Thursday, March 28, 2013

Thursday, March 28, 2013 - The Good Shepherd

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

The Good Shepherd
by Sinclair Noe

DOW + 52 = 14,578
SPX + 6 = 1569
NAS + 11 = 3267
10 YR YLD un = 1.85%
OIL + .59 = 97.17
GOLD – 8.90 = 1597.50
SILV - .33 = 28.46

For the week, the Dow rose 0.4 percent, the S&P 500 advanced 0.8 percent and the Nasdaq gained 0.6 percent.
Thursday marked the end of the trading week. The US stock market will be closed tomorrow in observance of the Good Friday holiday.
For the month of March, the Dow climbed 3.7 percent, the S&P 500 rose 3.6 percent and the Nasdaq added 3.4 percent.
For the first quarter, the Dow shot up 11.2 percent, the S&P 500 jumped 10 percent and the Nasdaq climbed 8.2 percent.
The best performing stocks in the S&P since the start of the year: Netflix, Best Buy, Hewlett-Packard, H&R Block, and Micron Tech. The worst performers included: Cliffs Natural Resources, JCPenney, US Steel, Garmin, Apollo Group, and Newfield Exploration.
For the Dow Industrial Average and the S&P 500 it was a record high close. Whoopee! The last all-time closing high for the S&P 500 occurred on October 9, 2007 at 1,565.15. The intraday all-time high was reached a couple of days later, on October 11, 2007, at 1,576.09. But just so we avoid any double standards, let's look at the real value versus the nominal value. The real value refers to the inflation adjusted price of the S&P compared to the nominal value, which is not adjusted for inflation. Using the Bureau of Labor Statistics CPI Inflation Calculator; the 2007 intraday all time high of 1576, when adjusted for inflation would be 1,764.
But wait, there's more!
For those of you old enough to remember, we were setting highs in the S&P back in March 2000, at the 1553 level. There has been quite a bit of inflation over the past 13 years, and if we adjust that 1553 number for inflation, the S&P 500 would need to reach 2093 in order to hit a real all time high. Don't hold your breath. We're about 30% shy of the real record. What this really means is that the S&P 500 has a really big, negative real return over the past 13 years.

Maybe the market does reflect the economy after all. It looks like the economy is just barely slogging along. The Commerce Department revised the fourth quarter Gross Domestic Product to show the economy growing at a 0.4% annual rate. The early guess at GDP had been slightly negative, so this is an improvement, but it isn't good enough to help the labor market. Much of the weakness came from a slowdown in inventory accumulation and a sharp drop in military spending. Consumer spending expanded at a 1.8 percent annual rate. The report showed business investment rose at a 13.2 percent rate, a bigger gain than initially estimated. The extra growth was mostly from more construction spending by businesses.

A fairly orderly open for the banks in Cyprus. The longest lines were journalists gathered in anticipation of a bank run which didn't happen. For depositors on the street it was orderly resignation.

The implications are less than orderly. European officials are hurriedly denying that the Cypriot bail-in is a "template". Markets know otherwise. The good bank/bad bank model adopted in Cyprus shows how banks can be recapitalized without government funds while still protecting insured depositors - thanks to senior bondholders and uninsured depositors taking losses. And some are even claiming this is an acceptable template. In the case of Cyprus, it was a way for the European Troika to go after tax dodging Russians, Putin's henchmen.

The larger template is that bondholders and depositors are now on the hook for gambling banksters. For bondholders there is always a certain amount of risk, and a need for due diligence. For the rest of the uninsured depositors, we now hear that it the responsibility of the depositor to have certainty about the institution where they make deposits.

The problem is that individual or even corporate depositors don't know the soundness of a banking institution; nor do the banking regulators, and in many cases, the management of the banks are clueless. If there is to be any hope of trust in financial institutions, there is a definite need for restructuring; for smaller banks that can safely and securely hold deposits, not take the deposits and go gambling in the nearest credit market casino.

Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case. In most legal systems, the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet.  Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.

The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. And if you think the banking system in the US is safer than the banking system in Europe, think again. The big US banks have not changed their ways since the crisis of 2008. The big US banks can actually use deposits to fund derivatives exposures. And remember that depositors are unsecured creditors, and remember that the 2005 Bankruptcy Act made derivatives counterparties senior to unsecured creditors.

And the recent investigation into the JPMorgan London Whale trade should serve as notice that any attempts at regulation are at the best, incomplete. JPMorgan is the largest derivatives dealer in the world, gambling tens of trillions in the derivatives casino. We did learn that when the London Whale started losing billions, the bank sought to hide that information, and doubled down on bad bets. The ease with which the bank hid losses and fudged valuations should set off flashing red lights for investors, and now for uninsured depositors.

The Cyprus haircut on depositors was called a “wealth tax” and was written off by commentators as “deserved,” because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers; you know, the same bunch that usually have a “get out of jail free card”.

Now that the Cyprus banks have re-opened, it looks like the crisis wasn't much of a crisis. Cyprus is so small that I was telling you it really shouldn't make much of a difference. The Euro-Union has a printing press, they could have printed enough currency to resolve the Cyprus Crisis before brunch. It was just a tiny crisis, like the island itself. Forget about it. Move along.

Except for the brief moment when the president of the Eurogroup let slip that Cyprus could be a model for future European bailouts. He quickly retracted that comment, but the cat was out of the bag. And even if confiscating deposits won't be the template for bank bailouts, the model is in place. We know that tool is in the toolbox. As for the crisis itself; this is the new model for effecting change; declare a crisis; manufacture a crisis; scare people; the Euro is collapsing; the sky is falling; we're going over a fiscal cliff. Whenever you hear the fear you can bet that somebody is trying to slip something past you. When someone cries wolf, someone is trying to herd the flock.

A good shepherd only cries wolf when there is true danger.

Wednesday, March 27, 2013

Wednesday, March 27, 2013 - What Does That Mean?

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

What Does That Mean?
By Sinclair Noe

DOW – 33 = 14,526
SPX – 0.92 = 1562
NAS + 4 = 3256
10 YR YLD - .05 = 1.85%
OIL + .35 = 96.69
GOLD + 5.90 = 1606.40
SILV - .07 = 28.79

With just a couple of trading days left in the first quarter, it looks like the S&P 500 will finish the quarter with its highest valuation in three years. At its current price, the S&P 500 has an LTM P/E of 16.1x; allow me to translate. The Price to earnings ratio, or P/E, over the last twelve months, (LTM) is 16.1. We get this number by taking the stock's current price divided by the company's 12 month earning per share. As an example, if a stock is priced at $10 and had earnings of $1, the P/E is 10. If they had earnings of $5 the P/E is 2; if they had earnings of 50 cents, the P/E would be 20. After gaining 9.2% year-to-date and growing its multiple, the S&P 500 will enter earnings season with high expectations. However, the current multiple is still low by long-term standards, so good earnings could sustain the rally. Maybe.

The Fed continues to throw money at Wall Street through its accommodative easing; Europe hasn't imploded yet; things could change and there could be a big event, but absent that, the stock markets will be paying attention to earnings. Forward looking P/E for the upcoming 12 months are expected to come in around 15.2. Now, in the past quarter the laggards have been technology companies, energy companies, and financials; while the leaders have been consumer companies and healthcare. One of the things to consider is whether the laggards can pick up the slack.

So, when we enter the first quarter earnings season, it will be interesting to see if there is a rotation to the energy or maybe the tech sectors. Tech should really be important when it comes to sustainability of the rally. Another area to watch is Emerging Markets, down more than 7% from the start of the year. If the markets are destined to move higher, the overseas equities would need to show strength, and might even represent an upside opportunity. Let me caution that I'm not making predictions here, just offering some thoughts on what might be important to watch.

Another thing to consider is that the US economy went flat-line in the fourth quarter; GDP was initially reported as negative and then revised to just barely positive, and in this environment, the stock market hits record highs. It won't be easy to turn in earnings numbers that support those new higher prices.

Lots of attention on Cyprus, especially tomorrow, when the banks are scheduled to reopen, with sharp restrictions; withdrawals will be limited to 300-euros per day. Big mess; lots of photo ops tomorrow. The Cypriot economy is struggling; they've gone almost two weeks with nothing but limited ATM withdrawals. Fitch just got around to downgrading the three biggest Cypriot banks.The banks are facing big losses and that is radiating out through the island economy. The private sector has already started cutting back.

When the banks reopen, they will confiscate deposits; nobody knows how much, but they will be taking from the accounts over 100,000-euro. The reversal of the decision to ‘tax’ insured depositors constitutes a last minute restoration of common sense. By forcing losses on uninsured depositors and the banks’ bondholders, taxpayers have to bear a smaller burden of the bailout loans; and this is a good thing.

One of the disturbing revelations is that the Euro-zone technocrats says this is the template for the future. It is now up to depositors to know the bad investments the banks hold, even if the banks themselves are withholding information or are clueless.

The Memorandum of Understanding, which is the deal that is supposed to explain how much the Troika will steal from bank depositors, has not been written up yet and, thus, the deal is utterly incomplete. In particular, we have no idea what degree and type of austerity will be imposed upon a collapsing social economy. And when a deal is reached, Cyprus is going to continue to be subject to the austerian predilections of the Eurozone, and we can see how well that is working out in Greece. A break, though more painful initially, might have been better in the long run. Cyprus should be “no big deal”, and it may still slip from memory, but it may also signal a turning point.

And with all that mess it's easy to forget about the mess in Italy. They had an election, with no clear winner, and today we learn they can't form a coalition government. The euro dropped below $1.28.

Remember the rest of Europe? Yesterday, S&P downgraded Bankia in Spain. They also cut their euro-zone gross domestic product forecast to negative 0.5% from the earlier estimate of a 0.1% decline.

The Bank of England’s Financial Policy Committee says British banks must come up with 25 billion-pounds in fresh capital by the end of the year to start plugging an estimated 50 billion-pounds ($75 billion) capital shortfall across the sector.

The largest US banks: Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo, together have paid $61 billion to settle credit-crisis and mortgage claims over the past three years, according to SNL Financial. But wait, there's more! Research firm Compass Point Research estimates that U.S. banks will wind up owing a further $24 billion related to the repurchase of faulty mortgage loans.

At least eight federal agencies are investigating JPMorgan; federal prosecutors and the FBI in New York are also examining potential wrongdoing. A recent misstep points to the growing friction between JPMorgan and regulators as well as to the concerns within the bank. JPMorgan misstated how the bank may have harmed more than 5,000 homeowners in foreclosure. The bank’s primary regulator, the Office of the Comptroller of the Currency, is expected to collect a cash payment from the bank to remedy the flawed review of loans. The problems stem from January, when JPMorgan and other big banks agreed to a multi-billion dollar settlement over foreclosure abuses. As part of the pact, the bank agreed to comb through each loan file to spot potential errors, a process that the regulators will use to help determine the size of the payouts to homeowners. While assessing 880,000 mortgages, JPMorgan overstated the potential harm for more than 5,000 loans.

In April senior executives are expected to meet with investigators who are examining the London Whale trading loss. A handful of executives have already met with authorities, but the second round will include Mr. Dimon. While he is not suspected of any wrongdoing, the officials hope Mr. Dimon will help build a case against traders in London suspected of lowballing their losses.

Federal prosecutors in Manhattan are examining JPMorgan’s actions in the Madoff case, suspecting the bank may have violated a federal law that requires banks to alert authorities to suspicious transactions. The comptroller’s office is investigating similar issues.

Marketwatch reports that Bernie Madoff is speaking out from prison, claiming  the banks knew of his Ponzi scheme all along. Madoff says that ‘the banks must have known,’ and were complicit and contributing to my crime.” He specifically points out JPMorgan Chase, Bank of New York Mello, HSBC, and Citicorp.

Madoff wrote that “the trustee seems unwilling to act on my offer” to help and he is therefore “offering this information to the appropriate governmental committees in the hope that this information will prove helpful in future regulation of the appropriate institutions.” The House financial services committee and the Senate banking committee had no immediate comment on whether they had received any information from Madoff.

Madoff’s comments come as prosecutors are looking at whether J.P. Morgan failed to fully alert authorities to suspicions about Madoff’s finances. Madoff’s comments also come as JPMorgan Chase is reportedly embroiled in a squabble with regulators over a government probe into the institution’s relationship with Madoff. According to a January Reuters report, the OCC, JP Morgan’s chief regulator, has been unable to obtain documents it has requested from the big bank in connection with an investigation into its relationship with Madoff.

The report cites a letter from Treasury Department inspector general Eric Thorson to JPMorgan’s general counsel, Stephen Cutler, saying the OCC has been unable to obtain what it is seeking. Madoff had an account at JPMorgan Chase that he used to transfer funds between offices.

The headline of the day comes from the Economist, under a section titled Catholicism and economics, the story is headlined “The Poor Pope” and the subtitle is: “Francis wants to emphasise the church's teaching on poverty. What does that mean?”

I'm not surprised that the folks at The Economist don't know what religion teaches us about poverty; the surprising part is that they turned their ignorance, or at least their indifference, into a headline.

Tuesday, March 26, 2013

Tuesday, March 26, 2013 - Miles to Go

Miles to Go
by Sinclair Noe

DOW + 111 = 14,559
SPX + 12 = 1563
NAS + 17 = 3252
10 YR YLD - .01 = 1.91
OIL + 1.40 = 96.21
GOLD – 5.90 = 1600.50
SILV - .09 = 28.86

The Dow Industrial hit a record hit close today, taking out the March 14 closing high. The S&P 500 came within a couple of points of the high close; it is having a hard time breaking through the ceiling; you just have to content yourself with the idea that the index has more than doubled from the lows of March 2009.

The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines, fell 7.1 percent to 12.77. The gauge has tumbled 29 percent for the year. It is a reflection of complacency.

We have many things to cover today.

Home prices were up in January and the year over year improvement in prices was the fastest in 6 years. The S&P Case Shiller Index of existing home sales was up 0.1% in January, and the year over year gains were 8.1%. On a year-over-year basis, all 20 cities measured by the Case-Shiller index improved, led by a 23.2% surge in Phoenix, with New York bringing up the rear with a 0.6% advance.

Sales of new U.S. homes fell 4.6% in February to mark the biggest drop in two years, though poor weather likely played a big role. Sales slowed to an annual rate of 411,000, down from a revised 431,000.

The consumer confidence index dropped to 59.7 in March, down from 68.0 in February. Most of the drop came from a decline in the expectations index, which slumped to 60.9 from 72.4, though the present situation index also fell, to 57.9 from 61.4. Consumer fears about the sequester are believed to have hurt the confidence numbers. We have nothing to fear but fear itself. It still holds true.

Orders for long-lasting goods surged in February largely because of gains in the volatile aircraft and defense segments, but demand was mixed for other manufacturers. Durable-goods orders climbed 5.7% last month to a seasonally adjusted $232.1 billion after a revised 3.8% drop in January. Orders outside of transportation fell 0.5% to mark the first decline in six months.

There has been a great deal of attention focused on the Dow Industrial Average back to new record highs; less attention on the Dow Transportation Average. The Transports include railroad companies. Shale-energy production exceeds pipeline capacity, and this will continue to be the case for many years ahead. Eventually, new pipelines will be built, but it takes time, and the production of shale oil is just getting started, and it's unlikely that the new pipelines will be enough. Railroad systems are already in place. Energy companies have invested over $1 billion dollars in new rail terminals near the shale operations. They have also put 20,000 new tank cars in service, which is an investment in the billions of dollars

There had been plans to reopen the banks in Cyprus today. Not gonna happen. Maybe Thursday. And when the banks open, there will be capital controls in place, meaning there will be restrictions on withdrawals. Larger depositors could see 40% confiscations. And that is just to raise the money for Cyprus to earn the dubious right to a bailout; the terms of which will likely drive the economy into a depression. Yes, there are protests in the streets of Nicosia.

A state-appointed emergency manager has taken control of the Detroit city government and started a drastic restructuring of its finances and operations. The first order of business was to extend an olive branch to the city government. The manager, Kevin Orr made clear that he alone would be responsible for decisions on how to stem the city’s mounting cash shortfall and reduce an estimated $14 billion in long-term liabilities.

The statute spells out some pretty clear powers,” he said, referring to the state emergency-manager law that allows him to sell city assets, renegotiate labor contracts and possibly recommend a bankruptcy filing.

There were protests in Detroit, just a few dozen.

Another day, another mind-blowing fact about the staggering difference between the haves and the have-nots. Incomes for the bottom 90 percent of Americans only grew by $59 on average between 1966 and 2011 (when you adjust those incomes for inflation), according to an analysis by Pulitzer Prize-winning journalist David Cay Johnston for Tax Analysts. During the same period, the average income for the top 10 percent of Americans rose by $116,071.

The Federal Reserve has cited Citigroup for failure to comply with federal law requiring banks to establish protections against money-laundering. They did not impose a fine. The Fed's action follows up on a similar order issued against Citigroup last year by two other bank regulators, the Office of the Comptroller of the Currency and the FDIC, which cited it for "deficiencies" in its compliance with the Bank Secrecy Act. The Fed said that Citigroup lacked effective systems of governance with respect to its Bank Secrecy Act and anti-money-laundering compliance programs. Citigroup has 60 days to submit a plan explaining steps the bank has taken to boost its compliance efforts. Some day, some day.

As it did before the financial crisis, Wall Street is bankrolling academics to bolster its case against regulation. Back then, the research gave warm tongue-baths to the virtues of derivatives. This time, the beneficiary is high-speed trading.
A highly publicized research paper from Columbia University claiming that high-frequency trading benefits society and shouldn't be regulated too much was paid for by -- surprise -- a high-speed trading firm.
Unlike most academic papers, this one, by Columbia Business School economics professor, was announced to the world last week and turned into an op-ed headlined "The Reality Of High Frequency Trading."

The argument is that high-speed trading bolsters that magical market stuff known as "liquidity," pushing stock prices higher and making companies richer and more willing to spend money, making us all wealthier. None of that has actually happened yet, of course, with markets and the economy flat since the advent of high-speed trading a decade or so ago. Never mind all that, though: Regulate high-speed trading too much and the liquidity could go away; so says the new research paid for by high speed traders. And bad things happen when the liquidity goes away.

A derivative is a financial product derived from another financial product” (for example, a futures contract tied to a stock index) — in practice, the term applies to a whole world of financial products that are written on a one-off basis between two entities called “counterparties,” as opposed to products that are traded on a broad, well-regulated market. Futures contracts are gambling — I can bet on the Dow to go down or up, for example — but trading in futures contracts is regulated gambling, in which winners are protected from losers, and in many cases, losers protected from themselves.

Not so, derivatives, in the usual meaning of the word. Derivatives in that sense are contracts between parties who want to trade risks, but they aren’t market-traded. They aren’t standardized. And counterparties aren’t vetted by any controlling institution.

It is now estimated that derivatives market has been growing. One of the biggest risks to the world’s financial health is the $1.2 quadrillion derivatives market. It’s complex, it’s unregulated, and it ought to be of concern to world leaders that its notional value is 20 times the size of the world economy. But traders rule the roost — and as much as risk managers and regulators might want to limit that risk, they lack the power or knowledge to do so. A quadrillion is a big number: 1,000 times a trillion.

That refers to the notional value. For example, if I bet on a basketball game, say $24 on the Lakers and $26 on the Clippers, I don't really have $50 of risk, just $2 dollars at risk, or $2 notional value. But the derivatives market is so big that the notional value is now $12 trillion, give or take; a much smaller number, but almost the size of the US GDP, and about 20% of the world economy.

Those numbers about the size of the derivatives markets are just guesses, because the market is unregulated, zero controls. Nobody knows the true size or the true dangers.

Monday, March 25, 2013

Monday, March 25, 2013 - We Have a Template

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend. 

We Have a Template
by Sinclair Noe

DOW – 64 = 14447
SPX – 5 = 1551
NAS – 9 = 3235
10 YR YLD un = 1.91%
OIL -.03 = 94.78
GOLD – 3.80 = 1606.40
SILV + .09 = 28.95

This week started in the Mediterranean, on a tiny, faraway island. Cyprus has apparently reached a deal with the Troika. Cyprus' banks have been closed for the past week and will not reopen until tomorrow, or possibly until Thursday. The deal involves the Troika stealing from bank accounts over 100,000-euros, in order to prop up Cypriot banks and then burden the Cypriots with a bailout package chock full of debt. The deal involves raising $7.5 billion from senior bondholders an people with more than about $130,000 in their accounts, which is the insured amount. Smaller account holders won't be raided. Once the $7.5 billion is raised, Cyprus will qualify for a $13 billion bailout from the Troika. In return for the bailout, Cyprus must drastically shrink its outsized banking sector, cut its budget, implement structural reforms, raise taxes, and privatize state assets

The citizens of Cyprus won't get to vote on this. Last week, the Cypriot Parliament unanimously rejected the bank account theft. So, the weekend negotiations have managed to strip Cyprus of democracy and then plundered the bank accounts; and that's just the beginning.

The Dutch chairman of the Eurozone, Jeroen Dijsselbloem, announced that the  heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe,saying: "If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."

These comments will probably alarm countries like Ireland and Spain that had been hoping to access the ESM bailout fund in order to restructure banks without killing off their financial sector by inflicting huge losses on investors. Effectively, the deal creates a new type of Euro currency; there is the euro held in financial institutions and subject to 10% devaluation at a whim, and then there is the physically held euro. And the money held in closed banks really doesn't have much value does it? I mean it is a bit more difficult to spend, after all.

How will this play out? Is Cyprus contained? The island nation has secured a short-term sovereign cash fix, which will do nothing whatsoever to address Cypriot public debt sustainability or the economy -other than hurt both.

Meanwhile a major taboo has been breached. The threat is that bank runs start in the margins, or in this case, the other periphery countries, based on a recognition that their bank is at risk plus a concern that they will be made to take losses, as large depositors were in Cyprus. Maybe people will be lining up at banks to withdraw money; they've certainly lined up at ATM machines; but the threat of a run has been reduced even by the fact that depositors under €100,000 were spared. However, the slow-motion departure of depositors from periphery banks is likely to resume.

We have a template.

The Federal Reserve's aggressive easing of monetary policy has bolstered the economic recovery. So says Ben Bernanke.

In prepared remarks to a group of academics in London, Bernanke said the integrated nature of the global economy meant the whole world benefits from a sturdier outlook.
"Because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not ‘beggar-thy-neighbor' but rather are positive-sum, ‘enrich-thy-neighbor' actions," he said.
In response to a deep financial crisis and recession, and subsequent weak recovery, the Fed not only lowered overnight interest rates to effectively zero but bought more than $2.5 trillion in mortgage and Treasury securities.
Domestic critics say the central bank's vastly expanded balance sheet, now topping $3.1 trillion, risks future inflation. But Bernanke has noted that inflation is forecast to remain at or below the central bank's 2 percent target for the foreseeable future.
Economic growth, meanwhile, remains more of a question mark, as gross domestic product will likely expand at only around 2 percent this year.
We hear it all the time. The Federal Reserve is pushing/manipulating/forcing the stock market higher. There are a few different ways I’ve seen this argued.The FED is improving the economy via ZIRP, QE, etc. This in turn is lifting the market.The FED is forcing people out of risk-free/low-risk assets into risky ones. Thus forcing people into stocks.The FED, buy ‘printing money’ is putting all this new money out there, which ends up in the stock market. The FED, or its henchmen in the Plunge Protection Team, is literally buying the market.

Now, the first two are legit arguments.The FED is certainly doing its part in trying to get people out of risk-free assets and into risk assets. However I also believe the economy is healing. Now, one must remember that the stock market is not the economy. It does not reflect everything in the economy. I don’t want to get too fundamental but basically the market, or at least the S&P500 reflects the conditions of the 500 companies listed in the index. So just because unemployment is high, it doesn’t mean other parts of the economy are not healing/healthy.

 Profits, Trade, and employment all have recovered or are healing. We can argue what is driving this. Market Monetarists would probably argue its all thanks to the FED. Libertarians would probably argue its thanks to the resiliency of the innovative private sector economy. It's probably somewhere in between. The FED has helped. The private sector is resilient. But that’s another conversation (the cause of the improving economy). The cause of the rising market is NOT just the Fed.

I am sure I can find other relationships that exist but correlate to a lesser degree. Yes, I understand correlation does not equal causation. But its going to be hard to argue that recovering profits, trade, and employment do not equal higher stock prices. I’m all ears if you could do that.

Now, just because a relationship exists, doesn’t mean its always going to be right. These relationships can get volatile, change, or totally lose correlation. So what might work today won’t work tomorrow. The market is more than just “The Fed!”, the Fed just happens to be the 800 pound gorilla. So, we hope for the best, without forgetting the track record.

Stocks finished lower last week, snapping a three-week winning streak. A big rally Friday, however, took the edge off what had been a much poorer showing through Thursday.  The angst among U.S. investors created by the financial crisis in the small island nation—just 0.2% of the euro area's gross domestic product—almost makes it seem as if the market is searching for a reason to correct after its quick 9% rise this year. While the pain for the Cypriot people is real, the stock market isn't worried about Cyprus, per se. The U.S. GDP "creates a new Cyprus by lunchtime,"
Cyprus was an excuse. There are many investors who say the market is due for a correction, and many who want the market to correct so they can buy in at lower prices; "When that happens, it's hard for the market to go down…There don't seem to be legs to the downside."

That doesn't mean the market can't produce a 5% to 7% correction, but that isn't likely until you see signs internally that it is weakening, such as breadth worsening or sectors not participating. With the first quarter ending next week, some volatility could come from "window dressing," as institutional investors rearrange their portfolios for their end-of-quarter statement by purchasing winning stocks and shedding losers.

If the stock market is searching for an excuse to correct, it might have to look elsewhere because the euro zone is running out of peripheral countries with huge debt problems. Of course, now, we have a template, and it is not a good one. 

Friday, March 22, 2013

Friday, March 22, 2013 - And the Award Goes to...

And the Award Goes to...
by Sinclair Noe

DOW + 90 = 14,512
SPX + 11 = 1556
NAS + 22 = 3245
10 YR YLD - .02 = 1.91%
OIL + 1.35 = 93.80
GOLD – 5.60 = 1610.20
SILV - .42 = 28.86

For the second time this year, the S&P 500 was down on the week, slipping 0.2% over the past five trading sessions. The Dow and the Nasdaq Comp also ended just a smidge lower for the week.

Cyprus has been a big concern this week. It is a tiny little island in the Mediterranean, and it is just a blip on the overall Euro-economy, but it could have big implications for the Euro-zone; which is something like the Hotel California; you can check in any time you please, but you can never leave. If Cyprus does leave, or get kicked out of the Euro, others may follow suit. If Spain or Italy leaves the Euro, there is no more Euro.

It has also not helped confidence in the euro that the Cypriot crisis has erupted at a time when other troubling problems are now raising their ugly heads in Europe. Less than a month ago, the electorate in Italy, the euro area’s third largest economy and a country with around 2 trillion-euro in public debt, voted overwhelmingly against austerity and structural reform. Imposing fiscal austerity on the periphery in those circumstances only seems to drive the periphery ever deeper into economic recession. Actually, depression may be more descriptive. In Greece and Spain, unemployment is about 25% and youth unemployment is running at about 50%; that's the stuff of depressions and long, tense summers.

And then to put salt on a wound, the Euro technocrats impose a tax on bank deposits. But it's not really a tax. It's just stealing. This isn't supposed to happen in a democracy. And if it happens to one sovereign European Union nation, there is nothing to prevent it from happening to another. The cure is worse than the disease. There is no reason Cyprus should have any significant impact on the global economy, and it probably won't.., probably; but if it does, it is because of the stupidity of the Euro technocrats.

The Cyprus Parliament, the elected officials today rejected the bank confiscation scheme. Instead they have approved a “National solidarity fund; they will pool together state held assets for an emergency bond issue. The Cyprus President meets with the Euro technocrats tomorrow in Brussels, (technically that's the Troika, or the EU, the ECB and the IMF). German officials are leaking news to the press, saying that Cyprus cannot expect any more help from Berlin, or Brussels, than what has already been offered. A Greek bank said it would offer to take over local units of Cypriot banks. This would safeguard all the deposits of Greek citizens in Cypriot banks. So, the only place in Europe willing to lend a helping hand is Greece. How bizarre.

The European Central Bank has given Cyprus until Monday to find a solution, or it says it will stop transferring money to its under-capitalized banks. Banks on the island have been closed since Monday and many businesses are only taking payment in cash. There were protests outside parliament again today.

Last week I talked extensively about the Senate investigation into the London Whale trading losses at JPMorgan. The 300-plus page report details multiple irregularities and plain and simple, criminal activity; ongoing criminal activity.

One of the interesting revelations deals with disclosure. In April 2012, just about a week after the London Whale trading losses first became public knowledge. Douglas Braustein, then Chief Financial Officer for JPMorgan said that regulators were fully aware of the London based chief investment office and what that trading unit had been doing. This was before JPMorgan’s acknowledgement in May that it had a serious problem, which eventually added up to more than $6 billion in trading losses.

At JPMorgan's quarterly earnings conference call in April of 2012, Braustein was quoted as saying: “We are very comfortable with our positions as they are held today, and I would add that all of those positions are fully transparent to the regulators. They review them, have access to them at any point in time” and “get the information on those positions on a regular and recurring basis as part of our normalized reporting.”

Last week at the Senate hearings, Senator Carl Levin asked  Scott Waterhouse, the OCC examiner-in-charge for JPMorgan, if Braunstein’s statement was true. “That is not true,” Waterhouse said. Levin asked if it was true that regulators got “the information on those positions on a regular basis.” Waterhouse answered: “No, we didn’t.”

And so, Braunstein changed his story last week. He told the Senate investigators that the statement he made in April 2012 was not true, but he covered his but, saying: “I believed it to be accurate based on the information that I had received.” Of course we still don't know what information he had a year ago that would make him think the regulators were getting accurate information.

What we learned is that the OCC is spineless. The testimony revealed that the OCC knew that Braunstein had made the claim that he was keeping the OCC informed with normalized reporting, and the OCC knew that was a lie, and they knew it one year ago, and they did nothing. Was it an act of omission or commission?

Part of the conclusions drawn from the Senate report: “The ability of C.I.O. personnel to hide hundreds of millions of dollars of additional losses over the span of three months, and yet survive internal valuation reviews, shows how imprecise, undisciplined and open to manipulation the current process is for valuing credit derivatives. This weak valuation process is all the more troubling given the high-risk nature of synthetic credit derivatives, the lack of any underlying tangible assets to stem losses, and the speed with which substantial losses can accumulate and threaten a bank’s profitability.”

Pretty harsh criticism, but not entirely accurate; the Senate report mentions the” lack of underlying tangible assets to stem losses”. While, the London Whale was gambling with derivatives which are nothing more than bets on side bets of side bets, there were tangible assets. Specifically, there were FDIC insured deposits.

And there is absolutely no evidence that gambling in shadowy and complicated derivatives markets has helped banks do the job that justifies giving them the benefit of deposit insurance. When you make a deposit in the bank, you are not turning over your hard earned money to a gambling addict. Well, actually you are doing that, but it probably isn't your intent.

Last week, the Federal Reserve released the results of its stress test on the big banks. Ally Financial did not pass. JPMorgan and Goldman Sachs passed but there were problems. The Fed is making them go back  to submit new capital plans by the end of the third quarter of this year to "address weaknesses in their capital planning processes."

The Senate investigation has laid out multiple instances of criminal activity. Now we sit back and see if the Department of Justice has the cajones to enforce the rule of law. Attorney General Eric Holder has stated that some banks were so large that he feared it would “have a negative impact on the national economy, perhaps even the world economy,” if criminal charges were filed against the bank.

Perhaps the Fed needs to change the terms of the stress test; if they economy can't stand them being prosecuted, they fail the test. At the very least somebody needs to stop them from gambling with FDIC insured money. We don't need a stress test to let us know that always gamblers eventually lose.

The Senate probe of JPMorgan did more than conclude that the bank hid the full damage of last year’s trading losses from investors and regulators. It delivered 900 pages of evidence that could help the Securities and Exchange Commission make the case that bank executives broke the law.

Former SEC Chairman Mary Schapiro said last year that her agency was investigating whether JPMorgan adequately disclosed the losses that eventually swelled to $6.2 billion on a derivatives portfolio. SEC officials will now be able to draw on the 300-page report by the Senate’s Permanent Subcommittee on Investigations—chaired by Michigan Democrat Carl Levin—as well as more than 90,000 e-mails and other documents, 200 transcribed telephone calls, and 25 interviews with bank officials compiled by the committee.

The case may become an early test for incoming SEC Chairman Mary Jo White, the former U.S. Attorney for the Southern District of New York whom President Obama picked to help the agency shed a reputation for failing to prosecute Wall Street wrongdoing. The report puts tremendous pressure on the SEC to address the responsibilities of JPMorgan and its top officers for what is happening in the trenches.

Then the craziest thing happened last night. A trade magazine called IR, hosted a black tie dinner to hand out awards for investor relations; kind of like the Oscars without the music, but with a bunch more irony. JPMorgan won the IR award for “Best crisis management”.

Maybe we are starting to see a change among the regulators. Remember Standard Chartered, the British bank? US regulators found that Standard Chartered back between 2001 and 2007, had laundered $24 million of transactions processed on behalf of Iranian parties and a total of $109million to Burma, Sudan and Libya also appeared to be in violation of sanction laws. Last year regulators fined Standard Chartered a little over $500 million and reached deferred prosecution agreements with the bank to avoid further sanctions.

Normally when this type of settlement is reached the banksters get to claim that there is no admission of guilt or innocence, but not in the case of Standard Chartered. Standard Chartered Bank signed a deferred prosecution agreement which, among other things, requires it to take responsibility for its previously illegal sanction-busting actions. When a bank gets caught laundering money to terrorists, they don't always get to claim innocence.

And so we fast forward to March 5 2013, and what did Sir john Peace, Chairman of Standard Chartered do? He claimed innocence. During a conference to announce the banks annual earnings, he said the bank's breaches were “not willful acts” and he described the multi-year money laundering operation on behalf of Iran as nothing more than a “clerical error”.

Well, the US regulators heard about that and they told Sir John Peace that he needed to revisit those remarks. In an unusual step, the bank was forced to issue a formal stock market announcement yesterday by US regulators. In a signed letter by Peace, the chairman said that during the press conference: "I made certain statements that I very much regret and that were at best inaccurate."

The formal apology went on to say:  "My statement that Standard Chartered 'had no willful act to avoid sanctions' was wrong, and directly contradicts Standard Chartered's acceptance of responsibility in the deferred prosecution agreement and accompanying factual statement. To be clear, Standard Chartered Bank unequivocally acknowledges and accepts responsibility, on behalf of the bank and its employees, for past knowing and willful criminal conduct in violating US ­economic sanctions laws and regulations, and related New York criminal laws, as set out in the deferred prosecution agreement."

So, very clearly, Sir John Peace lied, and with regard to the legal side of things, he made deliberate misrepresentations about securities. He also violated Standard Chartered's deferred prosecution agreement with US regulators. Standard Chartered - in the person of Sir John - has deceived prosecutors, regulators, and the investing public. This is outrageous executive behavior and it cannot be tolerated in a company that holds a US banking license.

The sad reality is that money laundering should have been enough to pull their banking license; violation of the deferred prosecution agreement should be enough to pull the license. We have senators asking just what is the level of criminality required to bring a bankster to trial; and the regulators they're afraid to prosecute. And so, Sir John was forced to read a letter which clearly states he is a liar.

And then he collected his bonus.

Thursday, March 21, 2013

Thursday, March 21, 2013 - Math Class was Canceled

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend. 

Math Class was Canceled
by Sinclair Noe

DOW – 90 = 14,421
SPX – 12 = 1545
NAS – 31 = 3222
10 YR YLD - .01 = 1.93%
OIL – 1.07 = 92.43
GOLD + 8.10 = 1615.80
SILV + .36 = 29.28

Some economic reports to touch on.

The number of Americans filing for first time unemployment benefits rose by 2,000 last week to 336,000, which is still close to a 5-year low. Jobless claims, a rough gauge of layoffs, have fallen below 350,000 in five of the past six weeks, marking the first time that has happened since late 2007.

The National Association of Realtors reports existing home sales rose 0.8% in February to a seasonally adjusted rate of 4.98 million, which marks the highest level of sales since November 2009. While sales are still below bubble levels, we are seeing improvements; low rates are luring buyers and rising prices are luring both buyers and sellers back into the market. Inventories rose 9.6% in February, but still at relatively tight levels. Year over year, the national median sales price rose 11.6%. The trend is up.

The House has approved a short-term funding bill that will pay for the operations of the US government through this September, the end of the 2013 fiscal year. The Senate had approved the bill Wednesday, meaning it has cleared Congress and now goes to President Obama, who has promised to sign it when he gets back from the Middle East.

Meanwhile, the House has also passed a budget plan, the third drafted by Representative Paul Ryan. It would convert Medicare into a private voucher plan, eliminate any expansion of Medicaid, repeal Obamacare, and undo Wall Street regulations. It passed in the House, and it seems destined to the dustbin, just like previous Ryan budget plans. It is doubtful the Senate Republicans would even consider bringing it to a vote, so Senate Democrats are trying to fast-track the legislation. They actually want to see the Republicans in the Senate leave a recorded vote on slashing Medicare. Meanwhile, the Senate is actually working on its own budget proposal, written by Senator Patty Murray.

So, amidst the politicking, the Congressional Budget Office, the CBO, the official scorekeeper on the economy; they have issued a report of the sequester, the automatic $44 billion in spending cuts. CBO says that the sequester will slow down economic growth by about 0.6%, which amounts to about $97 billion. So for every dollar we reduce the deficit this year, we sacrifice about two dollars and twenty cents in GDP. The cuts will also result in the loss of 750,000 jobs.

Apparently, many years ago, the budget for math education was slashed and nobody noticed, and we are just now seeing the effects in Congress.

The Census Bureau has released a new study on household debt between 2000 and 2011. Overall, fewer households carried debt in 2011 (69%) than in 2000 (74%).   Average household debt for people age 55 and over increased faster than for any other age group, while the 65-and-over group was the only category in which the percentage of people holding debt has increased since 2000. We’re much less likely to hold credit-card debt than we used to be: The percentage of households carrying a balance fell from 51% in 2000 to 38% in 2011. “Other unsecured debts” increased from 11% to 19%; “Other unsecured debt” includes medical bills and student loans.

The student loan debt hits younger households and the medical bills debt hits older households. The median amount of “other debt” held by people over 65 has more than doubled since 2000, to $4,000 today. Overall, 44% of 65-plus household hold at least some debt, and the average household owes $26,000 – also more than double its 2000 level.

The biggest debt factor for most households, including those older ones, remains mortgages and home-equity debt, which accounts for about 78% of all household debt.

Let's check in on the Cyprus Bank Heist. Here's some background. The Cyprus economy is largely dependent on tourism and banking; it is a tax haven, especially for Russians. The banking system in Cyprus has assets about 8 times GDP, which is huge, but not as huge as Luxembourg. So, Cyprus banks took some of the money and speculated on real estate, including real estate in Greece. That didn't work out. So, now the Cypriot banks can't honor their debts. Remember that deposits are considered a form of debt for banks. So, they announced the theft of deposits to pay down debt. People got angry. Now it looks like they might just steal deposits from accounts over 100,000 euro.

But even then the situation is by no means under control. There’s still a real estate bubble to implode. Half the economy, the banking industry, is still essentially wiped out and unlikely to attract new depositors even though the tax/levy/expropriation/theft of deposits is supposed to stabilize the banks. And then the bailout or bail-in will leave Cyprus with Greek-level sovereign debt.

Yesterday, there was talk of Russia swooping in with $4 billion-euro in a private deal with the banks and Gazprom, but now it looks like the Russians will sit it out.

For now, the banks remain on holiday, probably until Monday. The European Central Bank told Cyprus that emergency assistance to the two biggest Cypriot banks would be cut off if the government failed to agree on a plan to steal deposits, or I should say raise the billions required to qualify for a bailout; which as we discussed earlier is just a transfer of debt from the banks to the government. So, there is a deadline, which may or may not be a hard and fast deadline. And there is a chance that Cyprus will be kicked out of the European Monetary Union; which means they would have to bring back their own currency; which would likely be devalued; which would bring a huge increase in tourism.

And before long, we'll all forget about Cyprus, except as a footnote in the massive tomes of banks behaving badly.

And that brings us round to another old topic: synthetic collateralized debt obligations, or synthetic CDOs. You may recall that these are the gambling devices which nearly destroyed American International Group, AIG, the giant insurance company. And according to Bloomberg, there is a resurgence in the CDO market from hedge funds chasing yields. Just as a refresher, CDOs are side bets on side bets on pools of debt. You take some debt, say corporate bonds or credit card debt or mortgages, and you bundle it together; then you bet against the possibility of default with credit default swaps; then you bundle the credit default swaps and bet against those. Think of it this way; you take a bunch of apples, some good, some rotten, and you mash them all together; you pay off a credit rating agency and then you bet on whether the apple sauce is putrid.

AIG sold a lot of CDOs, and when the bets went bad, Hank Paulson forced AIG to pay off on some of the bets to his old firm, Goldman Sachs. But this may be the only known instance where someone was able to take applesauce and turn it back into apples. For the most part, CDOs are nothing more than gambling devices for hedge funds looking for yield; they have no real economic value.

What could go right?

Also, comes news that JPMorgan is dipping its toes back in the residential mortgage backed securities business, in its first non-agency deal since the crisis. This is where JPMorgan bundles residential mortgages into bonds. You may recall there was a problem with this sort of thing because some of the mortgages went bad and the people who bought the bonds cried foul and demanded refunds, or clawbacks. So why would JPMorgan get back into that business?

Well, these new bonds offer weaker promises; in other words, they write in the fine print that some of these mortgages might be rotten and if they are rotten, there is no provision to claw back a refund. Tough luck. It's right there in the fine print. I know what you're thinking; the credit rating agencies will surely give those bonds a very low rating because they will surely be crammed full of rotten mortgages.

Nope. They get a triple-A rating because they reveal in the fine print that there are probably going to be some rotten mortgages, so they aren't misrepresenting anything. And they include in the fine print that if they are rotten, there won't be any refunds.

Math class was canceled and ….

You know there has been a movement to do away with payday lending; this is the modern form of loan sharks; and you've surely seen the stores that offer payday loans. You know..., the banks; like Wells Fargo. Even as public anxiety grows about the dangers of payday lending, with 15 states recently banning the practice, many big banks are offering the service to their customers.

According to a new study by the Center for Responsible Lending "Despite federal banking regulators’ recognition of the abuses of payday lending and aggressive action blocking previous bank partnerships with payday lenders, a few large banks have begun offering payday loans directly through checking accounts," the study says. Large banks offering the service include Wells Fargo, U.S. Bank, Regions Bank and Fifth Third Bank.

The average annual percentage rate on a bank payday loan is 225 to 300 percent, the study says. Banks that offer payday loans extract payments automatically from the borrowers' checking accounts on the next pay cycle. In some cases, that withdrawal cleans out a borrower's checking account, leading to bounced checks. According to the study, users of paycheck advances are twice as likely to overdraw their bank accounts, leading to even more fees for the banks. And that's just the start of the potential problems.
The study says: "Research has shown that payday lending often leads to negative financial outcomes for borrowers. These include difficulty paying other bills, difficulty staying in their home or apartment, trouble obtaining health care, increased risk of credit card default, loss of checking accounts, and bankruptcy."
The elderly, already financially vulnerable and short on retirement savings, are making increasing use of these loans. According to the study, more than a quarter of bank payday loan borrowers are on Social Security.

Earlier, I told you that the age group 65-plus is taking on debt faster than other age groups, according to a Census Bureau report. The banks get this same research, and so they are now targeting seniors for payday loans. But for many seniors, their payday comes in the form of a social security check; so that's what the bankers are targeting.
These benefits are supposed to be protected from garnishment by creditors (other than the IRS for taxes or those holding child support claims) from garnishing social security benefits (SSA) or other public benefits. However, the banks were under no obligation to determine if the funds in a bank account that contained funds from more than one source were could be garnished.
There is supposed to be an account review to determine if a benefit agency deposited a benefit payment into an account, and then there is a lookback period. And theoretically the banks are supposed to look out for the account holders. There are now specific requirement the banks are supposed to follow. But what if they have set up a senior with a payday advance?

If a senior has some debt problems, their social security is supposedly protected. That's great. It makes financial institutions responsible for figuring out which funds are available for garnishment and which are not. And if the banks start digging in to accounts with SS funds, what's to stop them?

So, just a suggestion here. Social Security is doing away with mailing checks, and they are switching over to direct deposit. Benefits recipients should have a separate account (marked Social Security, for example) for their benefits, and that they never comingle the funds with other funds. Mess ups are less frequent and far easier to reverse and prove.

This is how to avoid problems with the loan sharks – you know, the ones that run the banks.