Wednesday, October 10, 2012

Wednesday, October 10, 2012 - Great Fun and Very Entertaining

Great Fun and Very Entertaining
-by Sinclair Noe

DOW – 128 = 13,344
SPX – 8 = 1432
NAS – 13 = 3051
10 YR YLD - .03 = 1.69%
OIL – 1.04 = 91.35
GOLD – 1.30 = 1763.60
SILV +.08 = 34.08
PLAT – 13.00 = 1678.00

(to listen to audio visit Financial Review at

It's earnings season. Chevron took a hit after announcing third quarter earnings would be substantially lower. Alcoa took a hit because law suits and remediation costs are part of their business model and not one time exclusions. FedEx announced it will fire workers and park planes to cut $1.7 in expenses. S&P cut Spain's sovereign credit rating to BBB-minus, just a notch above junk status.

Less than 4 weeks to the election. Tomorrow we can watch the vice-presidential debate. It's all great fun and very entertaining. Last week, the first presidential debate produced a bump in the polls for Romney. The latest Pew Research Center poll shows Mitt Romney ahead of President Barack Obama among likely voters, 49% to 45%. But the latest Gallup poll shows President Obama leading Romney among likely voters, 50% to 45%.

If you're wondering about the discrepancy, the reason is simple. The Pew poll covered the days immediately following last Wednesday's presidential debate, but it didn't include last weekend. The Gallup poll, included the weekend and that means it also included Friday's September's jobs report which showed unemployment down to 7.8 percent for the first time in more than three years. Romney got a bump from the debate. Obama got a bump from the jobs report. So, really the poll numbers are pretty accurate and indicate a very close race. It's all great fun and very entertaining and that is exactly what corporate media is hoping for; a horse race.

Part of the problem with the influence of money in elections is that all players in the game are affected by it, the corporate media included. Presidential elections are big money. Ratings, readership and advertising rates all soar, particularly when it's a close race in the home stretch. But not if it's a blowout. If one candidate has a comfortable lead, it is in the best interest of news reporting organizations, driven by the bottom line, to depict a tightening race.

The November 3, 1948 edition of the Chicago Tribune can sell for as much as $500. You know the paper; the one that had the big headline: “Dewey Defeats Truman”. Accuracy is not the point. The Las Vegas bookies still have Obama as the favorite by about 70% to 30%; those are the betting odds, not the anticipated vote tally. I think the bookies are more concerned with accuracy than the media; and that says more about the media than the bookies.

Two weeks ago the Republicans complained the polls were skewed. Now the Democrats complain the polls are skewed. Of course, the polls are incredibly misleading. When you hear numbers like 50% to 45% you naturally think that it applies to 95% of the entire citizenry. The truth is that Democrats and Republicans are outnumbered by citizens who don't vote. Maybe they have good reasons for not voting, but nature and democracy abhor a vacuum.

In contrast to the fun and entertainment of politics, the Federal Reserve is boring and dismal; this is not to say they are apolitical, they just lack excitement. Nothing says boring like the Beige Book, the Fed's anecdotal assessment of the economy from its 12 regional banking districts. 

The mid-August through September Beige Book shows stronger housing markets helped boost economic activity at the end of the summer in nearly every region of the country. Rising home sales helped lift home prices in most districts. Auto sales increased in most parts of the country. Consumer spending was flat or up only slightly in most districts. Manufacturing was mixed; half the districts reporting a slight improvement. Hiring was unchanged in most districts. Oil production hit a record high in South Dakota. The drought continued to weigh on farm activity in the Midwest. The central bank's outlook represents a subtle shift from gradual growth to moderate growth.

The Fed is also charged with regulating banks; they have finally approved the new stress test rules under the purview of the Dodd-Frank Act. The new rules apply to banks with consolidated assets of more than $10 billion. The new set of rules was jointly approved by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board and the Office of the Comptroller of the Currency (OCC). The regulation requires stress tests based on three scenarios - a baseline scenario, an adverse scenario and a severely adverse scenario. When they did the first stress tests a few years ago, they really underestimated the severely adverse scenario. Now, the banks are opposed to reporting the baseline, so they'll only have to report severely adverse scenario.

The effect is that the banks don't have to reveal how much loss-absorbing capital can be paid out through stock repurchases and dividends; better for shareholders and executive; worse for taxpayers in the event of failure and bailout. Of course, we've been told repeatedly there will be no bailouts in the future, not even for the chronically underfunded big banks. The idea behind the stress tests is that the Fed can head off such a failure. One little problem, the Fed backed off the requirement that CFOs of the banks confirm that the numbers they're providing are accurate.

The banks argued, and the Fed apparently agreed, that providing data about what's going on in the banks is simply too "confusing for any CFO to be able to be sure his bank had gotten it right." I'm not making this up. The CFOs of the big banks will be allowed to make up whatever numbers suit them. This leaves me just a tad leery of the stress tests and more than leery of the banks. Why would you ever put your investment dollars into a bank that is so complex that they can't figure out where the money is?

Dear Federal Reserve,
I thinks there is some money in this heah bank. I cain't figure out where it 'tis, but I ain't gonna stress about it, so we pass the test.

If you've been worrying about the fiscal cliff, and by the way it is a fiscal, not physical, cliff; worry no more. After the election the bankers will get back to running things in Washington. Politico reports the plan is to get a big budget deal that provides stability for investors by eliminating the threats of government shutdowns, credit-rating downgrades, debt ceiling disasters and wide fluctuations in spending and tax policy. Some on Wall Street believe the circumstances are so dire they are ready to pressure Republicans to abandon orthodoxy for a more important goal: to prove that Washington won't hold the economy hostage to its own partisan dysfunction.

Jamie Dimon, Lloyd Blankfein and others have signed onto a multimillion dollar ad campaign to build public support for a deal. And CEOs are also lobbying senior lawmakers and their aides to find a solution. The executives say they’re willing to consider ponying up more money in tax revenue to the government, a move they hope will give cover to Republicans that want to sign onto a grand bargain. And those who support a deficit deal believe both presidential candidates have given strong signals that they will work for one once the election is over.

Both Romney and Obama are widely viewed in corporate America as likely to support a deal roughly along the lines of the Bowles-Simpson commission recommendations that will include trims to Social Security and Medicare and new revenues beyond just increased taxes for the wealthy. Corporate America would also like to see such a deal include a lower overall corporate rate and changes to the taxation of overseas profits. I repeat; Social Security and Medicare get cut, taxes increase for everybody – except the corporations.

While many on the Hill are skeptical that even the clout of the Wall Street could force a deal, optimists believe that the outside help would pressure lawmakers to sign onto a deal, or at least to give them political cover if they do. The logic: If business says a deal will help jump-start the economy, how could Congress and the president be against it?

The bank executive say that if a deal is made, the largest single roadblock to a stronger US recovery, widespread and damaging corporate uncertainty on taxes and the ability of the US government to execute basic functions, would be lifted, unleashing a much stronger recovery that would benefit whoever is in the Oval Office and members of Congress who supported such an agreement.

And while the fiscal cliff is a problem, it is not the biggest problem we face in America – not by a long stretch.

Lloyd Blankfein, the CEO of Goldman Sachs, summed it up without a trace of irony or understanding: “Where else in the world are the problems so clearly solvable as they are here?”

No sooner had Blankfein uttered the words than I saw a vision of a possum walking through the great Okefenokee Swamp: Yep, son, we have met the enemy and he is us.

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