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 www.buysilvernow.com 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.