Wednesday, October 23, 2013 - Rally Fizzles

Rally Fizzles

by Sinclair Noe

DOW – 54 = 15,413
SPX - 8 = 1746
NAS – 22 = 3907
10 YR YLD - .03 = 2.48%
OIL – 1.05 = 97.25
GOLD – 7.50 = 1334.70
SILV - .15 = 22.66

So, after a five day rally we finally got the fizzle. The markets don't go straight up and the market had run quite a bit. The S&P 500 advanced 23 percent this year through yesterday, pulling within a half percentage point of the 23.5 percent gain in 2009. The S&P 500 was valued at 15.9 times estimated earnings as of yesterday, the highest since December 2009. While that’s up 16 percent this year and starting to feel a bit frothy, it’s still below the multiples at the market’s two previous peaks, when the ratio reached 16.5 in October 2007 and 25.7 in March 2000. Of the 169 S&P 500 companies that have reported results this season, 76 percent exceeded analysts’ predictions for profit, while 54 percent beat sales estimates.

And 87% of stocks in the S&P 500 traded above their average prices from the past 50 days. Today, though 7 out of 10 main industries in the S&P 500 declined, with commodity, consumer-discretionary and financial companies dropping at least 0.6 percent to lead the retreat.

Treasury yields fell to their lowest in three months on more bets that the Federal Reserve will maintain its stimulus efforts until next year. The Fed is kind of handcuffed from doing any tapering; the consensus is pushing it out to March. The weak jobs number supports it.

If you're looking for health insurance at healthcare.gov, don't despair. Help might be on the way. Republicans on the House Committee on Energy and Commerce have asked John McAfee to review the HealthCare.gov website. McAfee created the McAfee Anti-virus software company that bears his name. He sold that a few years back. House Committee on Energy and Commerce counsel Sean Hayes wrote to McAfee’s lawyer on Oct. 14. “For three years we have been monitoring the implementation of the law and have been trying to dig into what has happened with the Exchange rollout. Given the failures of Healthcare.gov, and Mr. McAfee’s expertise, I was hoping he might be able to discuss his views with staff on the hill.” McAfee declined to provide assistance. The back story on McAfee involves fugitive flight from a home in Belize following the death of a neighbor, deportation from Guatemala to the US, and some very bizarre behavior. He hasn't been indicted in the US. Meanwhile, or next best hope is that Edward Snowden decides to come home from Russia; don't hold your breath.

There was a strange phone call today; I'm sure it was somewhat awkward. The German government has obtained information that the United States may have monitored the mobile phone of Chancellor Angela Merkel and today Merkel called President Barack Obama to demand an immediate clarification. A spokesman for Merkel said she told Obama that if such surveillance had taken place it would represent a "grave breach of trust" between close allies. "She made clear that she views such practices, if proven true, as completely unacceptable and condemns them unequivocally," the statement read.

White House spokesman Jay Carney, responding to the news in Washington, said Obama had assured Merkel that the United States "is not monitoring and will not monitor" the communications of the chancellor.

The news broke as Secretary of State John Kerry, on a visit to Rome, faced fresh questions about mass spying on European allies, based on revelations from Edward Snowden, the fugitive former US intelligence operative granted asylum in Russia.

French President Francois Hollande is pressing for the US spying issue to be put on the agenda of a summit of European leaders starting on Thursday. He also called Obama earlier this week after French newspaper Le Monde reported that the National Security Agency (NSA) had collected tens of thousands of French phone records in a single month between December 2012 and January 2013. The paper said NSA appeared to be targeting people tied to French business and politics as well as individuals suspected of links to terrorism.

Merkel is not the only foreign leader whose personal communications may have been monitored by the United States. Last month Brazilian President Dilma Rousseff called off plans for an October state visit to Washington because of similar revelations.

We can tap phone calls around the world but we can't figure out how to sell health insurance on a website; go figure.

The Securities and Exchange Commission voted unanimously to propose rules that, for the first time, would allow investors to buy stock in companies over the Internet using a crowdfunding exchange. These rules could reinvent the way that companies raise money by allowing them to bypass the traditional costs of going public, which usually involved hiring costly investment bankers and accountants.

The SEC's vote on so-called equity crowdfunding is in direct response to Title III of the JOBS Act, passed last year, in which Congress is looking for a loophole to allow smaller companies to get an exemption from the strict rules controlling the sale of securities to individuals. Congress is hoping that by using Internet crowdfunding, small and promising companies could gather capital needed to grow and expand from a wide pool of investors. These companies could, in theory, raise money they need to grow well before they could afford the relatively high costs of a traditional initial public offering.

The rules would create a new financial entity, called a funding portal, which would be a Web site that would electronically connect investors with young companies looking to raise money. The SEC's approval is needed since such sites are banned today in order to protect investors. Currently, such Web sites would need to be registered with the SEC as a broker, giving the SEC power to oversee the entity. Furthermore, such private sales could only be offered to "accredited investors," or wealthy investors savvy enough to know the risks. The companies selling stock through portals would also face restrictions. Companies would have to disclose details on any investors or officers owning 20% or more of the company. Financial statements of the company's operating history plus a tax return, not to mention details about certain financial dealings between officers and outside companies would need to be disclosed.

Crowdfunding has drawn wide interest because it will be open to any investor regardless of their income or net worth. Under the proposal, crowdfunding must be done online through an entity that provides investors with forums to ask questions and communicate about a deal. All investors, not just the so-called accredited investors, will have the opportunity to invest in entrepreneurs and their ideas at an earlier stage than ever before. 

Businesses using crowdfunding could raise no more than $5,000 a year from someone whose income or net worth is less than $100,000. Investors with income or net worth greater than $100,000 could contribute as much as 10 percent of their annual income or net worth, to a maximum of $100,000 in one year. The proposal doesn’t require businesses or funding portals engaged in crowdfunding to verify compliance with those restrictions. Instead, a crowdfunding portal must ask investors to disclose their income or net worth as a means of determining compliance.

Even after the SEC vote, equity crowdfunding doesn't become a reality. There will be a 90-day period for the public to issue comments. The SEC will then review those comments and make a final determination.  The process of approving crowdfunding has taken much longer than most expected as the regulator balances the need to help companies raise capital, but protect investors from scams.

Meanwhile, a federal jury in New York today found Bank of America's Countrywide unit liable for defrauding Fannie Me and Freddie Mac by selling them thousands of defective loans. The jury also found Countrywide executive Rebecca Mairone liable for fraud. District Judge Jed Rakoff, who presided over the trial, told lawyers he will determine the amount of any civil penalty later. The government is seeking a penalty more than $848 million, considered the gross loss to Fannie Mae and Freddie Mac. Alternatively, the government argues the penalty should be more than $131 million, the estimated net loss.

After the jury left, Rakoff listened to arguments on whether he should consider the net loss or gross loss when deciding the penalty. He also ordered both sides to submit written arguments on whether there is a cap on the penalties he can impose.

This goes back to a 2007 Countrywide program called the High Speed Swim Lane, or HSSL, which later became known as the “Hustle”; a fast track program for subprime loans. What makes this unique is that this is the first case by the government against a bank over bad mortgages to go to trial. Before the Hustle Case, everything else was swept under the rug or settled without trial. This is the first trial – and Bank of America lost.

We've talked and will continue to talk about the tentative $13 billion settlement between JPMorgan and the Department of Justice. Now comes word JPMorgan is in settlement talks with the bonds’ buyers who are seeking at least $5.75 billion. A group of investors including asset managers Blackrock and Neuberger Berman Group has been negotiating with the bank during the past year to recoup losses incurred when underlying loans soured. This is still in the talking stage and an agreement isn’t imminent and the amount may change.