Thursday, December 12, 2013 - Three Strikes

Three Strikes

by Sinclair Noe

DOW – 104 = 15,739
SPX – 6 = 1775
NAS – 5 = 3998
10 YR YLD + .03 = 2.88%
OIL - .06 = 97.38
GOLD – 27.10 = 1226.20
SILV - .81 = 19.60

Stocks down for a third day in a row, and except for that big gain on the news of the monthly jobs report, this has been a nasty start to December. Weekly jobless claims jumped to 368,00 from 300,000 the week before. Overall retail sales climbed a seasonally adjusted 0.7% last month, the most since June.  Auto sales jumped 1.8% in November, the most since June. Meanwhile, there were drops in retail sales of 0.2% for clothing and accessories stores, and 1.1% at gasoline stations. Online and other non-store retailers saw sales rise 2.2% in November, the most since July 2012. Over the past year, retail sales have grown 4.7%. Inventories at US businesses rose 0.7% in October. Maybe businesses are expecting a great holiday shopping season but it isn't looking good.

Neither the jobless claims nor the retail sales will move the Fed’s current position on tapering. Markets have been focused on the timing and the slope of Fed bond-buying tapering and not on anything else. Most likely, the Fed will meet next week and not taper, but they will likely communicate clearly their intent to taper.

The just agreed 2014-2015 US budget deal faces a crucial test today when the House of Representatives votes on the bill, with Speaker John Boehner urging skeptical conservatives to back it. The agreement sealed between top Democratic and Republican negotiators is seen as a chance to end the brutal cycle of fiscal crises that have plagued Washington in recent years. The legislation, which sets spending caps at $1.012 trillion for 2014 and $1.014 trillion for 2015, and repeals billions in a package of arbitrary cuts known as sequestration, appears likely to pass the Republican-led House. It would then go to the Senate for a vote, likely next week before the chamber adjourns for the year-end holiday.

Pemex is the pride of Mexico. Part of the reason may be that it is ubiquitous. Every gas station in Mexico has the green and white sign of the state owned oil company. When all else failed, Pemex was the economic lifeblood of the Mexican government. Today, the Mexican Congress passed legislation  declaring that Mexico still owns its oil, but allowing private companies to drill for oil and natural gas in partnership with Pemex, or on their own, returning international oil companies to territory they were kicked out of 75 years ago.

The stated goal is to stimulate Mexico’s sliding oil production and vault the country into the developed world by tapping vast pockets of oil and natural gas deep under the earth and sea. Foreign oil companies have long been eager to gain access to Mexico’s oil and have quietly lobbied the government to open up for years, while Pemex is known for inefficiency at best, and corruption at worst. Mexico’s oil production has declined by 25 percent from its 2004 peak, to just over 2.5 million barrels a day. Pemex is spending more to pump less: investment has more than doubled in the same period to more than $20 billion a year. It may not be the best run oil company but Mexicans tend to consider it their oil company. In a country where controlling oil is often equated with sovereignty and national pride, the plan has set off furious debate.

And it's just part of a bigger plan. President Pena Nieto is also pushing to break up telecommunication monopolies, raise taxes and weaken the teachers union grip on faltering public schools. Two decades after Mexico sold off banks and the telephone monopoly, Mexicans pay more for credit and phones service than other Latin Americans, and they suspect they will pay more for gas under the new law, too.

Five years ago, Bernie Madoff was arrested in New York for running a Ponzi scheme. Madoff's banker was JPMorgan. Federal authorities suspect JPMorgan continued to serve as Madoff’s primary bank even as questions mounted about his operation, with one bank executive acknowledging before the arrest that Madoff’s “Oz-like signals” were “too difficult to ignore.” And so now, the authorities are going after JPMorgan; apparently close to a settlement that would involve about $2 billion in penalties and criminal action, or what passes as criminal action in the world of Wall Street bankers.

The government would use a chunk of the money, probably less than half to compensate Madoff's victims. The settlement would include a deferred prosecution agreement, which would list the bank’s criminal violations in a court filing but stop short of an indictment as long as JPMorgan pays the penalties and acknowledges the facts of the government’s case. The deferred prosecution agreement is expected to fault JPMorgan for a “programmatic violation” of the Bank Secrecy Act, which requires banks to maintain internal controls against money laundering and to report suspicious transactions to the authorities. And just to be clear, this case involves money laundering by JPMorgan.

The government has been reluctant to bring criminal charges against large corporations, fearing that such an action could imperil a company and throw innocent employees out of work. Those fears trace to the indictment of Enron's accounting firm, Arthur Andersen, which went out of businesses after its 2002 conviction, taking 28,000 jobs with it. Ever since, prosecutors have increasingly relied on deferred prosecution agreements, which is a slap on the wrist and allows the bank to continue, as long as they don't continue with their illegal activities. So the basic idea is that JPMorgan can break the law, pay off the government and promise not to do it again. Prosecutors insist that no one is too big to indict or too big to jail. It will be interesting to see if JPMorgan can indeed clean up its business and manage to stop breaking the law; and if they can't keep their nose clean, it'll be interesting to see if the prosecutors actually have the fortitude to enforce the law.

Two years ago JPMorgan entered an “non-prosecution agreement” to settle antitrust charges. I'm sure there is some sort of fine distinction between a “non-prosecution agreement” and a “deferred-prosecution agreement” but they sound similar; no criminal charges as long as they kept to the straight and narrow for 2 years. Then there was that problem of manipulating electricity markets between 2010 and 2012. The head of their commodities trading division, Blythe Masters, was accused of making false and misleading statements to federal energy regulators. No criminal charges were filed.

Pope Francis is at it again. Francis, who was named Time magazine's Person of the Year on Wednesday, has urged his own Church to be more fair, frugal and less pompous and to be closer to the poor and suffering. A couple of weeks ago he published an apostolic exhortation title, The Joy of the Gospel, where he attacked unfettered capitalism, as “a new tyranny” and  condemned the "idolatry of money".

Now in a new message for the Roman Catholic Church's World Day of Peace, marked around the world on Jan. 1, he also called for sharing of wealth and for nations to shrink the gap between rich and poor, more of whom are getting only "crumbs". And he says that huge salaries and bonuses are  symptoms of an economy based on greed and inequality.

Titled "Fraternity, the Foundation and Pathway to Peace", the message also attacked injustice, human trafficking, organized crime and the weapons trade as obstacles to peace.

Francis said many places in the world were seeing a "serious rise" in inequality between people living side by side. He attacked the "widening gap between those who have more and those who must be content with the crumbs", calling on governments to implement "effective policies" to guarantee people's fundamental rights, including access to capital, services, educational resources, healthcare and technology. The Pope says: "The grave financial and economic crises of the present time ... have pushed man to seek satisfaction, happiness and security in consumption and earnings out of all proportion to the principles of a sound economy."

I'm going to take a little vacation time over the next couple of weeks. Don't worry, I'll continue to update the blog on a kind of regular basis.