The Incredibly Massive Libor Scandal, Snakes, Plus the Halftime Report
by Sinclair Noe
DOW – 47 = 12,896
SPX – 6 = 1367
NAS +.03 = 2976
10 YR YLD -.03 = 1.60
OIL +4.46 = 92.12
GOLD – 12.80 = 1604.90
SILV - .59 = 27.80
PLAT – 16.00 = 1479.00
It was a busy day for the central bankers. It started with the Bank of England. A couple of months ago, the BoE stopped bond purchases; today they resumed the practice. The Bank of England Governor, Mervyn King announced they will increase bond purchase to 375-billion-pounds, or about $585-billion-dollars. They think this will help pull the UK from recession but they admit output will likely remain sluggish after contracting for the past two months.
A few minutes later, the People's Bank of China cut its key interest rate for the second time in a month and allowed banks to offer bigger discounts on their own lending costs. The one-year lending rate will fall by 31 basis points to 6 percent and the one-year deposit rate will drop by 25 basis points to 3 percent effective tomorrow. Banks can offer loans of as much as 30 percent less than benchmark rates.
A few minutes later, the European Central Bank cut its key interest rate by 25 basis points to a record low of 0.75 percent. ECB President Mario Draghi questioned the economic impact of cutting rates but did it anyway. He said the ECB is not “running low on policy options” but he didn't say what the other options are.
Draghi claimed this was not part of a coordinated move by the various global central banks, and that there had been nothing beyond typical communications. The Federal Reserve expanded Operation Twist on June 20th. The central banks of Australia, the Czech Republic, Kazakhstan, Vietnam and Israel also cut rates in June, while the Swiss National Bank is buying euros to defend its franc ceiling.
Bank of Japan officials meet next week to review their forecasts.
So, will all of this non-coordinated monetary policy help? The UK economy is so stressed that 90 percent of the money the central bank is injecting could end up in risk-free assets or reserves. Chinese investors are already calling for stimulus efforts and economic reforms. The ECB cut isn't expected to have much impact and there are calls for quantitative easing – they might also want to figure out how the whole monetary union should be structured and then figure out if they want to keep it in place or tear it apart. Seven of the 17 economies in the Euro-union need to be bailed out. In other words, 41% of the Euro-union is in trouble, and the Euro-union represents 25% of the global economy.
The question is: where will the necessary spark to rekindle global growth come from? Wherever it will come from, we didn't see it today.
Back here in the good ole USA, tomorrow's big monthly jobs report is expected to show 90,000 new jobs added to the economy. Goldman Sachs today said they thought the number will be better, closer to about 125,000. If it comes in less than 125k that means Goldman was shorting the market; if the number comes in significantly higher it means they were long. There is no way in hell I would ever trust Goldman on anything.
There is an old story of a woman walking down a country path in winter. There is snow and ice and it is very cold. She comes upon a snake in the path; the snake is nearly frozen. The snake says: “Take me in. Save me.” The woman says: “You're a snake. I can't trust you. You will bite me.” The snake says: “No, I won't bite you. I beg you. If you take me in I will do everything I can to repay you. You can trust me.” The old woman takes the snake to her home. She warms the snake near the fire. She feeds the snake. A couple days later, the snake is feeling healthy. The snake bites the old woman. The woman says: “You promised you wouldn't bite me.” The snake says: “Yeah, but I'm a snake. What did you expect?”
And that brings us back to the latest scandal in a never-ending string of banking scandals; this one involving Barclays and big lies about Libor, the London Interbank Offer Rate. Already there have been resignations, including the CEO Bob Diamond, who was forced to testify before the House of Commons.
During a three-hour grilling by MPs, Diamond told the treasury select committee of his disgust when he learned that traders at Barclays had manipulated interest rates in 2005. "When I read the emails from those traders I got physically ill. It is reprehensible behaviour and if you are asking me should those actions be dealt with – absolutely."
Asked when he learned of the practice of rate rigging – known as low balling – Diamond indicated that he only learnt about it when he was shown a report a few days before its publication. "The finding of the investigation, other than the things I learnt as a witness, came to me four or five days before they were published."
So, Diamond knew nothing; he wasn't involved in anything; and basically, all the banks across the world were fixing interest rates as they tried to lie and cheat and do anything they could to survive the financial crisis.
The chief investigator said: "I think, cumulatively, the whole package looks somewhat implausible."
You do understand that this is an enormously huge scandal, and if Diamond is correct that all the other banks were doing it, and that part is plausible, then the implications are massive. You might think I'm exaggerating because you watched the nightly news yesterday and there was no mention. The reason is that the nightly news thinks we are too stupid to understand the manipulation of interest rates.
But let me explain the basics: from 2005 and 2007, the bank allegedly varied the rates it reported to the British Bankers Association so as to improve its margins on internal trades. For example, Barclays could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This bumped up mortgage rates – however infinitesimally – for consumers even when the risk of the loans hadn’t changed at all. It wasn't a big jump, but it was a little jump. And there are 16 banks that report the rates to the BBA each and every day, and so there were others that were complicit in this rate rigging scandal in addition to Barclays. This is a banking cartel.
The Libor market is incredibly huge, so little moves can be extremely profitable. That was just part of the scandal – the second part involved lying about the rate as a way to pump up their financial strength, basically they lied about their credit score.
For example: 60% of prime adjustable mortgage rates were tied to Libor, and about 100% of subprime mortgages were tied to Libor; there are approximately $10 trillion in mortgages just in the US. So just a few basis points can make a big difference; and then credit card debt and student loans and basically almost all loans were tied to the Libor rate. And then there's about $350 trillion in credit swaps tied to the Libor. So almost every major corporation and most of the municipalities got a little haircut when the rates were manipulated. And the overall market tied to the Libor rates is about $800 trillion, or about 10 times the Gross Domestic product of the entire world. And Barclays and the other banks just took a little cut, just enough to wet their beaks. They stole, just a little bit, from everything because Libor is at the center of all credit. And if we are to believe Bob Diamond, all the bankers were cheating and were corrupt.
Are you surprised? This is the very nature of the big banks. They were given the green light that the rules did not apply to them. The same bank executives that crashed the global financial system in 2008, the worst breakdown since the Great Depression, the same guys are still running the same banks. Bob Diamond is not a newbie at Barclays. And the entire system is completely and totally rotten to the core. And this is an enormously huge problem. And everywhere you look – snakes.
It is time for the Halftime Report.
On January 5, 2012 we talked with Evan Greenberg, an old friend and former hedge fund manager. Evan specializes in finding small cap stocks. Years ago we started doing a Top Ten List. Evan picked 10 small cap stocks, at the end of the year we would tally the price and see how it worked out. Over several years, this method resulted in a couple of gains over 100%, and gains every year.
The rules of the game: small and micro cap stocks only; pick the stocks in January; no trades in or out; don't count dividends or trading costs. Five of the Top Ten are showing gains, while 5 are showing losses. On a per share basis, the returns are a positive 6.6%
Here is the list and the prices from Jan.5, in no particular order:
10. USHS – U.S. Home Systems =$7.24
9. TGE – TGC Industries =7.16
8. DLA – Delta Apparel = 19.25
7. PESI - Perma-Fix Solutions = 1.56
6. ANIK – Anika Therapeutics = 9.60
5. FRD – Friedman Industries = 11.29
4. CECE – CECO Environmental = 5.67
3. CVU – CPI Aerostructures = 13.03
2. ACET – Aceto Corp = 6.83
1.HURC – Hurco Companies = 21.58
The 5 gainers to date are USHS, TGE, ANIK, CECE, and ACET. Evan still likes FRD, CVU, CECE, and ACET in particular. If he could add three more small caps to the list, they would be: MOSY, MNTG, and MITL. Among the large caps, Evan likes MSFT and NVDA. His favorite short is LULU.
To contact Evan send email to: Egreenberg@legendcap.com
Good luck and you're welcome.