodging US regulations. That's just the way it is and that's the way Dimon wants to keep it.


One of the more important points was whether Dimon was forthcoming with investors. Dimon tried  to fend off implications that he misled investors on a now-infamous April 13 conference call, when he dismissed reports of potentially risky trading in the credit markets as a “tempest in a teapot.” A little later, Dimon admitted knowing that on April 10 the bank had a $300 million loss from the position, raising questions about his disclosures at the time. And then there were questions about Dimon's own failure to spot the troubled bet as evidence that the bank's risk-taking had become too unwieldy. 


At one point, Dimon said: “No, we're not too big to fail.” Those words should be carved in marble. And if, at some point in the future, we happen to repeat the problems of 2008 because we failed to address the cause; if that should ever happen, then we can refer to Dimon's testimony and be done with it.


Meanwhile, Attorney General Eric Holder has been cited for contempt by a House committee for failure to prosecute even one of the banksters responsible for the financial crisis. A spokesman for House Speaker John Boehner suggested administration officials had lied earlier or were now "bending the law," by handing out free “Get out of jail” cards to the banksters.


Wait, no. Excuse me. Holder was cited for contempt of Congress but it has nothing to do with the prosecution of banksters. It was for possibly covering up information regarding the “Fast and Furious” gun-running gone bad ATF scheme.


So many times we say the politicians are out of touch with the common man, but today, Attorney General Eric Holder proved that he is a man of the people; just like 88% of all American, Holder has contempt for Congress. 


Greece has a new government. Antonis Samaras, the leader of the New Democracy Party, was sworn in as prime minister today. Samaras is preparing to work with two other parties that agreed to form a coalition. Whether his government will last more than a few months, or succeed in renegotiating some of the tough austerity terms of Greece’s multibillion-euro bailouts with its European partners, remained an open question. Already the coalition is finding dissension among the different parties. But Europe did not implode today. And for the moment, Greece is not the biggest problem in Europe. Spain is. 


The G-20 summit in Los Cabos, Mexico managed to forge a tentative deal to put the machinery in place to extinguish the conflagration in the credit markets that is Spain, and which might also burn down Italy. The market reaction to Spain's 100 billion-euro EMU rescue for its banks has been ugly. Spanish bond yields jumped above the unsustainable 7% level. 


It looks like the plan is for the eurozone's leaders aim to deploy the ESM, the European Slush Mechanism,  to cap borrowing costs for Spain and Italy by purchasing sovereign bonds on the open market. Unfortunately, the ESM fund does not yet exist. It has not been ratified by Germany and Italy. When it does come into being, it won't have much money. It has a theoretical limit of 500 billion euro, which is a nice round number that sounds impressive but has no basis in reality. The ESM's paid up capital will start at just 22 billion-euro.


Britain's George Osborne cautioned against exuberance. "One thing we have learnt is: don't expect a single summit to solve the eurozone's problems, otherwise you are going to be disappointed. The eurozone is inching towards solutions."


But there are still problems, even if they can put some money into the bailout fund they still would need prevent a stampede. Once the fund starts buying Spanish and Italian bonds it will subordinate other creditor. You will remember that after the Euro-union refused to take any losses in Greece, they impose the entire loss on private bondholders, who suffered a 75% haircut. One of the victims of the Greek haircut was Norway's state pension fund, which now says it will boycott any future EMU debt issues following the act of theft.  And Norway isn't the only private investor putting on track shoes and preparing to run away from the Spanish and Italian bond market; plus, it is a safe bet that there are swarms of bond vigilantes that now smell blood in the water and are looking at the short side of Spanish bonds. In other words, it will take more than a wing and a prayer and 22 billion-euro to prevent the collapse of Spain. 










We've had a chance to digest the Jamie Dimon testimony before the House and there were a few highlights I found at theStreet


For example: Jamie Dimon is a patriot. "The most important thing to me," he told Rep. Scott Garret of New Jersey, "is the United States of America."


Rep. Jeb Hensarling of Texas spouted off a mini-speech about the "serial trillion-dollar deficits" in the U.S. that are a whole lot bigger than the puny $2 billion lost by JPMorgan. Two billion "seems to pale in comparison," he said, sniffing that he was "somewhat curious" about his colleagues' outrage over JPMorgan's loss. When you've got a disastrous federal budget to worry about, there's no reason to waste time worrying about too-big-to-fail banks that might or might not melt down the global financial system. 


Georgia "is number one in home foreclosures," said Rep. David Scott of Georgia, and it wasn't easy to tell whether he was bragging or complaining. He did, though, take the opportunity to thank Dimon that JPMorgan didn't foreclose on more homes than it did, with a shout-out for the people who worked at the Chase Home Ownership Center in his state. "Good job," said the congressman.


Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said that when there's a fiancial disaster in London it "often it comes right back here crashing to our shores."  Rep. Carolyn Maloney of New York talked about a "disturbing pattern" of London being Ground Zero of trading disasters. Dimon made a case at the Senate hearing last week that stringent regulations in the U.S. would drive business away from the U.S. markets -- the "best" in the world. He never addressed the possibility that they might be "best" because they are subject to more regulation than the competition.


 Maloney said to Dimon, "I always thought you loved New York. Why all these jobs and all this activity taking place in London?" Apparently, Jamie Dimon's love of the United States isn't really the most important thing. 


Spencer Bachus III, chairman of the financial services committee, was taking some flack from his colleagues because Dimon had not been sworn in. "This is not a criminal proceeding or even a civil proceeding," he said, adding that Dimon had volunteered to testify. Oaths are for criminals, not CEOs. Spencer Baucus, in his role as Chair of the Financial Services Committee also happens to be the largest recipient on the committee of JPMorgan campaign contributions. I'm not saying there is a direct correlation, but you might call it good ROI.


 America is "a business machine." That's how Dimon describes it, anyway, crowing that the U.S. has "the best capital markets in the world." His idea about regulations is that we need to get regulations "right" so they work for America. Let's hope we don't trash our standards so much that some other country figures out that higher standards can nurture a competitive business machine.


And maybe the most important thing we learned is that Bankers have rights, too. Dimon was getting some grief that he and his firm had lobbied for exemptions from the Dodd Frank Wall Street Reform Act, but he shot back at Rep. Maxine Waters of California. "Lobbying is a Constitutional right," he said. "We have our right to have our voice heard." And goodness knows that whatever may go wrong for banks and taxpayers, we certainly don't want any of our financial institutions to be giving up any privileges. This is what happens when you grant personhood to corporations, they start demanding rights, like the right to less regulations, the right to buy the best Congress money can buy.