Friday, September 28, 2012

Friday, September 28, 2012 - Eat Cake

Eat Cake
by Sinclair Noe

DOW – 48 = 13,437
SPX – 6 = 1440
NAS – 20 = 3116
10 YR YLD un = 1.64%
OIL + .25 = 92.10
GOLD – 6.50 = 1772.10
SILV - .17 = 34.59
PLAT + 13.00 = 1669.00

There are bad things and they are bad. There are good things and they are good, even though the bad things are bad.

Let me give you an example; You probably know I'm not a fan of the Federal Reserve. I believe there are better ways to conduct monetary policy. This does not mean the Fed's monetary policy doesn't work. You've heard the old adage, “don't fight the Fed”. In case you haven't noticed, the stock market has doubled in the past 3 1/2 years. That's good, even though the bad things about the Fed remain bad.

And the stock market has been performing much better than seems possible. As the third quarter comes to an end you might think about the problems in Europe and the slowdown in China; you might think about the slowdown in the US with the economy growing at an anemic 1.3% pace, the seemingly never ending housing recovery, the interminably high unemployment; and you might think of the looming fiscal cliff and the dysfunctional political bickering as corrosive elements sucking the life blood out of the economy; and you might think the best investment opportunities are in freeze dried foods and concrete bunkers – but no. The stock market has been sweet.

The S&P 500 Index has gained more than 5.8% in the current quarter and 15% since January. The Dow Jones Industrial Average is up nearly 4.3% in the past three months and 10.4% year-to-date. September is always a scary month in the markets; it is the month most likely to wipe out a portfolio. Seasonally speaking the stock market avoided a September surprise with a 2.4% gain. Next Monday we move into the fourth quarter, the best three-month span for returns over a 20-year, 50-year, and even 100-year period. According to the Stock Trader's Almanac, stocks have advanced in every fourth quarter since World War II (excluding 1948) when an incumbent president wins the election. No guarantees. The second scariest month in the stock market is October. The fourth quarter has some potentially big market moving events that will not tolerate complacency. The third-quarter earnings reporting season kicks off in October and it might be the weakest earnings season in the past 3 years.

Still, you look over a chart of the S&P 500 for the past 3 ½ years and you are looking at a massive bull market. It is a little bit amazing when you think about everything: the Flash Crash (make that crashes), Euro double dip, Euro riots, BRIC slowdown, debt ceiling debacle, oil spikes, unemployment, etc., etc., etc.. Just goes to show you. Even though the bad things are bad, there are good things, and they are good.

And that brings us to today's edition of Banks Behaving Badly. Bank of America says it has agreed to pay $2.4 billion to settle a class-action lawsuit related to its acquisition of Merrill Lynch. Shareholders alleged that Bank of America and some of its officers made false or misleading statements about both companies' financial health.

The lawsuit was filed on behalf of investors who bought or held Bank of America stock when the company announced its plans to buy Merrill Lynch in a $20 billion deal back in 2008; you may recall it was the same weekend that Lehman Brothers collapsed. Bank of America didn't tell investors all the details about the huge losses that were occurring in Merrill's fourth quarter. There was general reference to losses, but never was the magnitude of those losses disclosed. The transaction came into question later after Bank of America disclosed that Merrill would post $27.6 billion in losses that year. BofA ended up taking about $45 billion in bailouts.

The Securities and Exchange Commission won a $150 million settlement from Bank of America in 2009 to resolve charges that it misled shareholders when it acquired Merrill; but this was different; they failed to disclose to shareholders before they voted on the Merrill deal that it had authorized Merrill to pay as much as $5.8 billion in bonuses to its employees in 2008 even though the investment firm lost $27.6 billion that year. And a major civil fraud suit against Bank of America and former CEO Kenneth Lewis remains pending from New York state.

So, BofA will pay $2.4 billion to settle the case but they are not admitting any wrongdoing. Makes you want to holler; throw up both your hands.

While it might be a challenging third quarter earnings reporting season for many industries, there is one sector that is expected to do well – the big banks. And the biggest banks are likely to profit from the same thing that got them into trouble five years ago: mortgages. The fees generated from making mortgages will be a big profit center. There has been a small boom in refinancing activity and that is likely to last for the next year or so. Banks benefit from the fees they get from closing loans, but also from the fact that investors want more mortgages than lenders can easily make. When a bank makes a new loan, it can quickly sell it off to investors at a relatively high price.

Over the past year, with the Fed acting as a backstop, the interest rates have dropped but the spread, the difference between what the banks charge the home-buyer and they amount they sell the mortgage-backed security to investors – that spread has doubled. If the spread was the same as it was one year ago, the mortgage rate on a 30-year fixed would be about 2.8%. Yesterday, Freddie Mac said the average rate for a 30-year home loan fell to a record low of 3.4 percent. That difference or spread is just profit for the big banks.

So, next week Wells Fargo and JPMorgan Chase are both expected to post more than $4.5 billion in profits for the third quarter, an increase of more than 15 percent from last year. Fixed-income trading revenue will likely rise at the investment banks, thanks in part to more trading in mortgage-backed securities.

The University of Michigan-Thomson Reuters consumer-sentiment gauge rose to a final September reading of 78.3 — the highest since May — from 74.3 in August.

The Commerce Department reports consumer spending rose by 0.5% in August; that's the fastest rate since February. Personal income inched up 0.1% last month on a seasonally adjusted basis. After-tax incomes adjusted for inflation, meanwhile, actually fell 0.3% last month. This may sound obvious, but it is worth noting; consumers cannot keep spending faster than their incomes grow, especially since their savings rate is already on the low side.

I ran across a guide published by Fidelity Investment, and it looks at how much you should have saved at various points in your life in order to be on track for retirement. Obviously, the best thing is to start saving money at an early age and let the power of compounding help. Here's how much you should have saved at different ages in order to have a retirement paycheck that matches your working paycheck:

Start at age 15, and you need to save 8% of annual income for life.
Start at age 20, and you need to save 11.1% of annual income for life.
At age 25 you need to save 15.4%.
At age 30 you need to save 21.4%.
At age 35 you need to save 30.1%.
At age 40 you need to save 43.2%.

At age 50, you need to save 100%. If you earn $100k at age 50, and you only save $50k, then your saving strategy will only allow you to retire on a $50k lifestyle. So, you need to lower your expectations, or maybe buy a lottery ticket.

Spain’s bank stress tests came and went Friday evening in Madrid. Of 14 Spanish banks subjected to the tests, seven will need an additional $76 billion in capital, which was widely expected. There are still bigger problems in Spain. This week, Spain announced budget and economic reforms, and there was social unrest and protests. Spain's richest region, Catalonia, is calling for independence, part of the mounting political fallout from an economic crisis that is far from resolution. So far, Spain's Prime Minister Mariano Rajoy has resisted going to the ECB for a bailout that would include submitting to the humiliation of internationally imposed austerity measures to qualify for the rescue.

Riot police fired tear gas at an angry mob throwing gasoline bombs during a general strike in Athens today, a day after Spanish police shot rubber bullets at leftist protesters attempting to storm parliament, where lawmakers were mulling more austerity. Days after it seemed European policymakers may have finally launched a drive to save the continent's single currency, the euro zone's battlefield is spreading from trading floors to the streets. Last week, a march by half a million Portuguese forced the government to climb down over planned cuts to workers' take-home pay. Portugal is a small country; only about 10 million people. A half-million Portuguese taking to the streets is significant; it's like the entire capitol city of Lisbon was protesting in the streets. About a week ago, 1-and-a-half million people marched in protest through Madrid.

I see almost nothing about these protests on the nightly network news. A couple of weeks ago, ECB President Mario Draghi promised to do whatever it takes and then the European Central bank promised to buy the bonds of troubled governments if necessary. And all the debtor nations had to do was was agree to more and more austerity. The markets were downright giddy with the prospect of open-ended quantitative easing from the ECB. Then the Greeks and Spaniards and Portuguese had strikes and huge, massive demonstrations. It turns out that austerity has already gone too far. The people on the street don't give a damn about bailing out the banks and the bondholders.

Thursday, September 27, 2012 - GDP Dries Up

GDP Dries Up
by Sinclair Noe

DOW + 72 = 13,485
SPX + 13 = 1447
NAS + 42 = 3136
10 YR YLD +.02 = 1.64%
OIL + 2.25 = 92.23
GOLD + 24.30 = 1778.60
SILV + .67 = 34.76
PLAT + 13.00 = 1654.00

This economics stuff is an imprecise, semi-dismal, pseudo-science. This morning the Bureau of Labor Stats released the preliminary annual benchmark revision to the jobs report. Seems there were an additional 386,000 jobs as of March 2012. They'll revise the numbers again in February.

The Commerce Department reports the US economy grew at an annualized rate of 1.3% in the second quarter; that's down from 2% in the first quarter; and that's down from 4.1% in the fourth quarter of last year. The results were worse than anticipated. The Bureau of Economic Analysis made an initial guess that GDP grew at a 1.7% pace, then they revise the guess down to 1.5%, then they make a third and final guess which was today's 1.3% number.

We can talk about politicians, corporations, workers, the Fed, and lots of other factors but one of the most important factors in the lower GDP number was the weather. The Midwest drought wasn’t the only thing that caused the government to change its GDP estimates. Figures for consumer spending and business investment also were revised down, along with the contribution to GDP of net exports. A drop in farm inventories knocked about 0.2 percentage points from the GDP. And we're just feeling the initial impact of the drought; the economic effects will likely continue into the second half of the year.

Despite some rain associated with Hurricane Isaac, the drought is not improving. A couple of weeks ago, 63% of the contiguous US was suffering some sort of drought. Today, 65% of the country is affected by drought. The economy will have to deal with weaker exports of agricultural products and you and I will deal with higher prices for food.

Yesterday we talked about the political polls showing Obama taking a solid lead over Romney. Today, the Reuters/Ipsos daily tracking poll showed Obama with 49% support compared to 42% for Romney among likely voters. Early voting is underway in several states. The race might be decided before election day. The next point is how this polling might affect the makeup of the House and Senate.

According to a Bloomberg National Poll, Republicans in Congress have an unfavorable rating of 51 percent, and Democrats are only in slightly better shape, with 49 percent of poll respondents viewing them unfavorably.

So, I'm waiting for an October surprise, or waiting to see the results of Florida's new 600-lever voting machines. The Florida voting officials say the steam powered devices should streamline the process of punching out chads on the 36 page ballots. What could go wrong?

In less than a week Mitt Romney and President Barack Obama will face off in the first of three debates. The focus is domestic policy, and taxes will undoubtedly be a key topic.
President Obama wants to extend the Bush-era tax cuts for all but those earning more than $250,000. Romney wants to extend those tax cuts for all including top earners, cut individual rates another 20%, and eliminate the capital gains tax, making up for all revenue losses by closing loopholes.

A new report released by the Congressional Research Service questions the impact of tax cuts for the wealthiest Americans. The nonpartisan CRS says cuts in the top marginal tax rate and top capital gains tax rate "do not appear correlated with economic growth."
The report says cutting top tax rates don't appear to boost saving, investment or productivity, or the size of the economic pie, but do seem to increase disparities in income. Current top marginal tax rates are 35% on income and 15% on capital gains and dividends. All are set to expire by year-end if Congress doesn't act to stop implementation of the Budget Control Act. That law mandates that the top marginal rates will jump to 39.6% on income and dividends (as they were when Bill Clinton was president) and 20% on capital gains after the new year.

But even those rates are much lower than historic rates. In the 1950s the top marginal income tax rate topped 90% and the top capital gains rate was 25%. The Congressional Research Service says tax rates for those with the highest incomes "are currently at their lowest levels since the end of the second World War."
And the share of the income earned by the top 0.1% of families is more than double their share in 1945---9.2% during the 2007-2009 recession, though lower than 12.3% just before the recession hit, according to the latest data from the Congressional Research Service.
So, if you watch the presidential debate next Wednesday, you could make a little game out of how many times you here a reference; you know, every time a candidate mentions CRS, you take another hit on the crack pipe.

Spain has announced a new budget for 2013 and a timetable for economic reforms. Central government spending would be cut by 7.3 percent and they'll impose a 3.8% VAT tax. Ministry budgets will be cut by 8.9% next year and public sector wages will remain frozen for a third year. The Spanish government announce 43 new laws to reform the economy, including reforms to the labor market, public administrations, energy and telecom services. The Spanish state of Catalonia might secede; they've scheduled a referendum on independence. The unemployment rate still tops 25% in Spain, and half of the young workers can't find jobs. Anti-austerity protesters have taken to the streets. One recent protest in Madrid drew one-and-a-half million. The measures announced today will likely result in more street protests.

It seems we can't get through a day without another case of banks behaving badly. Today's edition features a familiar name, Goldman Sachs, in a case involving campaign contributions to ex-Massachusetts state treasurer, Timothy Cahill, who was a candidate for governor in the state. Cahill lost his gubernatorial bid to incumbent Deval Patrick. In April, Cahill was indicted on criminal public corruption charges for allegedly using the state's taxpayer-funded lottery advertising budget to boost his campaign.

Neil Morrison, a former vice president in Goldman's Boston office, worked extensively on Cahill's 2010 campaign while also soliciting underwriting business from the Massachusetts treasurer's office. The SEC has also charged Morrison, and the case against him continues. Goldman Sachs will pay $12 million to settle charges it violated what they are calling “pay to play” rules. Pay-to-play refers to cash or other contributions made to officials to influence the award of lucrative public contracts. Or to put it simply – bribery.

Kareem Serageldin, the ex-global head of Credit Suisse Group’s CDO business charged in a bonus-boosting fraud tied to a $5.35 billion trading book, will fight extradition to the US until he reaches a plea deal.
Serageldin’s lawyer told a London court today that his client’s arrest yesterday outside the US Embassy was a result of “miscommunication”, and Serageldin was negotiating a plea bargain with U.S. prosecutors before the arrest. Serageldin, a US citizen who lives in England, was charged in February with masterminding a scheme to fake collateralized debt obligations. Serageldin was named in an indictment unsealed in February accusing him of conspiracy, falsification of books and records and wire fraud. The conspiracy charge carries a maximum five- year prison term on conviction. The other counts are punishable by as many as 20 years. The case is being investigated by agents of the Federal Bureau of Investigation in New York.

OK, why is this important? Because it might represent the the highest-level Wall Street executive to be charged in a case relating to the 2008 financial meltdown.

I had an email from a listener. You can do that by writing me
How is it that both Gold and the stock market move in the same direction;
it should be that they move in an inverse relationship since they represent
opposing economic factors and cycles. Inflation, money creation and debt expansion should be sending the Gold market soaring,while the equity and debt markets should be declining!

What gives?

Here's the quick answer: Central banks are weakening their currencies to boost their economies and gold is a beneficiary, and the story of weak currencies and strong gold is back in play and it’s not just the dollar, it’s all currencies. All that money printing is a stimulus for stocks, but also a weakness for currencies.

Wednesday, September 26, 2012

Wednesday, September 26, 2012 - A Funny Thing Happened on the Way to the Forum - Not Funny HaHa

A Funny Thing Happened on the Way to the Forum - Not Funny HaHa
by Sinclair Noe

DOW – 44= 13,413
SPX – 8 = 1433
NAS – 24 = 3093
10 YR YLD - .06 = 1.62%
OIL +.23 = 90.21
GOLD – 7.30 = 1754.30
SILV +.25 = 34.09
PLAT+9.00 = 1641.00

Did you hear the one about the bank's prop trading desk. This will have you laughing out loud, it is a real side-splitter.Well, not so much a slap your knee kind of joke, not a real hearty guffaw, but more like a giggle, more like a hahahaha kind of joke.

So this trader for Morgan Stanley, just a tyro, he walks onto the trading floor and he's talking to his more experienced colleagues. They told him the banks misreported the Libor rates in away that would generally bring them profits. The kid said he was unaware of that, as he was relatively new to financial trading. The old, battle scarred traders laughed the kid off the trading floor.

Libor fraud: More fun than a barrel of monkeys.

And then Bloomberg reports on new emails from RBS traders reading: “Our six-month fixing moved the entire fixing, hahahah.”

Haha, haha indeed. Libor fraud: Grins and giggles since the turn of the millennium.

We keep getting all this information that Libor fraud was an ongoing and well-known, in your face fraud. And yet, nobody goes to jail. It is funny. Not in a laughing funny kind of way, but in a strange, nauseating, disgusting funny kind of way.

I don't normally jump into politics with you. How you vote is your business. How I vote is my business. I don't think you're going to base your vote on my opinions, and vice versa, so I try to focus on more pragmatic concerns. This does not mean we live in an apolitical world. And so, the time has come to look at where we stand. The polls are no longer showing a statistical tie.

According to the latest Quinnipiac Poll, Barack Obama leads Mitt Romney by about ten points in three crucial swing states — Florida, Pennsylvania and Ohio. Obama leads Romney 53% to 44% in Florida, 54% to 42% in Pennsylvania, and 53% to 43% in Ohio. No candidate has been able to win the presidency without two of these three states since 1960, and no Republican candidate has ever lost Ohio and won the presidency.

On individual issues, voters in these states — averaged together — trust Obama will do a better job on immigration than Romney (50% to 42%), international crises (54.3% to 40%), national security (53.3% to 41.6%), Medicare (55% to 39%), health care (54% to 40.6%), and the ever-important economy (51% to 45%). Romney ties or slightly leads Obama on whether he is better suited to deal with the budget deficit.

According to the Gallup daily tracking poll President Obama has stretched his lead over Mitt Romney to 6 percentage points nationally. A Washington Post poll released late Monday showed Obama with leads in Ohio and Florida. Obama led Romney by 8 points in Ohio, 52-44 percent, and by 51-47 percent in Florida.

While every state matters in the 2012 presidential election, in all honesty some matter more than others. President Obama will certainly win New York, for example, and Mitt Romney will certainly win Texas. Let's review the swing states:

Obama leads Romney in Virginia by 46% to 43%.
In North Carolina, Obama leads 49-45.
Obama leads in Colorado 51-45.
In Iowa and Nevada, Obama leads 51-44.
In Paul Ryan's home state of Wisconsin, Obama has a 12 percentage point lead.
In Michigan, Obama leads 54-42.

Some of you are now sighing deeply, others are cheering softly. This is what the polls are telling us. And I've heard some who would disparage the polls, but that's just personal bias. These polls are pretty accurate. That does not mean the election is over. We still have about 40 days to election day, even though early voting has started in about half the states. A lot can happen over the next few weeks. Next week, there will be the first presidential debate. There are still billions of dollars that will be poured into the races. There is still the chance that votes will not be counted in a forthright manner. There is always the chance of an October surprise.

Iran's president Mahmoud Ahmadinejad addressed the United Nations General Assembly this morning. The guy is crazy. He could start something. Netanyahu might do something. The Egyptians situation might flare up. Syria might unravel. We've been paying all this attention to the Middle East and you've quietly forgotten about the Euro-zone

Earlier today, demonstrators clashed with police on the streets of Athens and Madrid in an upsurge of popular anger at new austerity measures being imposed on two of the euro zone's most vulnerable economies.

In some of the most violent confrontations, Greek police fired tear gas at hooded rioters hurling petrol bombs as thousands joined the country's biggest protest in more than a year. The unrest erupted after nearly 70,000 people marched to the Greek parliament. There is a general strike in Greece. Ships stayed in port, museums and monuments were shut and air traffic controllers walked off the job. Trains and flights were suspended, public offices and shops were shut, and hospitals provided a reduced service.

Greece may be the weakest country in the Euro-zone but a chain is only as strong as its weakest link. If Greece goes into default, there is nothing to prevent Portugal, Ireland, Spain and Italy from following.
In Madrid, Prime Minister Mariano Rajoy faced violence on the streets of the capital and growing talk of secession in Catalonia as he moves cautiously closer to asking Europe for a bailout. The Spanish people do not want a EU, IMF bailout. They know the consequences. In public, Rajoy has been resisting calls to move quickly to request assistance, but behind the scenes he is putting together the pieces to meet the stringent conditions that will accompany rescue funds.
Spanish bond yields approached 6 percent for the first time in months, while European shares and the euro fell sharply. Just in case you were wondering why QE to Infinity and Beyond hasn't been pushing the price of oil and commodities and precious metals higher; the reason is because the ugly situation in Euro-land is pushing the dollar higher. The dollar index inched back up to 79.9, not a level of strength, but not the breakdown you might anticipate with the announcement of open-ended bond buying and an acknowledgment that the US economy isn't strong enough to get a job. Yes we are in bad shape, but you should see the other guy.

Yesterday, Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank's latest round of monetary easing was unlikely to help growth. Today, Charles Evans, president of the Federal Reserve Bank of Chicago, said he wholeheartedly supported the Fed's plans to buy $40 billion in mortgage-backed securities every month in an effort to drive interest rates lower and stimulate economic growth.

Plosser is among a minority group of Fed officials who have argued that the central bank has done all it can to help the economy and going any further in terms of pumping more money into the financial system through bond purchases runs the risk of triggering higher inflation in the future.

Evans took issue with those who have warned that the Fed's efforts could have unintended adverse consequences. Evans said: "Being timid and unduly passive can also lead to unintended consequences. If we continue to take only modest, cautious, safe policy actions, we risk suffering a lost decade similar to that which Japan experienced in the 1990s."

Tuesday, September 25, 2012

Tuesday, September 25, 2012 - Fed Good at Growing Inequality

Fed Good at Growing Inequality
by Sinclair Noe

DOW – 101 = 13,457
SPX – 15 = 1441
NAS – 43 = 3117
10 YR YLD -.04 = 1.68%
OIL - .51 = 90.86
GOLD – 3.90 = 1761.60
SILV - .23 = 33.84
PLAT + 8.00 = 1634.00

Let’s start with a few economic reports. Case Shiller’s Index of existing home sales posted a 1.6% increase in July; all 20 cities in the index saw housing prices rise; it’s the fourth month of price increases, and the past 12 months are now showing increases. This is very positive news for housing. Pricesin Phoenix gained 2.2% to take the year-on-year increase to 16.6%, by far the strongest advance of any major metropolitan area. Los Angeles saw a 1.3% gain, and the year-over-year comparison has now turned positive by 0.4%.

The consumer-confidence index increased to 70.3 in September, the highest level since February. Generally when the economy is growing at a good clip, confidence readings reach at least 90. September expectations increased for employment and business conditions, while consumers’ views on the present situation also rose. One of the big factors affecting the optimistic outlook is the turn in the housing market.  In August, the dividend-reinvested S&P 500 was up some 18% year-on-year. The combination of positive returns on stocks and real estate hasn’t been this good since 2006. Any economic gains are still fragile but you take whatever positives you can find. Both consumer-confidence measures, the one conducted by the University of Michigan and the one done by the Conference Board, showed big pops in September.

Optimism is a marvelous thing but every party has a pooper, and today, the party on Wall Street fizzled when  Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank's latest round of monetary easing was unlikely to help growth. Earlier this month, the Fed announced it would continue with Operation Twist, and they added a plan to buy $40 billion a month in mortgage backed securities; the plan was open-ended; the Fed would just keep buying until the employment situation improved.  But Plosser doesn’t think it will work; he says: “We are unlikely to see much benefit to growth or to employment from further asset purchases." 

Plosser’s comments weren’t a big surprise; he is considered hawkish among the Fed Presidents. Other Fed leaders have announced their support for QE to infinity and beyond. Still, Plosser drew some of the blame for the stock market’s sour mood this afternoon.

Central banks in the US, Europe and Japan may have come forward with stimulus measures in recent weeks to try to stimulate the global economy but not every country is cranking up the printing press. South Korea is buying gold; they added about 70 metric tons of gold to their reserves. Russia also added to reserves, but not as much as the Koreans. So the trend of central banks beefing up their gold reserves is alive and well.

Inflation is the most talked about risk of all this central bank money printing but there is still a lot of deleveraging in the US economy.  Bernanke is probably right to discount inflation as a short term danger. Meanwhile, we’ve heard nothing from the Federal Reserve or its assorted hawk and dove presidents about the impact of the Fed’s sustained easy-money policy on economic inequality. The Organization for Economic Cooperation and Development, the OECD says income inequality has been increasing in the US, to the point where the top 10 percent of our population earns 14 times more than the bottom decile; the OECD average ratio is 9 to 1.

You can’t blame the Fed. Well, you can blame them but not for everything. The world has changed, and you have to consider globablization, technological change, education, demographic patterns, and fiscal policy has been horrific in this country for at least the past 30 years, maybe forty.  Maybe the Fed cranking up the printing press will help create a few jobs, which might help the inequality problem. Workers pulling in a wage are doing better than workers pulling in an unemployment check or nothing at all.  The crazy part is how the Fed’s plan may or may not work. Bernanke’s plan is to push down interest rates across the board which should increase the value of assets such as stocks and real estate; then the people that own stocks and real estate will feel wealthier and they will be more likely to go out and spend money or borrow money to spend; rising demand will force businesses to hire new workers. We know that people are feeling more confident but that might not equate to feeling wealthier, much less result in actual spending 

Individual participation in equities has been on the decline for 10 years; institutional investors and high frequency traders dominate the stock markets. Families in the lowest 20 percent of the income distribution scale spend more than a third of their income on food. Households in the bottom fifth spend 10% of their annual income on gas, vs. 2.2% for the top quintile. Yesterday, Goldman Sachs predicted commodity prices will rise 18.2%, in large part because of QE. Ironic, isn’t it?

The Dallas Federal Reserve is a strange branch location; they’ve issued papers about splitting up the too big to fail banks. Now they’ve issued a research paper that examines the central banks role in increasing inequality. The paper says the Fed’s accommodative policy and bailouts have supported the financial sector and the result is the rich got richer and the poor got poorer, and the result is the US has more inequality than any other developed nation. Bernanke says he wants to help people get jobs, but the tools he has used over the years and continues to use today have only resulted in a lopsided economy.

Part of the blame has to fall at the feet of Congress. Bernanke is giving Congress at least a little cover for continuing to do nothing. In pop psychology that's known as being an enabler. Has he even considered the merits of holding Congress's feet to the fire by declining to perpetuate his policy of centrally-planned subsidized money and the accompanying systematic understating of risk?

What else is going on in the world? The Greek government is resisting a push by yhe IMF to impose additional austerity measures. The Greek people are increasingly angry over the prospect that public salaries and pensions will be cut again in a last-ditch bid to secure a new loan installment of $40 billion from Greece’s creditors.

Meanwhile, the Portuguese people have put up with one draconian package after another – with longer working hours, pay cuts, tax rises, an erosion of pensions, and the result is that the economy has contracted by a little over 10%.They have protested peacefully, but they finally said enough is enough and they have killed a plan to raise social security taxes. Portugal cannot recover under the policies in place. The government is destroying the Portuguese economy for no useful purpose. It is pain without gain.

As Spain tries desperately to meet its budget targets, it has been forced to embark on the same path as Greece, introducing one austerity measure after another, cutting jobs, salaries, pensions and benefits, even as the economy continues to shrink.  Once again, Spanish protestors took to the streets and encircled the main parliament building. Parliament took on the appearance of a heavily guarded fortress as about 1,400 police officers ringed the building to keep back demonstrators. The organizers of the latest protest said in a statement that they had no plans to try to occupy Parliament, but instead wanted to surround the building to show that “democracy has been kidnapped” and needs to be saved from the hands of inept Spanish politicians. Spain must still decide whether they want to accept the IMF bailout and its attendant demands, which can never be met.

The Bank for International Settlements says  German lenders have the highest exposure in Europe to Spain, at $139.9 billion, of which $45.9 billion alone is exposure to banks.

Monday, September 24, 2012

Monday, September 24, 2012 - Counting Fingers

Counting Fingers
by Sinclair Noe

DOW – 20 = 13,558
SPX – 3 = 1456
NAS – 19 = 3160
10 YR YLD -.04 = 1.72%
OIL +.14 = 92.07
GOLD – 8.50 = 1765.50
SILV - .55 = 34.07
PLAT – 16.00 = 1626.00

Goldman Sachs is out with some research. I always feel more than a little skepticism when reading Goldman research. It's tough to believe a research report from a company you know would bet against you. You want to count your fingers after shaking hands. Goldman Sachs strategists expect the "fiscal cliff" to push the market lower in the fourth quarter, and they recommend investors sell the stocks that have lagged so far this year.

Goldman chief U.S. equity strategist David Kostin writes that the S&P 500 should fall sharply after the election when investors finally realize that there is a possibility that the fiscal cliff will not be resolved smoothly. He says the majority of investors expect to see the fiscal cliff avoided in the lame duck session of Congress, but Goldman sees a one-in-three chance that Congress will fail to address the issue.

Goldman says a catch-up strategy could be to sell stocks that have had the worst performance year-to-date. In the 23 years that the S&P was positive in the first nine months, a sector-neutral basket of underperforming stocks continued underperforming by an average 291 basis points during the fourth quarter, giving the strategy a 65 percent outperformance rate.

In a separate report, Goldman forecasts an 18.2 percent return on commodities in the next 12 months, with energy and industrial metals leading the way. Not 18.3%, but 18.2%.

The Standard & Poor's GSCI Enhanced Commodity Index gain of 18.2 percent will compare with 26.5 percent in energy ( or around $125 a barrel), 10 percent in industrial metals and 6 percent in precious metals. Agriculture will be down 5 percent over the same period and livestock up 4.5 percent. The Federal Reserve's third round of quantitative easing will help boost copper in the 2013 first half.

(Econombrowser had this analysis of ...Oil prices slipped below $92 a barrel, and finished just above. New efforts to revive growth from central banks in Europe, Japan and the U.S. have not been enough to overcome pessimism about the global economy's prospects. When economic growth slows, so does demand for fuel which typically results in lower oil prices. A stronger dollar makes crude more expensive and a less attractive investment for traders using other currencies. Can the wild swings in the price of oil over the last few weeks have anything to do with supply and demand? You remember last week, when the price of oil dropped $3 in a minute?The move sparked talk of an erroneous trade—called a "fat-finger" error in industry parlance—or a computer algorithm gone awry.

Fat finger or no, there was an even bigger drop on Wednesday, leaving the price of West Texas Intermediate well below where it had been prior to Fed Chair Bernnake's announcement of QE3, or even the price before the Jackson Hole Speech. Those who doubt that oil prices are determined solely by fundamentals would naturally ask, what aspect of the supply or demand for oil could have possibly changed in the course of less than a minute last Monday? The obvious and correct answer is, there was no change in either the supply or the demand for physical oil over the course of that minute. The minute-by-minute price of a NYMEX contract is determined by how many people are wanting to buy that financial contract and at what price, not by how much gasoline motorists burned in their cars that minute. But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump?
In one sense, the answer to that question is yes-- last week's decline in the price of crude oil will soon show up as a lower price Americans pay for gasoline. But here's the problem you run into if you try to carry that theory too far. There are at the end of this chain real people who burn real gasoline when they drive real cars. And how much gasoline they burn depends in part on the price they pay-- with a higher price, some people use a little bit less. Not a lot less-- the price of gasoline could change quite a lot and it would take some time before you could be sure you see a response in the data. That small (and often sluggish) response is why the price of oil can and does move quite a bit on a minute-by-minute basis, seemingly driven by forces having nothing to do with the final users of the product.
But if the price of oil that emerges from that process turns out to be one at which the quantity of the physical product that is consumed is a different amount from the physical quantity produced, something has to give. Indeed, the bigger price drops we saw on Wednesday followed news that U.S. inventories of crude were significantly higher than expected.

There are several channels by which QE3 may end up influencing the quantity of oil physically produced and consumed. A lower value for the U.S. dollar would mean a greater quantity demanded worldwide at a given dollar price of oil. A higher level of economic activity (the ultimate goal of QE3) would also boost demand for the physical product. And lower real interest rates may make it profitable to store more oil physically, leaving less available for the ultimate users of the product. So I would have expected QE3 overall to be one factor that could contribute to a higher dollar price for oil.

But any investors who have been assuming that QE3 will boost the price of oil for no reason other than the fact that other traders expect it to raise the price of oil may find themselves tripping painfully over the fat finger of reality.

We're just about to wrap up the third quarter; top performers so far include precious metals funds, which is another way of saying precious metals. A bounce back at bargain levels, weakness in the dollar and a play on QE3. Stocks erased Q2 losses in the third quarter. Commodity and European funds outperforms, with Euro-region funds up about 10% on the quarter. Maybe it's just bargain hunting. Large caps and value outperformed small cap and growth.

Federal Reserve Bank of San Francisco President John Williams says QE3 is essential and the Fed might do even more. Williams said the Fed “will continue buying mortgage-backed securities until the job market looks substantially healthier,” and they “might even expand our purchases to include other assets.” I don't know how you expand on unlimited Quantitative Easing, but we might find out.

The German edition of Der Spiegel is running a series of articles on the European situation, which make clear, as if that were still necessary, that Europe is still an absolute mess. You know, just in case you thought it was not; that Mario Draghi's latest unlimited whatever it takes has somehow chased away the demons.

First, Der Spiegel writes that the Greek deficit is twice as high as thought , at 20 billion-euro, according to a preliminary version of the long awaited troika report. The gap has to be closed for the next tranche of bailout money to be paid.

Second,euro-zone countries plan to let the bailout fund balloon up to $2.6 trillion. Remember that the German Constitutional Court limited Berlin's part to about $25 billion (billions compared to trillions). Creative accounting to infinity and beyond. 

Third, the latest German plan would split up investment and retail activities for Germany's banks (including Deutsche), think Glass Steagall. He wants to ban commodities speculation. And he wants a bank-ESM, a fund paid for by banks that can be used to bail them out, rather than taxpayer money.

There's lot more going on, and going wrong, in Europe, no matter what Draghi does, and no matter what plans José Manuel Barroso unveils. I'm really not expecting the Euro-situation to collapse real soon but here is the really scary part. The fate of the continent and its people is presently in the hands of a group of bankers, technocrats and delusional politicians.

More young adults are leaving their parents' homes to take a chance with college or a job. Across the nation, people are on the move again after putting their lives on hold and staying put. Once-sharp declines in births are leveling off, and poverty is slowing.

A new snapshot of census data provides sociological backup for what economic indicators were already suggesting: that the nation is in a tentative, fragile recovery; maybe, kinda, sorta.

The new 2011 census figures show progress in an economic recovery that technically began in mid-2009. The annual survey, supplemented with unpublished government figures as of March 2012, covers a year in which unemployment fell modestly from 9.6 percent to 8.9 percent. So, this data really is lagging.

The census figures show slowing growth in the foreign-born population, which increased to 40.4 million, or 13 percent of the US population. Last year's immigration increase of 400,000 people was the lowest in a decade.

The bulk of new immigrants are now higher-skilled workers from Asian countries such as China and India, contributing to increases in the foreign-born population in California, New York, Illinois and New Jersey.

Income inequality varied widely by region. The gap between rich and poor was most evident in the District of Columbia, New York, Connecticut, Louisiana and New Mexico, where immigrant or minority groups were more numerous. By county, Berkeley in West Virginia had the biggest jump in household income inequality over the past year, a result of fast suburban growth just outside the Washington-Baltimore region, where pockets of poor residents and newly arrived, affluent commuters live side by side.

As a whole, Americans were slowly finding ways to get back on the move. About 12 percent of the nation's population, or 36.5 million, moved to a new home, up from a record low of 11.6 percent in 2011.

Among young adults 25 to 29, the most mobile age group, moves also increased to 24.6 percent from a low of 24.1 percent in the previous year. Longer-distance moves, typically for those seeking new careers in other regions of the country, rose modestly from 3.4 percent to 3.8 percent.

Less willing to rely on parents, roughly 5.6 million Americans ages 25-34, or 13.6 percent, lived with Mom and Dad, a decrease from 14.2 percent in the previous year. Young men were less likely than before to live with parents, down from 18.6 percent to 16.9 percent; young women living with parents edged higher to 10.4 percent, up from 9.7 percent.

The increases in mobility coincide with modest improvements in the job market as well as increased school enrollment, especially in college and at advanced-degree levels.

Marriages dipped to a low of just 50.8 percent among adults 18 and over, compared with 57 percent in 2000. Among young adults 25-34, marriage was at 43.1 percent, also a new low, part of a longer-term cultural trend in which people are opting to marry at later ages and often cohabitate with a partner first.
Births, on the other hand, appeared to be coming back after years of steep declines. In 2011, the number of births dipped by 55,000, or 1 percent, to 4.1 million, the smallest drop since 2008.

Some 17 states showed statistically significant increases in the poverty rate, led by Louisiana, Oregon, Arizona, Georgia and Hawaii. Among large metropolitan areas, McAllen, Texas, led the nation in poverty, at 38 percent, followed by Fresno, Calif., El Paso, Texas, and Bakersfield, Calif. In contrast, the Washington, D.C., metro area had the lowest level of poverty, about 8 percent, followed by Bridgeport, Conn., and Ogden, Utah.

Government programs did much to stave off higher rates of poverty. While the official poverty rate for 2011 remained stuck at 15 percent, or a record 46.2 million people, the government formula did not take into account noncash aid such as food stamps, which the Census Bureau estimates would have lifted 3.9 million people above the poverty line. If counted, that safety net would have lowered the poverty rate to 13.7 percent. And without expanded unemployment benefits, which began expiring in 2011, roughly 2.3 million people would have fallen into poverty.

Friday, September 21, 2012

Friday, September 21, 2012 - It's Not Whether You're Right or Wrong

It's Not Whether You're Right or Wrong
by Sinclair Noe

DOW – 17 = 13,579
SPX – 0.11 = 1460
NAS + 4 = 3179
10 YR YLD - .02 = 1.76%
OIL + .47 = 92.89
GOLD + 4.50 = 1774.00
SILV - .12 = 34.62
PLAT + 11.00 = 1641.00

Let's be very clear on what has happened over the past week or so. You already know the Fed announced QE3 to infinity or 5.5% unemployment plan (whichever comes first). What does that really mean? It is probably a very, very bullish event for stocks and commodities. We talked about commodities and equities moving higher in anticipation, and we saw silver move up about 33% over the past month; gold up 14%; the Dow Industrials picked up almost 600 points; the S&P 500 up about 60.

Since March 2009, Gold is up 97%, silver is up 162%, oil is up 122%, and the Continuous Commodity Index (CCI) is up 55%. And then we've seen some consolidation over the past week, exactly as we anticipated, because this was the pattern that we saw after previous QE announcements, but you've got to suspect QE3 means the Fed has flipped the switch to risk-on.

Maybe you also remember that back in the Spring I brought up the old adage about the best and worst 6 months in the market; you remember, “Sell in May and stay sway.” Well, the S&P 500 is up about 50 points from May 1st. If you missed that, don't feel bad because you also missed the roller coaster that saw the S&P 500 drop 150 points. I don't see the need to rush back in, at least until the dust settles.

And based upon past performance we should anticipate precious metals going back to test old highs. Based upon past performance we should anticipate stocks moving higher. Remember what has happened over the past 3years? Remember when the S&P dropped down below 700 in March 2009? That is a double; that is more than 100 percent in gains from the lows to now. What happened? Big chunks of money were thrown at the markets; TARP, TALF, QE1, QE2, Operation Twist, and more.

There's another old saying, “Don't Fight the Fed”, but let's look at the fight the Fed has taken on. After all, the Fed was compelled to announce QE3 and there are more reasons than just 8.1% unemployment. Industrial production dropped 1.2 percent in August. That was far below forecasts and the worst reading since March 2009. The first of the regional manufacturing indices we're getting for September look nasty, too. The Empire Manufacturing Index for the New York area plunged to -10.4 from -5.9 a month earlier, while the employment subindex dropped to 4.3 from 16.5.

Retail sales, excluding autos and gas, rose 0.1 percent last month. That was far below the 0.4 percent gain economists expected. Another "core" sales number fell 0.1 percent. And it appears the spending numbers may have been propped up by Americans taking on more debt. I don't think this is a change from the deleveraging trend, just a bump in an established trend going back 17 quarters. And while we have seen job growth, and that is a good thing after the massive job losses of 2008 and 2009, it hasn't been enough. Real inflation adjusted incomes are suffering. Average hourly earnings dropped 0.7 percent in August, the biggest decline since the summer of 2009.

FedEx is like a canary in the coal mine; after all, businesses need to ship their products, if they are shipping products. Back in June, FedEx cut its forward earnings guidance due to waning demand for its services worldwide. Then it cut its guidance for a second time in early September. And then, just this Tuesday, it cut its future guidance again. That's three warnings in four months, a sign that business is deteriorating at a rapid, and unexpected, pace.

The railroad, Norfolk Southern says it’s shipping fewer things in a slow economy, and declines in coal and merchandise shipments will slash revenue by $120 million, causing it to miss quarterly profit targets by as much as 28 percent.

The Dow Jones Transportation Average has been trending sideways for pretty much the entire year. The lackluster trading bothers adherents of Dow Theory, one the oldest and most respected models for timing the market. One tenet of Dow Theory is that industrial and transportation averages should confirm new highs together in a healthy bull market. The Dow Industrials are near their highest levels since 2007. Are the Transports undervalued or is the Industrial Average artificially high? I don't know, but I know that the more the trend-lines diverge, the more reason to worry.

Speaking of worry, the Volatility Index is grinding along in the low teens and that indicates the markets are more than sanguine, they are downright complacent. Think of a super low VIX as a runaway train; nobody's paying attention to the controls in the locomotive and it's just a matter of time till the train comes off the tracks.

We've talked extensively about the problems in the Euro-zone and the slowdown there affects us here. There is a global slowdown. The ECB has enacted their own version of QE, also the Bank of Japan this week announced accommodative easing. The People's Bank of China is expected to follow suit.

Can the Federal Reserve lift the US economy out of the doldrums? Will lower interest rates compel anyone to buy or will it merely punish savers? Can the Fed's monetary policy accomplish the job without the assistance of fiscal policy?

This past week, Congress showed the wheels have come off the track. They couldn't even manage to pass a $1 billion jobs program putting veterans back to work tending to the country's federal parks lands and bolstering local police and fire departments. Veterans of Iraq and Afghanistan face an unemployment rate of about 10.5%, roughly one-third higher than the general population. Here's the deal; we ask the troops to defend us and put everything on the line; in return we pay squat but we promise to take care of them when they come home. That's been the deal with every army in every nation throughout history. If we can't get this right, what hope do we have for dealing with the looming fiscal cliff?

So, there are some problems, but again I remind you that past performance indicates QE should be bullish, and you don't want to fight the Fed. Of course, it takes a while for the effects of QE to work through the economy, and the more the Fed goes down this path the more the returns diminish.

Jim Rogers, the co-founder of the Quantum Fund, back in the 70's, was interviewed on CNBC and he said: “The Federal Reserve is pumping huge amounts of money into the market… This is a Federal Reserve rally. The money has to go somewhere, and it's going into the stock market and the commodity market.”

Rogers thinks the artificial rally will end badly but he didn't care to guess when. Right now, it is a rally; it won't go up in a straight line, and there will be some shakeouts along the way, but it is a rally. The Fed will keep interest rates lower than you can imagine for longer than you can imagine. And the Fed will pump more money into the big banks than you might believe possible. And they will redistribute wealth to their banker buddies much more than any benefits that might accidentally trickle into the broader economy. And asset prices will go up, and that includes stocks, real estate, and commodities including energy and precious metals.

You may not be in lockstep with the Fed. You may not agree with their methods or even their reason for being, but don't fight the Fed. Now, that said, I'm reminded of a quote from Jim Rogers partner in the Quantum Fund, all those years ago. George Soros said: “It's not whether you're right or wrong that's important, but how much money you make when you're right an how much you lose when you're wrong.”