Monday, April 15, 2013

Monday, April 15, 2013 - Have a Great Day

Have a Great Day
by Sinclair Noe

DOW – 265 = 14,599
SPX – 36 = 1552
NAS – 78 = 3216
10 YR YLD - .02 = 1.70%
OIL – 3.97 = 87.32
GOLD – 124.40 = 1353.40
SILV – 3.16 = 22.79

I hope you're well. I hope you're day has been blessed, because in many ways this has been a lousy day, and the stock market was just a minor part of it.

There has been another act of violence, possibly a terrorist bombing; this time in Boston. Two bombs exploded near the finish line of the Boston Marathon; about a half hour later, another bomb exploded near the JFK Library. Boston Police confirm there were a couple more explosive devices that were found and defused. It looks like three people are dead and more than 100 injured, some very seriously, including about a dozen people who have lost limbs.

The blasts took place about four hours after the start of the race, which meant that there were still several thousand runners yet to finish the race. The first two bombs exploded just before 3PM Eastern, one after another, and within about 100 yards of each other, very near the finish line of the marathon race. There have been unconfirmed reports that a suspect is in custody, possibly a Saudi national, but clearly it is an ongoing investigation at this time.

It's tax day of course. I hope that doesn't come as a surprise. File now, file an extension, file anything, except of course if you are a major multi-national corporation; in which case, just present your tax dodgers card, along with one or more addresses from an off-shore tax haven, and no worries. But for the rest of us, file now and send money. What do you get for your money? Well, there's an app for that, courtesy of the White House and some research organizations, and it will tell you just what you bought with your tax dollars.

Let’s say that you paid $20,000 in income taxes last year. According to the White House app, you would have spent about $7,000 on defense, including the military operations in Afghanistan and Iraq. The second-biggest category is health spending, on programs like Medicaid and Medicare. That accounted for about $6,400. After that comes “job and family security,” which includes unemployment insurance and programs for the working poor, which you spent about $5,000 on last year. Net interest on the debt is also a major category, accounting for about $2,300.

Then, there are many much smaller categories. Humanitarian aid, for instance, cost you only $228 out of your $20,000. You spent about $1,300 on programs for veterans and $190 on agriculture. Education and job training cost you about $940 and NASA about $170. Disaster response worked out to about $120.

There are a few things to note here. One is that “mandatory” spending – including government funding for Social Security, Medicaid, Medicare and interest on the debt – and military spending together significantly outweigh “discretionary” spending. That is upside down to many Americans’ perceptions of the budget. (It is also worth noting that the White House separates out tax revenue for and spending on Social Security and certain parts of Medicare.)

And the other thing is that if you still have your calculator clutched in your sweaty palm, and you just happened to be punching in numbers as I was speaking, you realize that all those numbers add up to more than $20,000. If you go to the White House calculator and say you paid $5,000 in income taxes, it will break it down into an equivalent $5,000 in spending. But that doesn’t really make sense. Last year, Washington spent far more than it took in; about $1.1 trillion more. That means that for every tax dollar it collected, it spent about $1.43. By the same logic, your $20,000 in income taxes translated into about $28,600 in spending.

Now if you went to the grocery store and spent $20,000 and you received $28,600 in groceries, you'd be very happy, but you spend the same amount with the taxman and you feel like you've been abused. You gotta lighten up. It's good to remind ourselves of some realities. First, the taxes we pay are, by international standards, fairly modest. Second, despite what some would have you believe, the wealthy are not crushed by the burden of taxation. And third, though nobody particularly enjoys giving part of their income to the government, taxes are the price we pay for having an advanced, democratic society; which works well more days than not.

Alright, let's talk about gold. Not that I have all the answers. Gold took a big drop today. We've seen similar declines in the summer of 2008 and the third quarter of 2011. Of course, 2008 preceded the collapse of Lehman; 2011 brought about a globally coordinated central bank intervention. In both instances, gold moved lower and the S&P 500 followed with a slight lag; and in both instances, gold moved higher. Still, this is the biggest single day sell-off in about 30 years. There were rumors of a big sale of gold in London (about 100 tons on Friday, followed a few minutes later by a 300 ton sale – which has all the markings of a short sale push to drive prices lower); there has been talk that the Central Bank of Cyprus was trying to sell it's gold reserves, which may or may not be separate from the other big sale. Nothing confirmed right now. If Cyprus is forced to sell, the concern is that it will be a template, and there are plenty of troubled Euro-countries with much bigger gold reserves than Cyprus.

There are plenty of debates today about the reasons for such a big move in gold today. There are people trying to defend gold and others trying to tear it down. Gold is the ultimate antithesis to central banks. The Bank of Japan has recently pulled out the Quantitative Easing bazooka; maybe this will be the template for central bankers moving forward. Maybe the economy is purring along on the road to recovery, and the central bankers can step back from QE in the near future. Of course, none of that has anything to do with the physical demand for the metal.

If someone is selling, someone is also buying. At this point I haven't heard anything conclusive about the selling pressure; all I can really say is that something seems a bit fishy. The markets may be selling, but the public is buying. One report had public buying of physical gold outpacing sellers by 50 to 1 at bullion dealers, and the premiums over spot are the highest we've heard about in years.

However, you may recall that right after the Federal Reserve’s Open Market Committee leaked valuable inside information to big banks, Goldman told its clients to initiate a short on gold. So, it appears to be a concerted attack on gold, or maybe there is something we haven't heard yet.

It's earnings reporting season. Citigroup posted earnings of $1.17 per share and revenue topped $20 billion. The fun or infuriating part of banks reporting earnings is to try and figure out what they are actually reporting; assumptions for loan loss reserves and adjustments for hedging and off-balance sheet holdings can make most analysis and comparisons meaningless. So, let's just consider price. When you account for Citi's reverse stock splits and price declines, Citi trades at a split adjusted $550, which means it would have to increase share price 12-fold, just to get back to break even.

We have seen and discussed the pathetic lack of federal regulators to regulate the big banks, and so it is left to private investors to fill the void. You are already familiar with JPMorgan's London Whale trading fiasco. The Police Retirement System of St. Louis filed the lawsuit against Chairman and CEO Jamie Dimon, as well as other executives and board members, in State Supreme Court in Manhattan. The suit alleges the bankers breached their fiduciary duties to shareholders by failing to block the risky trades, which ultimately lead to more than $6 billion in losses. In their court papers, lawyers for the St. Louis pension fund highlighted letters from a union pension adviser, CtW Investment Group, that they said "warned the board multiple times that the company's lack of internal controls and severely flawed risk oversight structure posed serious threats" to the bank. The letters were from the spring and summer of 2011.

The quote of the day goes to a lawyer for the plaintiff, who said: "Although the purpose of JPM's CIO was to hedge against risk, the company's board and senior management oversaw its transformation into a high-stakes casino. That's like filling a fire extinguisher with gasoline."

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