Thursday, October 31, 2013 - Halloween Miracles

Halloween Miracles

by Sinclair Noe

DOW – 73 = 15,545
SPX – 6 = 1756
NAS – 10= 3919
10 YR YLD + .02 = 2.54%
OIL - .53 = 96.24
GOLD – 20.20 = 1323.70
SILV - .83 = 22.01

The S&P closed near its intraday low, but it's been a good October. For the month, the Dow gained 2.8 percent, the S&P 500 added 4.5 percent and the Nasdaq rose 3.9 percent. The S&P 500 is up 23.2 percent for the year so far.

The S&P/Case-Shiller index showed that home prices in 20 large metro areas rose 1.3% from July and 12.8% from August 2012. Prices haven't risen this fast year over year since Feb. 2006. Still, there are signs of a cooling. The rate of monthly increases in the 20 large cities peaked in April. Since then home prices continued to rise, but at a slower pace each month. This month 16 cities reported smaller gains in August compared to July. Las Vegas saw the largest annual increases, with prices soaring from a year earlier  29.2%. In San Francisco prices jumped 25.4%; in Los Angeles 21.7%; in San Diego 21.5%.

The Chicago purchasing managers index jumped to a reading of 65.9 in October, up from 55.7 and well ahead of the consensus of 54.5. Readings above 50 indicate expansion.

The number of Americans filing first-time claims for unemployment insurance fell by 10,000 last week, to 340,000 from 350,000 the week before. Though it's the third straight week that claims have dropped, the number of applications is still within a range that signals a sluggish labor market. The unemployment rate at 7.2% is almost certain to climb in October because of the government shutdown. The jobless rate includes workers who are temporarily laid off from their jobs, even if they eventually get paid for time missed. As a result, the unemployment rate in October will include furloughed government workers as well as private-sector employees laid off by companies that rely heavily on federal contracts. The unemployment rate could jump up to 7.5%. The number of net jobs created, however, might not be affected nearly as much. That number is derived from a separate Labor Department survey of businesses about how many people they hired in a month.

The unemployment rate in the 17-nation eurozone remained unchanged in September at a record high of 12.2 percent. The number of unemployed rose by 60,000 to 19.45 million. The jobless rate for those aged under 25 edged up to 24.1 percent from 24 percent in August. The unemployment rate for the wider 28-nation European Union remained unchanged at 11 percent.

 Figures on government spending and debt were released today. The government's fiscal year runs Oct. 1 through Sept. 30. Total public debt subject to limit was $17.043 Trillion. The deficit through August dropped to $755 billion.

Settlement talks between the Justice Department and JPMorgan are in danger of breaking down over the bank’s demands that it avoid future criminal charges and that another government agency pay some of the $13 billion price tag.

Federal prosecutors have been working with JPMorgan for months to resolve allegations that the bank knowingly sold securities made up of low-quality mortgages in the lead-up to the financial crisis. As of last week, the nation’s largest bank had agreed to a tentaive $13 billion settlement that would expunge multiple government probes. Details of the agreement were being hashed out, but now the sides have reached an impasse.

Attorneys for JPMorgan proposed a deal that would give the bank protection from future criminal investigation. Federal prosecutors assumed that aspect of the deal was settled and were bothered when attorneys asked that the bank be released from future criminal prosecution. There also remains a standoff over whether JPMorgan or the Federal Deposit Insurance Corp. is responsible for losses on mortgage securities issued by Washington Mutual, the failed bank that JPMorgan bought out of receivership for $1.9 billion in 2008. Some of those securities are a part of the complaints that JPMorgan is trying to resolve in its settlement with the Justice Department.

Have your ever heard of the push-out provision? It's a little known provision in the Dodd Frank reforms, and the bank lobbyists have killed it, and lawmakers came together in bipartisan unity to bury it. The idea behind the push-out provision is that the banks would have to separate their swaps trading units from the main bank, where funds are FDIC insured. So, now that the lobbyists have killed the push-out provision, they can gamble in derivatives trading using insured deposits.

Now, if you're wondering why or if this is significant, just look at Cyprus, or if you want to get a bit closer, look at Detroit. Both pensioners and bond holders argue they should have priority in claiming a stake in the city's assets in the bankruptcy process. However, a different class of creditor has legally senior status. Holders of financial derivatives enjoy super-priority in bankruptcy, thank to changes in the bankruptcy law of 2005; they are not subject to the ‘automatic stay’ provision intended to prevent a disorderly grab for collateral by competing creditors. They can press their claim immediately, prior to bankruptcy proceedings and therefore before claims by competing creditors are considered. This may potentially leave nothing for other creditors to divide during subsequent proceedings.

The latest court proceeding in Detroit was to determine if retired city workers might get 16 cents on the dollar, even though the Michigan constitution contains a provision which bans any action to cut pension benefits of public employees, or whether the federal bankruptcy code trumps the state constitution. And if you think Detroit is the only city with these kinds of problems, think again. And if you think it only applies to retirement plans, remember what I just told you about the push-out provision. That's right, the super-priority position of financial derivatives also applies to your FDIC insured bank account.

Bill Gross, the billionaire founder and chief investment officer of Pacific Investment Management Co., also known as PIMCO, writes an investment outlook; kind of a regular newsletter that he posts on the website. The latest from Bill Gross is a bit of a surprise. He says wealthy people need to stop whining about the taxes they pay, realize their success is mostly dumb luck and pay even higher taxes to help the less fortunate. Gross writes in his latest monthly missive, entitled "Scrooge McDucks,": "Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off." It's a Halloween miracle. 

And he continues: “Admit that you, and I and others in the magnificent '1%' grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living.”

And Gross suggests the soaring income inequality of the past few decades is a serious problem for the entire US economy: “Developed economies work best when inequality of incomes are at a minimum. Right now, the U.S. ranks 16th on a Gini coefficient for developed countries, barely ahead of Spain and Greece. By reducing the 20% of national income that “golden scrooges” now earn, by implementing more equitable tax reform that equalizes capital gains, carried interest and nominal income tax rates, we might move up the list to challenge more productive economies such as Germany and Canada.

“I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make.”

Gross notes that the 1 percent now take up 20 percent of U.S. income, up from 10 percent in the 1970s -- a fact he attributes at least partly to the massive tax cuts for the wealthy enacted by Presidents Ronald Reagan and George W. Bush.

Gross also points out that the wealthy have gotten all of the benefit of the explosive rise of the financial sector over the past several decades, along with a 30-year decline in interest rates. Together, these two factors lined the pockets of the wealthy, but left everybody else behind. And Gross offered a policy prescription: “If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing ‘capital’ at lower rates than ‘labor’ should now end.”

And then Gross takes a shot at Carl Icahn, and probably quite a few other captains of industry by adding: “If X can’t grow revenues any more, if X company’s stock has only gone up because of expense cutting and stock buybacks, what does that say about the U.S. or many other global economies? Has our prosperity been based on money printing, credit expansion and cost cutting, instead of honest-to-goodness investment in the real economy?”