Wednesday, August 14, 2013 - Gripped by Euphoria

Gripped by Euphoria

by Sinclair Noe

DOW – 113 = 15,337
SPX – 8 = 1685
NAS – 15 = 3669
10 YR YLD - .03 = 2.71%
OIL + .11 = 106.94
GOLD + 15.10 = 1337.50
SILV + .41 = 21.88

Egypt's military was accused of pushing the country towards civil war after hundreds of protesters were believed to have been killed in a “massacre” at two Muslim Brotherhood protest camps.Security forces used machine guns, snipers, tear gas and armoured bulldozers during a full scale assault to clear the camps in Cairo. The operation left a scene of carnage on the capital’s streets and Egypt embroiled in its worst turmoil since the start of the Arab Spring.

With clashes breaking out across the country, the military declared a month-long state of national emergency and imposed a sweeping curfew in major cities.

Wednesday’s operation was the culmination of a six-week stand-off between Egypt’s security forces and the Muslim Brotherhood which followed the military’s decision to remove Mohammed Morsi as president. He had been the country’s first Islamist leader and its first to be democratically elected.

Mr Morsi’s supporters had vowed to occupy two protest camps,in Cairo until he was reinstated. That ended when the military moved into both camps with decisive force.

The Muslim Brotherhood put the number of dead at more than 500, and said that those killed in the “massacre” included unarmed civilians, women and children. Egypt’s health ministry gave an official death toll of 149, with more than 1,400 injured, although those figures were expected to rise.

The eurozone grew by 0.3% in the quarter to June, according to Eurostat, ending a recession – defined as two or more consecutive quarters of negative growth – that had dragged on for 18 months. Economists had forecast more modest growth of 0.2%, following a downwardly revised contraction of 0.3% in the first quarter. The data also showed growth in the wider European Union rose by 0.3%, after shrinking by 0.1% in the first three months of the year.

The revival was led by Germany, which grew by 0.7% in the second quarter. And for many Europeans there's not much cause for celebration just yet. More than 19.2 million people are currently unemployed in the euro area, according to Eurostat, with more than one in four Spaniards and Greeks out of work. It takes two quarters of economic contraction to call a recession, and only one quarter of growth to call the end of the recession. One quarter is not a trend.

It's an oft-used rule of thumb, but it's not really the official definition. That's why the National Bureau of Economic Research, the official arbiter of U.S. recessions, defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Most everybody agrees that the U.S. was officially in a recession in 2001, even though we never had two straight quarters of negative GDP in that recession.

Second-quarter Eurozone GDP was pulled higher by strong growth in some countries, including Germany, France and Portugal. But France and Portugal are still touch-and-go, and several other countries, including Spain, Italy and the Netherlands, are still in recession. All it would take is a credit crisis in one of those countries to spark another debt panic and slam economic growth once again. Greece and Cyprus are still in a Depression.

One more reason to be less than exuberant about the end of the Euro-Recession is that they haven't really solved the problems. They are still trying to enforce austerity on the periphery, and it still isn't working; there's been a little relief when they take the boots off the necks, but otherwise, not much has changed. The financial sector is still a big problem; they still have banks to break up, and they might, starting with RBS, but that will be slow, and painful

Fund managers around the world are exuberant, convinced that America is in full recovery and Europe has overcome its debt crisis. Maybe not so much today, but that's the general feel. Bank of America’s monthly survey of investors showed a dramatic rise in confidence in August, with a net 72% expecting growth to accelerate over the next year. It is the highest in reading since 2009. This would be considered a contrary indicator. When everybody is happy, they've already put their money in the markets, and there is nothing left to do but sell.

Survey says almost everybody expects bond yields to rise as deflation fears evaporate, with just 3% still worried about the risk of an economic relapse. Managers have slashed their bond allocation to a 28-month low. The exuberant mood comes as margin debt on Wall Street hovers near $377 billion, just below its all-time high and well above peaks before the dotcom crash and the Lehman crisis. Margin debt is a form of debt as “a tool used by stock speculators to borrow money from brokerages to buy more stock than they could otherwise afford on their own. If the stock rises, they end up making far more money. If the stock crashes, you could lose your shirt and more. Brokers can force the sales of certain positions to cover losses.

Forced sales of stocks can set off panic and a rush for exits, snowballing into a crash, as happened in 1929. The current market may have further legs but there are some “astonishing similarities” between the latest patterns and events preceding prior market crises. Profits have been ticking along at stall speed just as in 2006 and 2007, and just like then people are resorting to leverage to squeeze out the last dime.

The rise in margin debt is matched by leveraged excess across the system, with debt-driven buy-backs of corporate shares running at a $400 billion annual rate. Leveraged buy-outs are back in vogue. IPOs are all the rage again. Junk bond yields are near record lows.

Investors are betting the US Federal Reserve is about to taper bond purchases for healthy reasons, because the US economy is strong enough to stand on its own feet. The counter-view is that the Fed is tightening for “unhealthy” reasons, because it has taken to heart warnings from the Bank of International Settlements about the dangers of excess leverage and a fresh asset bubble.

The Bank of America survey said there has been a dramatic divergence between “Main Street” and “Wall Street”. While the US economy has grown by $1.3 trillion since 2009, the US stock market has added $12 trillion.

The bank said nominal GDP growth over the past four quarters has been the slowest ever recorded outside a recession. This would not normally be circumstances when the Fed took away the punchbowl and tightened credit.

Two former JPMorgan Chase employees are facing criminal charges related to the trading scandal that cost the bank $6.2 billion last year. The two lower level employees are charged with wire fraud, and conspiracy to falsify books and records related to the trading losses. The trader who traded the losses, Bruno Iksil, also known as the London Whale, is cooperating with investigators. The two guys who have been charged have not been arrested.

Preet Bharara is the prosecutor and he tried to sound tough today. "This was not a tempest in a teapot, but rather a perfect storm of individual misconduct and inadequate internal controls," he said, directing his remarks squarely at Jamie Dimon.

He also said, "The difficulty inherent in precisely valuing certain kinds of financial positions does not give people a license to mislead or cover up losses. That goes double for handsomely paid executives at public companies whose actions can roil markets and upend an economy." So, it sounds tough, but it's not like we've seen them going after senior management.

You probably think you are entitled to some modicum of privacy in your emails. You would be wrong. Google, said so, publicly today. The internet giant argued in a US lawsuit that people who send messages via email should not “be surprised” if those messages are intercepted by the recipient’s email provider, in the same way that someone sending a letter to a business associate might expect it to be opened by a secretary.

"People who use web-based email today cannot be surprised if their emails are processed,” Google said. “Indeed, 'a person has no legitimate expectation of privacy in information he voluntarily turns over to third parties,” it added, citing a Supreme Court judgment handed down over electronic communications in 1979 – long before Google existed.

If you have a question or a subject you would like to bring to my attention, you can send me an email. …... sinclair@moneyradio.com

That should work.