bank-o-meter.com

Hamlet Dies

by Sinclair Noe

Record Highs for Dow and S&P.

DOW + 169 = 15,460
SPX + 22 = 1675
NAS + 57 = 3578
10 YR YLD - .10 = 2.57%
OIL – 1.92 = 104.60
GOLD + 22.70 = 1286.60
SILV + .69 = 20.25

To taper or not to taper? That is the question.

Whether 'tis nobler in the mind

to suffer the slings and arrows of outrageous bond market feral hogs

or to feed the savage beasts with unending securities purchases.

Or to tighten against a Sea of non-existent inflationary troubles

And by opposing end them: to die, to sleep,

to slaughter the feral hogs at the Discount Window trough;

and end the thousand Natural shocks that markets are heir to?

Is that all? To taper, to tighten, perchance to Dream;

Aye, there's the rub.

For one is QE and the other is accommodative monetary policy,

while fiscal policy and structural reforms

are nothing more than ephemeral motions,

the stuff of what dreams may come,

When we have shuffled off this mortal coil.

Well, that's enough of our literary mosh pit for today. As I recall, Hamlet died.

The FOMC minutes released by the Fed yesterday, were much ado about nothing... sorry. There was a bunch of talk that boiled down to the basic idea that Quantitative Easing and interest rates are two separate policies. The FOMC bigwigs have no intention of raising the interest rate target; that is off limits. The securities purchases under QE will taper off at some point, but there were more in favor of continuing than quitting. And even when they do quit, it will be slow, or it will be a variation on the theme. For now, it just makes sense that they will continue, if for no other reason it is a way to structurally reform the capital reserves of the big banks; a job the politicians and the courts have been unwilling to undertake.

So, the big theme from the FOMC minutes is we can get the taper without higher rates. But the bond market may have something to say about that. After all, the Fed has been the biggest buyer in the bond market; remove the biggest buyer, and prices drop and rates go up. If or when the Fed tapers that just signals for a flood of money to exit bonds. Indeed we've seen massive redemptions in bond funds at the biggies: Pimco and Vanguard.

Then, if you look over at the Dollar Index you might think there has never been talk of taper. The greenback jumped off a cliff the past two days, although it did firm up in afternoon trading.

And thus the Native hue of Resolution
Is sicklied o'er, with the pale cast of Thought,
And enterprises of great pitch and moment,
With this regard their Currents turn awry,
And lose the name of Action.

The Fed is driving the markets. Make no mistake about it. If you are still inclined to fundamentals, you might be wondering what is driving the valuations. As we begin with the second-quarter earnings season, analyst expectations are calling for companies in the S&P 500 to see earnings growth in the neighborhood of 0.8%. Revenue growth, or lack thereof, will be another point of weakness but operating margins should remain supportive.

Over the past 4 years, improved earnings, and their accompanying stock market rallies, have been driven by cost cuts rather than strong profit growth. That can't last forever. Companies have been keeping the fire stoked by burning the furniture, then the doors, and now they're ripping the roof off the joint to keep the fires burning. There just isn't a lot more cost cutting that remains. Because of this, it is unlikely we will see many surprises in performance results in earnings this season.

So, the next question is whether valuations are enough to drive further rallies. Not really, but that's the wrong question because we know that this market is being driven by the Fed. Of course, valuations could lead to a long grind up even if we don't see a big rally. Some are already saying that today's record high close is nothing more than short covering; that's where traders who were shorting the market, betting it would go down, got caught and now have to buy back in to cover their positions.

Of course we can speculate on what is driving the market at any given moment but if you really want to make money like the pros, the trick is to be fast and early.

You've heard of the Consumer Confidence Index. The highly respected gauge of consumer sentiment is compiled by the University of Michigan and Thomson Reuters and released each month. And you can get it 2 seconds before the rest of the world, if you're willing to pay an extra $6,000 per month. The 2 second advantage really only has value to high frequency traders who can jump in ahead of the rest of the world and scalp a bit of profit. If that sounds like insider trading, it is.

New York Attorney General Eric Schneiderman has opened an investigation, saying: “The securities market should be a level playing field for all investors and the early release of market moving survey data undermines the fair play in the markets.”

The Institute for Supply Management teamed up with Thomson Reuters to also sell a kind of enhanced access to the results to a monthly survey of purchasing managers. For a price, they send out a special version of the report designed to be digested by computers and thus quickly trade-able. The Duetsche Borse sells a 3 minute early version of the Chicago Business Barometer for 2,000 euros a year.

Thomson Reuters says they sell the Consumer Confidence Index 2 seconds early version to help their customers make better informed trading and investment decisions. Seriously, that was their response.

Did you ever see the old Paul Newman and Robert Redford movie, “The Sting”? The basic idea was that they set up a guy to think he was hearing the real-time results of a horse race, when in fact, the results were a few minutes old. The guy bet on the race and lost. There's a sucker born every minute. Thank you Thomson Reuters, for helping make us all better educated suckers, or, I mean …, investors.

And finally, an idea whose time has come, or is actually long overdue, and probably has very little chance of success, but we have to talk about it. A bipartisan group of 4 senators that includes Elizabeth Warren and John McCain introduced an updated version of the Glass-Steagall Act today.

The new bill, which is also cosponsored by Sens. Maria Cantwell (D-Wash.) and Angus King (I-Maine), would require banks that accept federally insured deposits to focus on traditional lending and would bar them from engaging in risky securities trading. The separation between lending and trading was originally imposed in 1933 by the Glass-Steagall Act. The legislation introduced today would also bar banks that accept insured deposits from dealing swaps or operating hedge funds and private equity enterprises.

McCain voted for the 1999 Gramm-Leach-Bliley Act, which repealed Glass-Steagall, but he's come to his senses. Good for him. Even the folks who wrote the 1999 act have come to regret it. Not Phil Gramm, but the folks who wrote it from Citigroup. Quick history; in 1998 Citibank merged with Travelers. The new company combined commercial banking and insurance and investing in a one-stop shop. It was the largest merger in history at the time. One problem – it was illegal under the Glass Steagall Act of 1933. So, the folks at Citigroup lobbied and they lobbied hard, and they re-wrote the rules to suit their pocketbooks.

Last Summer, former CEO Sandy Weill said he had a change of heart about repealing Glass-Steagal.

In 2009, John Reed, the co-founder of Citigroup issued his regrets, saying: “ I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel. So generally speaking you'd have consumer banking separate trading bonds and equity.”

And then, 10 years after his treasonous deal, Reed tried to justify his greed, saying: “When you're running a company, you do what you think is right for stockholders. Right now I'm looking at this as a citizen.”

Apparently Citigroup management was forced to renounce citizenship as a requisite for employment.

Senator McCain issued a written statement today, saying: "Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world. Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits."

He's absolutely correct. Gamble all you want, just don't make me pay for your gambling losses. Unfortunately, the bill introduced today probably doesn't have much chance, because frankly the banks are still running Washington. They control the place.