Friday, July 12, 2013

Friday, July 12, 2013 - Malala Day

Malala Day
by Sinclair Noe

DOW + 3 = 15,464
SPX + 5 = 1680
NAS + 21 = 3600
10 YR YLD + .02 = 2.60%
OIL + 1.34 = 106.25
GOLD - .80 = 1285.80
SILV - .23 = 20.02

So, let's recap. On Wednesday, Ben Bernanke said the Fed wasn't going to raise interest rates and really, nobody needs to worry about tapering. Or at least that's what the markets decided to hear this time, and so the S&P 500 managed its best week in 6 months, up 2.6%; treasuries rebounded with their best week in a year as the yield on the 10 year notes dropped 14 basis points; the dollar had its worst week in almost 2 years and gold had its best week in 8 months. And the price of oil jumped about 5%, and gas prices are up 9 cents in the past 4 days with today's increase the largest in 6 months, pushing the price of regular gas to its all-time high for this time of year.

If you were looking for inflation, we found it. The Producer Price Index, or PPI, measures inflation at the wholesale level and it was came in at 0.8% for June; the increase was mainly because of a nearly 3% increase in energy prices. The US economy has long been, and still remains very vulnerable to big swings in energy prices.

As you know, it is earnings reporting season, and today was the big day. JPMorgan and Wells Fargo reported earnings. Not only are these two of the biggest banks, but the big banks represent some of the strongest potential earnings of any sector in the economy for the past quarter. After the banks report, earnings season is all downhill.

Wells Fargo reported a 19% increase in 2Q profit, posting net invome of $5.5 billion or 98 cents per share. Revenue was flat at $21.4 billion. Wells Fargo is now the largest home mortgage lender and 2Q saw a drop-off in the mortgage market as rates increased, but that was late in the second quarter and did not significantly affect results. A bump in credit cards and commercial lending, and record origination of auto loans, further offset the home loan slowdown. So, with revenue flat, where did the extra profit come from? They cut expenses; specifically, they significantly reduced the amount they set aside in reserves for bad loans. What could go wrong?

JPMorgan reported a 31% increase in 2Q earnings, posting net income of $6.5 billion, or $1.60 a share. Revenue was $20 billion, compared with $26 billion in the period a year earlier. Two big sources of revenue increase came from the investment banking unit and from a 38% increase in fees, even as the mortgage banking business declined and net interest on loans dropped slightly. The record setting profit got a boost by setting aside $1.4 billion less for loan loss reserves, even as they set aside an additional $600 million for potential litigation. We don't know what litigation they're anticipating but that is enough for a pretty big legal battle.

There was also a nifty bit of accounting that somehow didn't show up in 2Q earnings and it deals with the increase we've seen in interest rates in the past month and a half. It falls under the category of Accumulated Other Comprehensive Income, and it dropped from $3.5 billion to $400 million. That little gem didn't make it into the headline earnings number, but when you start adding up some of the bad stuff, the headline numbers don't look so great. In fact, they start to cause some concerns.

Keep in mind that JPM is comparing 2Q earnings to a year ago, when the firm lost $3.4 billion as a part of the failed London Whale trade. As a side note JPM's total loans decreased slightly in the last quarter, while their excess reserves increased. You may also recall that the gambling money used by the London Whale came from excess reserves. And in a strange twist, the CIO, which is the London trading unit which included the London Whale, the CIO generated a negative $648 million in revenue in the last quarter. But the bigger question is what the bank is doing with the excess reserves; they aren't making loans with the money; so the indication is that they are trading with the money.

So, anyway the big profit announcements for 2Q earnings reporting season peaked today.

Of course, part of the JPMorgan conference call this morning dealt with the Senate Bill, introduced by Elizabeth Warren and John McCain to reinstate the Glass-Steagall law which would split investment and commercial banking, also some discussion about capital reserve requirements for banks.

Regarding a 21st century version of Glass-Steagall, the bank seems to think the best reason why it is not needed is because they have lots of customers, and because they are customers they must like the business model, so why change?

And regarding the increased capital reserve requirements which call for the biggest banks to hold more reserves than smaller banks, well Jamie Dimon thinks that's unfair and creates an imbalanced competitive playing field. In other words, complete disregard for the concept of too big to fail. And it will come as no surprise they plan to lobby hard against Glass-Steagall, increased capital reserves, and don't forget reforms to the trading of credit derivatives.

The whole argument seems to be that the banks won't be able to compete and they won't be able to lend money if they actually have to observe sound business practices. This is boilerplate response from the banksters but it doesn't hold water. JPMorgan has enough money to make more loans right now, but they would rather trade through their investment banking business than make loans. As for the competitive disadvantage, well let's use JPM's own reasoning: a measurably healthier bank should have an easier time raising money and attracting customers.

And with regard to regulations on overseas trading in the $700 trillion derivatives market; first, it looks like the CFTC will move forward on imposing that part of the Dodd-Frank reforms. The CFTC voted on that this morning. The real reason they object to regulations on derivatives is because in an unregulated environment, they get to siphon off big profits with almost zero accountability.

Four Danish pension funds filed a lawsuit against twelve large banks, accusing them of increasing costs for investors trading in the $27 trillion credit default swap (CDS) market by stopping exchanges from entering the market.

The case, filed in the U.S. District Court in the Northern District of Illinois, follows a similar suit filed in May by an Ohio-based pension fund, the Sheet Metal Workers Local 33, and the Cleveland District Pension Plan in the same court.

The funds allege that dealers used their ownership and controls over clearing, data and other entities crucial to the market to block an independent clearinghouse from offering exchange-trading, deny market participants real-time price information and stop new participants from entering the market.

The CME Group (CME), the world's largest derivatives exchange and Chicago-based hedge fund Citadel Group, planned to offer CDS exchange trading in 2008 before dropping the plan the following year. The banks threatened to withdraw their business from the CME if it went through with it CDS exchange venture, the funds allege.
The banks used their control over the International Swaps and Derivatives Association (ISDA), a trade group, and Markit, a data provider and owner of benchmark indexes, to deny or delay licenses the exchanges needed to offer CDS trading, according to the complaint. The funds also accuse the banks of controlling a CDS clearinghouse, which is now owned by IntercontinentalExchange (ICE), to keep trading off exchanges and restricting membership to the clearinghouse to the largest banks. Markit and ISDA are defendants in the suit and ICE is named as a co-conspirator.

The House of Representatives defied a White House veto threat and passed a farm bill on Thursday that expands the taxpayer-subsidized crop insurance system but omitted food stamps. Lawmakers passed the 608-page bill, unveiled by Republican leaders late on Wednesday night, on a 216-208, party-line vote after two hours of debate in which no amendments were allowed.

Republican leaders said food stamps, traditionally part of the farm bill, would be handled later and that, for now, they needed a way to start negotiations with the Senate over a compromise bill. Democrats said the real intent of the action was to isolate food stamps for large cuts in funding. House Speaker John Boehner declined to say if leaders would allow a vote on a farm bill with larger food stamp spending than his party liked. "We'll get to that later."

Just a reminder; there are now more than 47 million Americans using food stamps for their daily bread. The House passed a version of the bill that includes $195 billion in subsidies to farmers or for agribusiness over 10 years, but it eliminates food stamps and nutrition programs. Now, they are expected to get around to it sooner rather than later, but this just seems to be a dangerous political game.

Do you remember the story of Malala Yousafzai? She's the Pakistani schoolgirl who was shot in the head last year by extremists for speaking out about her right to education. She survived and today is her 16th birthday. The United Nations declared today “Malala Day” and she spoke before the UN in New York. This is an amazing young girl. Here is the link to the speech, and it is very worthwhile to take the time to watch this.

Let me share a few of her quotes:

First of all she said: "'Malala Day' is not my day. Today is the day of every woman, every boy and every girl who have raised their voice for their rights."

Also, “ We realize the importance of our voice when we are silenced.”

Today we call upon the world leaders to change their strategic policies in favor of peace and prosperity.”

We realize the importance of pens and books when we saw the guns. The extremists are afraid of books and pens.”

One child, one teacher, one book and one pen can change the world. Education is the only solution. Education first.”

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