I've Never Been to Spain and I've Never Seen a Flash Flamenco
- by Sinclair Noe
DOW – 7 = 13,164
SPX + 1 = 1405
NAS + 13 = 3030
10 YR YLD +.08 = 1.80%
OIL -.07 = 94.26
GOLD + 4.10 = 1604.10
SILV un = 27.93
PLAT un = 1400.00
JPMorgan Chase, Barclays, UBS, Deutsche Bank, Royal Bank of Scotland, HSBC Holdings, and Lloyd's are the seven banks subpoenaed in the past week in New York and Connecticut’s investigation into alleged manipulation of Libor. Citigroup and UBS received subpoenas earlier this year as part of the investigation. New York Attorney General Eric Schneiderman and Connecticut Attorney General George Jepsen are jointly investigating alleged manipulation of the London interbank offered rate, or Libor.
Meanwhile, HSBC has handed over details of current and former employees to the US authorities as part of a tax probe that almost sank rival bank UBS in 2009. As a result, the bank may be sued by the former employees claiming banks infringed the criminal code and Swiss privacy laws. HSBC claims it has avoided breaching strict Swiss banking secrecy laws by redacting from the documents any information that could lead to the identification of clients.
Yesterday, I told you that Standard Chartered had reached a settlement with New York State regulators. There will be no criminal prosecutions as a result of the settlement, mainly because the New York state regulator doesn't have prosecutorial powers. You may also recall that when this story broke last week, one of the first things Standard Chartered did was to hire PR firms that tried to say most of the Iranian transactions were before the sanctions, and it wasn't really $250 billion in money laundering, it was at the most maybe a paltry $14 million.
Part of the settlement with the New York State Department of Financial Services is that both parties agree the conduct involved transactions of at least $250 billion. Not that it matters. SCB still gets off with a slap on the wrist, just a $340 million dollar fine, not even one percent of the business done. And you will note the language did not say, “the conduct at issue involved FRAUDULENT transactions of at least $250 billion.” Still, they face investigations from the federal regulators, the Treasury, the Federal Reserve, and the Department of Justice; all are notorious for cutting sweetheart deals with the banksters. Whatever deal they reach will now be based on $250 billion not $14 million.
Meanwhile, Reuters reports the estates of the victims of the 1983 bombing of the US Marine barracks in Beirut sued Standard Chartered seeking compensation over the bank's concealment of Iran-linked transactions. The civil lawsuit, filed in US district court in Manhattan, said the bombing victims obtained a $2.6 billion judgment in compensatory damages against Iran in 2007. The court document said the plaintiffs include representatives of the estates of the 241 US servicemen killed in the attack in the Lebanese capital, relatives and heirs and bombing survivors. The lawsuit on behalf of the bombing victims claims "those unlawful actions are part and parcel of Iran's longstanding, determined efforts to evade collection of the judgment, and other judgments."
Treasury prices fell, sending 10-year yields toward the highest in almost three months. Ten-year yields have climbed from the record low of 1.38 percent on July 25. We've been getting some fairly positive economic reports and that weighs on bonds. We've seen a slightly better than expected July jobs report; it wasn't great but it was better than expected. The July retail sales report was pretty solid. Today, a report showed that industrial production in the US increased more than forecast in July; manufacturers are turning out more cars and computers.
On the flip side, we've seen inflation is flat. The BLS reported that the seasonally adjusted Consumer Price Index, a measure of inflation at the retail level, was virtually flat at 0.0% in July, or just 0.6% annualized rate. The CPI less food and energy increased 0.1% (1.1% annualized rate) on a seasonally adjusted basis. There is a different calculation, the CPI-W, used for figuring the cost of living adjustment for Social Security and other programs – not a big jump but positive.
The Fed is focused on the future, because monetary policy influences the economy only gradually, so what officials really care about is what the data will show in the coming months. Their most recent guesses, published in June, pegged core inflation between 1.2 and 1.7 percent this year, which is well below their target. All in all, inflation is below target for the Federal Reserve calculations, which means they have some room to be a little looser with monetary policy, but the slightly positive economic reports mean that another round of QE is not in the immediate future. You may recall that in 2010, Fed Head Bernanke gave a speech at the Jackson Hole Economic Symposium and signaled a second round of quantitative easing or QE2. There is another Jackson hole Symposium on August 31st, but don't expect QE3. This doesn't mean the Fed is not loose with money – they are; just that they likely won't be announcing QE3.
Last week, for a brief time, the machines took over the stock markets; tens of thousands of trades took place of some of the major stocks; trades done by what they are now calling rogue algorithms. This created instability in prices; trading was halted, but not before Knight Capital lost about $400 million on rogue trades. This instability is troubling for anyone trading or investing in stocks.
Knight Capital's business is these quick in and out trades. They've established computer rooms in close proximity to the exchanges, and they get a split second advantage, just enough for the computers to jump in front of a trade, and manipulate the bids and offers in such a way as to scalp a tiny amount from thousands or even millions of trades. The federal commodities trading commission reports that something like 500 to 600 people at Goldman Sachs are employed doing nothing but working on these kinds of quick in-and-out algorithm tradings, although I don't think Goldman's algorithm is to blame for this particular incident. But it's a very widespread thing that's happening, and last week it went out of control. So, now there is talk about the need for regulation; there has been talk about regulating these kinds of flash trades for a few years. There was supposed to be something in Dodd-Frank. Nothing has been regulated.
One possible solution is a financial transaction tax, just a small tax on each share traded, the tax might even increase as volume increases. That would probably eliminate the flash traders, who are really nothing but middle men, skimming from each trade while adding nothing of value. Rightfully, isn't that the role of government? New York state actually has stock transaction tax and it's been on the books for more than 100 years, and it rebates the tax to the Wall Street traders for some inexplicable reason. The tax doesn't cover flash trades.
Don't confuse flash trades with flash mobs; that is apparently the latest thing in Spain. The Spanish government gave in to demands to bailout the Spanish banks and imposed harsh austerity measures on the Spanish people. So the people are having flash mobs in grocery stores and then they steal food and give it to the poor. Other flash mobs dance the flamenco in bank lobbies and they sing songs about how they dislike the bankers. I've never been to Spain but I would like to go.
According to regulatory filings late yesterday, some well-known money managers reported significantly reduced stakes in big banks, including JP Morgan Chase and Goldman Sachs, as well as food companies such as Kraft Foods Inc. in the second quarter. Billionaire investor George Soros’s Soros Fund eliminated positions in JPMorgan Chase, Goldman, and Citigroup. The investment company also reported a new stake in Wal-Mart and a big stake in Facebook.
Warren Buffet's Berkshire Hathaway reduced positions in Procter&Gamble, Johnson and Johnson, Intel, and Visa. Berkshire increased its existing positions in Wells Fargo and IBM. Buffet bought National Oilwell Varco, an oilfield equipment company, and Phillips 66.
And John Paulson, the guy who made a fortune bundling subprime junk through Goldman Sachs and then betting against it; Paulson was selling stock in the second quarter and buying GLD, the exchange-traded fund that tracks the price of gold. Paulson's $21 billion hedge fund now has more than 44 percent of its US traded equities tied to bullion.