Monday, August 25, 2014 - Tax Weasels

Tax Weasels
by Sinclair Noe

DOW + 75 = 17,076
SPX + 9 = 1997.92 (record)
NAS + 18 = 4557
10 YR YLD - .02 = 2.38%
OIL - .27 = 93.38
GOLD – 4.60 = 1277.20
SILV - .05 = 19.45

The S&P 500 crossed above 2000 intraday, closing off the high for the day, but still closing in record territory. We recognize it but we don’t have a big celebration. It’s just a number, a nice big round number. For reference, the S&P 500 topped 1,000 back in February 1998.

Economic data today includes:

Sales of new single family homes dropped for a second month in June. New home sales slipped 2.4%, but data from the past 3 months was revised to show 33,000 more new homes were sold than previously reported. The median sales price increased 2.9% from a year ago. At July’s sales pace it would take 6.0 months to clear the supply of houses on the market, the highest since October 2011. Tomorrow, we’ll see the latest data on existing home sales from S&P/Case-Shiller.

Separately, financial data firm Markit said its preliminary services Purchasing Managers Index dipped to 58.5 this month from 60.8 in July.A reading above 50 indicates expansion.

Last Friday ECB President Mario Draghi delivered the luncheon speech at the Jackson Hole Symposium; Draghi said the ECB had done all it could for now and the governments of the EU needed to step up. Today a survey was published from the National Association for Business Economics and the conclusions show most economists surveyed think the Federal Reserve’s monetary policy is on track but the US needs to enact structural policies in order to stimulate stronger economic growth.  The Fed’s expansionary monetary policy has been at odds with a sharply restrictive fiscal stance that saw budget deficits declining from 11% of GDP in 2009 to less than 3% this year.

Economists overwhelmingly expect the Federal Reserve to hold off raising short-term interest rates until at least 2015. But nearly a third say doing so would mean the central bank waited too long. While many economists appear at ease with the “steady-as-she-goes perspective” from the Fed, “almost 40% say the stimulus policies are no longer necessary and should be curtailed or sunset.” On other topics, business economists say immigration reform is one of their top priorities, and the US needs to let more immigrants in. Meanwhile, the economists surveyed support the idea of lifting the ban on exports of US-produced crude oil and nat gas. The industry is pushing for the right to export more fuel overseas to ease the threat of overproduction, a move that could also help reduce the US trade deficit. The White House moved this summer to loosen restrictions on crude exports, but an outright end to the ban faces higher hurdles, and would require Congressional approval.

A new academic paper from economists from the University of Chicago and the University of Maryland suggest the weakness in employment is not just a result of the Great Recession, but a longer-term structural change in the economy; the share of Americans with jobs has declined because the labor market has stagnated in recent decades; fewer startups creating new jobs; fewer people losing or leaving jobs, fewer people landing new ones. This suggests the US has been headed to higher unemployment even before the financial crisis, and even if we add jobs, we still have problems that can’t be overcome by Federal Reserve monetary policy alone. The paper says that a 1 percentage point decline in the churning of the labor market lowers the employment rate by 0.77 of a percentage point, a huge effect.

It’s Monday, and so we have some mergers to cover. The Swiss drug maker Roche agreed to buy InterMune for $8.3 billion. InterMune is based in California; it has one drug called pirfenidone to treat idiopathic pulmonary fibrosis, a fatal scarring of the lungs. It is licensed to sell the drug in Europe, and hopes to get approval in the US later this year. About $87 billion in pharmaceutical acquisitions were made in the first half of this year, eclipsing the total for all of 2013.

If you are Canadian or have ever been to Canada or know Canadians, then you probably know Tim Hortons; it’s a chain of coffee and donut shops; kind of like Starbucks but the coffee is actually good. And it may be the new home of the Whopper. Burger King wants to buy Tim Hortons. If completed, the deal would mean Burger King’s corporate headquarters would move to Canada, where it would qualify for a corporate inversion, with the idea of lowering Burger King’s corporate tax bill. The actual headquarters and the executives go nowhere, but the nominal address changes so the company can avoid US tax rates. Burger King says the deal is not about the taxes, but about the coffee, and the fast food breakfast business. Coffee may be an especially important attraction for Burger King and its majority owner, the Brazilian investment firm 3G Capital. In Tim Hortons, Burger King would be getting a restaurant chain that is essentially synonymous with coffee in Canada. Yea, that’s the reason; it’s the coffee, not the taxes; or maybe they’re trying to create a new donut-burger. Yea, that’s it. They’re just trying to compete with waffle tacos and sausage pancakes.

With the 15% nominal rate in Canada, this is absolutely a move about taxes; rooted in the lie that American corporations pay the highest tax rates in the world, which is not true when you consider the effective rates rather than nominal rates. When it comes to effective rates, what corporations actually pay, the US ranks 17^th out of 27 developed countries. Walgreens recently scrapped an inversion deal because of public blowback. Once one of these brands pulls off an inversion deal without blowback that actually hurts sales, it will be a run for the exits.

There are so many companies trying to weasel out of taxes that the inversion trend is the hot new thing on Wall Street, so hot that JPMorgan is backing a new online broker that has bundled up 25 companies seen as inversion targets. The basket of companies is called the Tax Inversion Targets, or TIT; I am not making this up. Count on JPMorgan to go for the most weasely product and then tack on a bit of tacky.

Late Friday, Goldman Sachs agreed to buy back $3.15 billion in mortgage bonds from Fannie Mae and Freddie Mac to end a lawsuit filed in 2011 by the Federal Housing Finance Agency. The FHFA accused Goldman of dumping low-quality mortgage bonds during the run-up to the financial crisis. Goldman is not paying a penalty, but it is estimated the bonds are worth only about $2 billion today. Last month, lawyers for the FHFA presented evidence showing that Goldman was aware of weakness in the subprime mortgage market but did not pass that info to clients buying subprime bonds, even as Goldman was shorting the bonds. Just to be clear, Goldman was selling the bonds and simultaneously betting the bonds would fail.

AP is reporting that a column of Russian tanks and armored cars crossed into Ukraine’s far southeast, which is away from the fighting that has been taking place. The markets have been worried about a Russian invasion of Ukraine; now it looks like it is happening, and the markets seem to discount it.

ISIS, has been fighting in Iraq, and even though US airstrikes are inflicting damage, they are still entrenched. Meanwhile, they have taken over a key government airbase in Syria. BBC says government forces evacuated the airbase. Syrian state television confirmed that government troops had lost control of the base. The US has not been targeting airstrikes against ISIS in Syria.

Twice in the last seven days, Egypt and the United Arab Emirates have secretly teamed up to launch airstrikes against Islamist-allied militias battling for control of Tripoli, Libya. Responsibility for the airstrikes was initially a mystery. After the first set, several American officials initially said that signs pointed to the United Arab Emirates, but clearly American intelligence was surprised.

Workers are assessing quake damage and starting to clean up after a 6.0 magnitude quake in Napa California; it was the strongest quake in the San Francisco area in 25 years. Approximately 172 people were treated for mainly minor injuries; two people had serious injuries; no deaths have been reported. Several building were badly damaged and a mobile home park caught fire. The biggest economic damage may come to wineries.

Meanwhile, a large 6.9-magnitude earthquake has struck a sparsely populated area of central Peru. There were no immediate reports of damage or injuries, and authorities were still surveying the region.

Hackers again showed how powerful electronic attacks can be when they forced Sony's PlayStation Network and Blizzard's Battle.net offline over the weekend. The same group responsible for shutting down the gaming platforms, which calls itself the Lizard Squad, also claimed credit for sending a bomb threat via Twitter that grounded a plane carrying Sony Online Entertainment president John Smedley. The plane was traveling from Dallas to San Diego but was diverted to Phoenix. No bomb was found.

Earlier this month, the computer systems at 51 UPS stores were found to have been infected with malware that could potentially allow criminals to gain access to consumer data. The FBI says that up to 1,000 retailers could have malicious software on their sales systems, potentially exposing sensitive information to identity theft and financial fraud.

And that raises the question of why companies continue to get hacked? The most probable answer is that corporate executives just don’t want to spend the money on security because they consider it a cost without a financial benefit; at least until after the fact.

And finally, John Sperling has died at the age of 93. Back in 1978, Sperling founded the University of Phoenix. The University of Phoenix has a presence in 38 states and in Puerto Rico, and at one point touted 242,000 students, although that number has significantly dropped. Sperling became a billionaire, and he used his wealth on several philanthropic projects, including research into seawater agriculture and anti-aging medicine. He was also an outspoken critic of the government's war on drugs, advocating for treatment instead of criminalization.

Wednesday, July 02, 2014 - Milk and Cookie Binge

Milk and Cookie Binge
by Sinclair Noe 

DOW + 20 = 16,976
SPX + 1 = 1974
NAS – 0.92 = 4457
10 YR YLD + .07 = 2.63%
OIL – 1.18 = 104.16
GOLD + 1.10 = 1328.20
SILV + .18 = 21.25

Record highs for the Dow and the S&P 500. We celebrate with milk and cookies. It’s good, it’s wholesome.

Unlike Goldman Sachs, which apparently likes to celebrate with binge drinking at strip clubs; at least that’s the accusation by 2 former Goldman employees suing Goldman for discrimination against women. Support for their claims includes statements of former Goldman Sachs employees, expert statistical analyses and evidence on earnings and promotions from the firm’s own records. According to filings with the court, female vice presidents earned 21 percent less than men and female associates made 8 percent less, the former employees claimed; about 23 percent fewer female vice presidents were promoted to managing director of the bank relative to their male counterparts.

We’ll stick with milk and cookies.

Tomorrow we’ll get the monthly jobs report, one day early due to the holiday shortened weekend. Today we got the ADP Employment Report showing private nonfarm payrolls increase 281,000 in June. That’s the best ADP report since the fall of 2012. That would be a very good number indeed if it translates to the government report tomorrow. The ADP report should not be used as a predictor of the government jobs report. Both reports tend to move in the same direction in the long term, but month to month fluctuations can be quite pronounced. It is expected tomorrow’s report will show 215,000 net new jobs in June.

Here’s another indicator; the ISM manufacturing employment index was unchanged in June at 52.8%; the historical correlation between the ISM employment index and the BLS employment report suggest the economy lost about 5,000 manufacturing jobs in June; the ADP report showed the economy added 12,000 manufacturing jobs last month.

The best way to boost the economy is to have more people working, which then equates to more people spending. Even though the unemployment rate has dropped to 6.3%, that’s still high; and long term unemployment is still a problem, and indicates there is still slack in the labor market. Just as important as the number of jobs created is the quality of the jobs created. For several years, the trend has been for lower paying jobs, where wages are below the average of $24.38 an hour. There has been some improvement this year, with 61% of the 1.07 million new jobs in 2014 paying above the average hourly wage. So, keep an eye on wage growth in tomorrow’s report; it will be a critical component in overall GDP growth.

So, as we wait for the jobs report, we are left to question whether the economic recovery is really gaining traction. Dr. Copper says yes. Copper closed at its highest price in more than 4 months. Copper for September delivery gained 6 cents, or 1.9 percent, to settle at $3.27 a pound. Since copper is an industrial metal used in everything from buildings to cars, it’s considered a good economic indicator, however it might be a better indicator of growth in China, the world’s largest buyer  of copper.

Federal Reserve chairwoman Janet Yellen delivered a speech to the International Monetary Fund and she says the Fed has the right focus on jobs and inflation, and should leave stability concerns to regulation. Many economists and investors are concerned the Fed’s policies have fostered potential financial asset bubbles. Yellen said today: “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

Yellen said she saw pockets of increased risk-taking across the financial system that could warrant a more "robust macroprudential approach" if those concerns grew.

BNP agreed on Monday to pay almost $9 billion while admitting criminal violations of United States sanctions. BNP admitted to funneling and hiding some $30 billion in transactions to Iran, Sudan, and Cuba. The bank will also be barred from clearing any financial transactions in dollars for a year starting in January. Credit Suisse and a subsidiary of UBS also pleaded guilty recently to tax avoidance and interest-rate rigging, respectively. JPMorgan Chase, Bank of America and other United States banks have paid billions of dollars in penalties but have, so far, avoided criminal liability. The French government says that’s not fair.

And while it might be easy to dismiss the French for whining, they are correct. New research suggests that overseas firms like BNP Paribas do in fact pay bigger fines and plead guilty more often than United States companies. United States criminal fines from 2001 to 2010 were about five times greater on average for foreign firms than for their American counterparts. The average penalty was 22 times bigger for foreign companies after adjusting for the type of crime and whether the company was listed. One reason may be that prosecutors single out only the most serious cases abroad. Another reason might be because prosecutors are afraid of hurting a domestic business. Another reason might be that prosecutors are spineless wimps in the face of the political clout of US banks.

What we have learned is that businesses and investors don’t seem to care about the criminal convictions of Credit Suisse and BNP and that might signal that if a conviction will not shut down the company, then there’s no reason not to convict, international or domestic.

Yesterday we told you about that creepy experiment by Facebook, designed to make you feel good or bad by filtering out good or bad content. Facebook faces a government investigation in Europe over its study of whether manipulating people's news feeds could change their emotions. Facebook won't be helped by the fact that the company didn't alter its terms of service to disclose to users that their posts would be used for research until four months after the experiment took place.

The implementation of the European Union's so-called "right to be forgotten" policy is already having a worrying impact on the media, with at least two outlets revealing on Wednesday that links to articles of theirs have been scrubbed from Google. A European court ruled in May that Google must remove links to articles from its search engine if the subjects of the post asked it to. The court specified that links could be scrubbed if they were "inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed."

When the ruling came down, some worried that it would place too much power in the hands of public figures who wished to have unflattering information about themselves hidden. On Wednesday, the Guardian and the BBC both disclosed that just such an occurrence seemed to have taken place with stories of theirs. The Guardian case involved 6 articles that were taken down from Google’s European platforms. The BBC case involved Stan O’Neal, the former head of Merrill Lynch, implicated in the subprime mortgage scandal. Is the data in the BBC report "inadequate, irrelevant or no longer relevant"? Hmm.

Solar installers SolarCity and SunRun have filed a lawsuit against Arizona’s revenue department over the state’s decision to apply property taxes to third-party solar-power systems. SolarCity and SunRun have popularized leasing, rather than owning, residential rooftop systems. The companies install and maintain the systems in return for monthly payments that are generally less than a homeowner’s monthly power bill. 

Arizona’s revenue department last year decided to tax leased solar panels, resulting in $152 extra in property taxes for the first year of a homeowner’s leased $34,000 solar panel array, a charge that would decrease as the value of the array goes down; still it’s a large enough increase to wipe out most or all of the savings from going solar. Until last year, both owners and leasers of solar panels didn’t have to pay property taxes. There are concerns that applying taxes on systems would wipe out the savings from solar leasing and stunt solar-power growth in Arizona.

Thursday, May 01, 2014 - If the Cops Never Arrest the Killer, Nobody Really Died

If the Cops Never Arrest the Killer, Nobody Really Died

by Sinclair Noe

DOW – 21 = 16,558
SPX – 0.27 = 1883
NAS + 12 = 4127
10 YR YLD - .04 = 2.60%
OIL - .39 = 99.35
GOLD – 6.40 = 1285.90
SILV - .13 = 19.12

No record high for the Dow today. The Industrial Average was up and down, up and down throughout the day, but couldn’t hold positive territory. Today’s economic reports showed consumer spending increased, as did manufacturing activity, and unemployment claims.

Consumer spending increased 0.9 percent in March after rising by 0.5 percent in February, the largest gain in more than 4-1/2 years. The top 6 automakers backed up the spending report by reporting year over year gains in sales. The spending report supports the notion that cold weather just paused consumer activity and there is pent up demand that will lead to more economic activity in the second quarter. Income increased 0.5 percent in March, the biggest gain since last summer, but with spending outpacing income growth, the saving rate, which is the percentage of disposable income households are socking away, hit a 14-month low.

The Institute for Supply Management said its manufacturing index of national factory activity rose to 54.9 last month, up from 53.7 in March. A reading above 50 indicates expansion in the nation's factories. Manufacturing activity has now accelerated for 3 consecutive months and last month's gains were driven by a pickup in employment, export orders and inventories; although new orders were unchanged.

The Labor Department reports initial claims for state unemployment benefits increased 14,000 to a seasonally adjusted 344,000. Tomorrow morning we’ll get the monthly nonfarm payrolls report; look for 210,000 net new jobs in April and the unemployment rate to dip to 6.6%. That wouldn’t be enough to lift the labor market out of the doldrums but it would be another small step in the right direction.

A couple of news articles caught my attention, one from the Murdoch Street Journal and the other from the NY Times. You are forgiven if you missed them; they deal with banksters, and fraud, and regulators who look the other way, hoping for a post-government job with a golden parachute, and prosecutors without spines.

The Journal story deals with the Swiss units of Goldman Sachs and Morgan Stanley, and how they’ve agreed to hand over potentially incriminating details about how they helped Americans evade taxes; in return the banks won’t face prosecution.  Goldman's Swiss private bank had about $12 billion in assets under supervision as of the end of last year. Morgan Stanley's Swiss private bank had $50.7 billion in assets under management as of last year. The other big US banks likely did the same things, but they haven’t worked out a deal just yet.

Goldman and Morgan Stanley figured out the playbook, and it appears to go something like this: Senior officers of the banks aid and abet tax fraud by wealthy American clients, fail to make legally required criminal referrals, fail to comply with subpoenas, and then demand immunity from prosecution. Department of Justice prosecutors pee their pants and cave in to a slap on the wrist deal. No senior banker or bank was prosecuted. No banker was sued civilly by the government. No banker had to pay back his bonus that he “earned” through fraud. And the tax cheats that they aided and abetted have plenty of time to cover their tracks and might get away scot free, because the banksters aren’t required to turn over the client lists.

Then I read a New York Times story that claims federal prosecutors are getting close to criminal charges against at least a couple of major banks: Credit Suisse, for offering tax shelters to Americans, and BNP Paribas for doing business with countries like Sudan and Iran that the US has placed under sanctions. Prosecutors in New York and Washington have apparently held talks with BNP about a guilty plea from the bank’s parent company. Ben Lawsky, New York’s top regulator reportedly plans to impose steep penalties against BNP and its employees but would not revoke the bank’s license. Prosecutors have secured similar assurances from the New York Fed.

The discussions between regulators and prosecutors and lawyers was obtained under the Freedom of Information Act, and they demonstrate that defense lawyers were pushing prosecutors not to act without assurances that regulators will keep a bank in business. The question of culpability seems fairly straightforward; BNP conducted its own internal investigation that identified significant volume of transactions that could be considered impermissible under sanctions in place between 2002 and 2009, including improperly routing money through its New York branches.

There doesn’t seem to be a big concern at BNP about the possibility of criminal convictions that might result in loss of the bank’s charter, much less worry over executives facing jail time. It’s as if the criminal acts were performed by ghosts or phantasms.  BNP has set aside $1.1 billion in legal reserves; they expect a fine; it’s the cost of doing business.

Of course this is nothing new; two years ago, HSBC escaped criminal charges for violating economic sanctions and what appeared to be clear cut money laundering. JPMorgan recently paid a $2 billion dollar fine for its role in assisting Bernie Madoff’s Ponzi scheme, without having to admit guilt. Of course no one goes to jail. Almost no one. In January, Kareem Serageldin, a mid-to-upper level executive for Credit Suisse (not a CEO or CFO) was sentenced to 30 months in prison for concealing hundreds of millions in losses in the bank’s mortgage backed securities portfolio. Why this guy ended up going to prison and not somebody from Lehman, Bear Stearns, AIG, Countrywide, Bank of America, Merrill Lynch, Citigroup, HSBC – go figure; there is no rhyme or reason beyond the notion that regulators and prosecutors are simpering little cowards.

It didn’t used to be this way. After the crash of 1929, the Pecora Hearings seized upon public outrage, and the head of the New York Stock Exchange landed in prison. When FDR took office he immediately announced a banking holiday and the bankers snapped to attention. After the savings-and-loan scandals of the 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks and S&Ls. In the late 90s and the turn of the century, when the tech bubble burst and revealed widespread corporate accounting scandals, top executives from WorldCom, Enron, Qwest and Tyco, among others, went to prison. And the accounting firm of Arthur Andersen was criminally convicted for its complicity in the fraudulent steaming scam that was Enron; Andersen went out of business in 2002; delivering pink slips to many good and decent accountants along with the pond scum. Since then prosecutors have walked lightly for fear of collateral damage.

Since then, the bankers realized they could act with impunity, and they have. There has been no crackdown following the meltdown of 2008. From 2004 to 2012, the Justice Department reached 242 deferred and nonprosecution agreements with corporations, compared with 26 in the previous 12 years. The idea behind a deferred prosecution agreement, or DPA, is that the banksters stop doing the illegal stuff and if they do any other illegal stuff, the deal is off the table, and prosecutors can come down with full weight for past and current wrongdoing. Instead, there is no follow-up. It’s like a criminal is released on parole, violates parole, violates parole again, and again, and again; and the courts turn a blind eye.

So, now, with the BNP and Credit Suisse cases, the prosecutors goal seems to be criminal prosecution without making the banks actually suffer the consequences of criminal charges. Prosecutors consider them test cases; BNP and Credit Suisse aren’t the biggest banks; prosecutors aren’t sure what would happen with criminal charges; they don’t really know what to expect if they actually get a criminal guilty plea. If they start small, it might mean the end of the BNP tennis tournament or it might mean 200-thousand pink slips for bank employees, or it might be the spark that ignites a financial panic. They overlook the slow, insidious, systemic rot of the foundations of all global financial transactions – trust. In the long run, that seems far more dangerous.

Attorney General Eric Holder has testified before the Senate “that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute, if we do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

The bank lawyers play on this fear; they claim bank clients -- including trustees, fiduciaries and pension funds -- could be forced to cut ties with a financial institution labeled a criminal enterprise.  Counterparties also might think twice before entering into billion-dollar transactions with such firms. Damaging a bank’s business could lead to broader fallout across the financial industry, just as Lehman’s collapse in 2008 prompted investors to withdraw from other firms on concern its exit would set off a wave of losses. Even the threat of criminal action must be handled in such a way as to not spook customers.  

It seems to be a spurious argument; akin to a doctor telling you that surgery to remove a cancerous tumor is dangerous and painful, so there is nothing to do but let the cancer overwhelm the host, curl up and wait to die. And then there is the more absurd part of the defense; the idea that pension funds would be forced to cut ties with criminal banksters; as if it is perfectly fine to have pension funds and trustees doing business with bankers involved in criminal activity, just so long as there are no official criminal charges. A complete denial of wrongdoing based upon a lack of enforcement. If the cops never arrest the killer, nobody really died. Yea, that’s it, pay no attention to the bloody corpse, pay no attention to the wreckage and devastation of the global financial meltdown; whistle past the graveyard.

You know the meltdown involved criminal wrongdoing; the regulators know it; the prosecutors know it. What they don’t seem to know is the collateral damage from non-enforcement and non-prosecution. Every action has a consequence, and non-action is a form of action.

Wednesday, April 16, 2014 - What is Really Plausible

What is Really Plausible

by Sinclair Noe

DOW + 162 = 16,424
SPX + 19 = 1862
NAS + 52 = 4086
10 YR YLD + .01 = 2.63%
OIL + .05 = 103.81
GOLD - .20 = 1303.20
SILV + .07 = 19.73

Let’s start with some earnings news and then we’ll move over to economic data.

Google posted $3.4 billion in net income, or $5.04 per share, in the three months ended March 31, compared to $3.3 billion, or $4.97 per share, in the year-ago period. Revenue rose 19% to $15.4 billion, but analysts had estimated $15.5 billion, and the shares were getting clobbered in late trades.

IBM reported its lowest quarterly revenue in five years; IBM reported revenue of $21.7 billion for the quarter, but that marks the eighth consecutive decline in quarterly revenue. The company has been restructuring its business by cutting jobs and selling its low-end server business. This is not what you would call a growth model.

Also, from the faulty business model file: Bank of America posted a $276 million loss for the most recent quarter. The financial results included a pre-tax expense of $6 billion, or approximately 40 cents a share after tax, to cover litigation costs as the bank moved to resolve mortgage-related litigation fallout from the financial crisis that began in 2007 and other issues; far worse than the $3.7 billion investors had braced for. The bank today agreed to a $584 million settlement of litigation over nine residential mortgage-backed securitizations insured by the Financial Guaranty Insurance Company. The FGIC said the securitizations were sponsored by Countrywide, which Bank of America bought in 2008.

Since the 2008-2009 financial crisis, Bank of America has logged some $50 billion of expenses for settlements of lawsuits and related legal costs, before taxes. Without those charges, its income before taxes would have been about three times higher. When does it end? How do you factor this when you try to value shares of a company? The simple answers: it ain’t over yet, and don’t even try.

In economic news: China reported that its economy grew at its slowest pace in 18 months at the start of 2014, but the increase was better than expected and showed some improvement in March.

From the Census Bureau: privately owned housing starts in March increased 2.8% from February to a seasonally adjusted annual rate of 946,000; single family housing starts increased 6% from the month before at an annual rate of 635,000. Building permits authorized were down 2.4% from February at a seasonally adjusted annual rate of 990,000, but it’s still 11.2% higher than March of last year.

The Federal Reserve reports industrial production increased 0.7% in March, following a 1.2% advance in February; for the first quarter industrial production moved up at a 4.4% pace. The increase in industrial production, which beat economists' expectations for a 0.5% gain, reflected in part a 0.5% rise in manufacturing output. There were also hefty increases in production at mines and utilities.

The Federal Reserve has just released its April Beige Book, a collection of anecdotes on economic conditions from business contacts across each of the 12 Fed districts. Economic growth increased and consumer spending rose, at least for people who weren’t completely snowed in. The Fed seemed quite fascinated with the weather, mentioning it more than 100 times; it’s like they had never seen snow before, and they seemed amazed that it makes actual work difficult for some people.  

Transportation, manufacturing, financial services, and auto sales all improved, though the reports on residential housing markets were “varied.” The Beige Book also talks of delays to crop plantings and shipments of commodities, as well as a pig virus that hurt hog farming. Labor market conditions continued to slowly improve with minimal wage pressure, and prices were generally stable or slightly higher.

Fed Chair Janet Yellen delivered a speech to the Economic Club in New York. She said the economy is improving, it will continue to improve, and by 2016 it will be normal, and then it will all be good. Yellen said: “I find this baseline outlook quite plausible.”

Yellen laid out 3 questions that will guide the Fed policymakers: Is there still significant “slack” in the labor market? Is inflation moving back toward 2 percent? What factors may push the recovery off track?

Is there still significant “slack” in the labor market? Why yes, yes there is. The unemployment rate is at 6.7% and Yellen would prefer to see it closer to 5.2% or 5.6% and she thinks it will take about 2 more years to get there. Further slack exists in the share of the workforce working part time and the long term unemployed and the low level of participation in the workforce. Toss in almost no wage pressure.

Is inflation moving back toward 2 percent? Yellen said inflation significantly persisting below 2% was more likely than inflation moving substantially above 2%. At the moment, the Fed’s favorite measure of inflation is less than 1%, well below the Fed’s annual inflation target of 2%.Inflation is likely to gradually move back toward the central bank’s target. Yellen said that to some extent, the low rate of inflation seems to be due to factors that are likely to be temporary, including lower consumer energy prices and a drop in import prices.

What factors may push the recovery off track?  Yellen says there can be a lot of ‘twists and turns’ in the economy” and the central bank has no “fixed idea” about what will come to pass. The Fed will try to set the course and Yellen said the central bank’s new forward guidance can serve as an “automatic stabilizer” that helps investors from overreacting to “twists and turns” the economy may take.

She cited the ongoing fiscal drag on the economy. This is a recurring theme; we heard Bernanke talking about this for a long time. Allow me to translate from Fedspeak to plain language. The Federal Reserve is responsible for monetary policy; Congress handles fiscal policy. So fiscal drag means that the policies laid out by Congress have hurt the economy. The Fed has tried to stimulate the economy, much like stepping on the accelerator while the Congress has been applying the brakes. That’s a bit simplistic because there are other factors at work. The Fed is stepping on the gas, the Congress is stepping on the brakes, and we’ve got rotten, ill-behaved bratty children in the back seat, reaching over and grabbing the steering wheel and threatening to drive into a brick wall; in this example, the bratty kids in the back seat are the banksters.

Just a little reminder of a story from the Summer of 2013; when we learned that Goldman Sachs was in the aluminum business. Goldman had 27 industrial warehouses in the Detroit area, where they stored aluminum. Goldman also had an interest in the financial markets for aluminum; they bet on price movement in the commodity; and they exploited pricing regulations set up by an overseas commodities exchange, which essentially allowed them to keep aluminum in storage longer than allowed, which keeps it off the market and out of production, which jacks up prices, based upon simple supply-demand, and then they bet on those higher prices. They literally had trucks moving aluminum from one warehouse to another, all around Detroit, but they wouldn’t ship it out for production. The move cost consumers more than $5 billion over the last 3 years.

The inflated aluminum pricing is just one way that Wall Street is flexing its financial muscle and capitalizing on loosened federal regulations to sway a variety of commodities markets. The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. Federal regulators were also looking at JPMorgan and 3 other banks for rigging electricity prices.

Using special exemptions granted by the Federal Reserve and relaxed regulations approved by Congress, the banks have bought huge swaths of infrastructure used to store commodities and deliver them to consumers. After hearing of all the abuses by the banks, some people thought it might be good to rethink these policies. And about 9 months have passed, and finally 2 senators, Sherrod Brown and Elizabeth Warren, have sent a letter to the Fed, suggesting that "As a general matter, [big banks] should be prohibited from owning physical assets like warehouses, pipelines, and tankers."

Aluminum prices have continued to rise not necessarily because the commodity has become more valuable or scarce, but simply because the wait times for physical delivery have steadily grown longer. In some cases, the wait has lasted more than a year. Meanwhile, commodity traders have come up with a unique solution to banks hold physical commodities in warehouses to manipulate prices. The London Metals Exchange will give traders the ability to hedge aluminum prices, as the commodity continues to rise due to lengthy delivery times that have thrown a wrench in a number of supply chains.

Here are a few facts for your consideration: roughly one-third of everything we buy goes to interest; the interest goes to private banks; at the height of the financial crisis over 40% of US corporate profits went to the financial industry, up from 7% in 1980. The simple reality is that I we could just get those crazy banksters under control, we would have at minimum a couple of trillion extra dollars floating through the economy, and we wouldn’t have to worry (as much)  about the Fed and Congress and monetary policy versus fiscal drag, and we would all be talking about the phenomenal economic recovery. And that is not only plausible, but that’s a fact.

Friday, March 21, 2014 - Friday Wrap-up

Friday Wrap-up

by Sinclair Noe

DOW – 28 = 16,302
SPX – 5 = 1866
NAS – 42 = 4276
10 YR YLD - .02 = 2.75%
OIL + .69 = 99.59
GOLD + 6.20 = 1335.70
SILV un = 20.38

The S&P 500 briefly climbed to a record high of 1,883.97, just over its previous record of 1,883.57. We hit resistance and didn’t break through. For the week, the Dow is up 1.8%, the S&P is up 1.6% and the Nasdaq is up 0.9%.

The European Union has added a few more sanctions against Russia, adding 12 names to their list of Russians and Ukrainians facing asset freezes and travel bans. One EU commissioner said the goal is not sanctions, the goal is to get Putin to the negotiating table. The EU doesn’t want anything to rattle their already weak financial situation. In Europe they consider the Spanish “recovery” to be one of their success stories. GDP is projected at 1% growth, double last year’s 0.5% pace, and youth unemployment is still 55%; and this is considered good news. Spain, and several other EU nations are in no condition to fight a sanctions battle with Russia.

A separate order signed by President Obama yesterday expanded sanctions and authorized potential future penalties. Yesterday’s sanction expansion included Bank Rossiya, not one of the largest Russian banks, but it starts to pull the financial sector into the equation. The EU cancelled a summit in Russia planned for June. US bankers are now considering whether they participate in a scheduled May investor’s conference in Russia.

Several US banks have a presence in Russia; Citigroup has about 1 million Russian customers. Goldman Sachs has made at least $1 billion in investments in Russian companies and won a three-year contract last year to advise the Kremlin on improving the nation’s image overseas and to help the country attract more investors. Seriously, I can’t make this stuff up.

Euro leaders also vowed to wean the EU off oil and gas imports from Russia; you may recall a similar pledge made in 2008 after Russia invaded Georgia. And the EU did cut back on oil and gas imports, a little, but they still rely on Russia for nearly a third of oil and gas imports. This time, the leaders set a deadline for mid-year to come up with a comprehensive plan. A summer time plan is quite different than actual gas in the tank to heat the kitchen in winter.

Any cutbacks in Euro-zone energy imports will likely push Russia to export energy to the East, and as we mentioned a few days ago, they have a pipeline to the Pacific. Putin is scheduled to visit China in May, apparently for final negotiations on a natural gas supply deal. The next logical question is, why would the world’s largest oil exporter and the world’s most populous nation need Western banks when they have each other?

On Wednesday the Federal Reserve FOMC wrapped up a policy session and Chairwoman Janet Yellen was asked when the Fed might consider raising rates and she said it would be after asset purchases were completed and then she said a “considerable” time and then she was pressed to explain and she said a considerable time was about 6 months. And Wall Street traders did the math and computed that rates would start to go up in May of 2015, and they had a minor freak out. That was Wednesday, and the question was whether Yellen and her Fed colleagues would walk back that timeline. Today, the answer is no, they will stick with it.

St. Louis Fed President James Bullard today said Yellen was simply echoing prevailing market expectations when she said made the reference to 6 months. Dallas Federal Reserve President Richard Fisher echoed the idea that asset purchases would end around October and interest rate policy would come under consideration soon thereafter, describing the timeline as “sound”. So, Yellen didn’t have a slip of the tongue, she did make a fairly concrete policy signal.

This does not mean there is unanimity among Fed policy makers. Today, Minneapolis Fed President Narayana Kocherlakota said that raising interest rates to head off a potential financial crisis is simply not worth it, and he thinks the odds of a crisis are low, so there is little benefit to trying to reduce the probability of a crisis with tighter monetary policy.

Of course, the Fed is already in the process of tightening monetary policy, that’s what the taper is. This will cause long-term interest rates to rise -- and the worst is still to come. For instance, the yield on the 10-Year note jumped to 2.77%, from 2.68% on the same day of FOMC's decision to reduce asset purchases by another $10 billion. And short-term rates are rising to an even greater extent, despite the fact that the Fed is still posting a bid of $55 billion each month for these debt instruments. The Fed’s quantitative easing asset purchase plan was the only reason the yield on the 10-year note has been so low for so long. Well, not the only reason; the weak economy was part; but QE was the primary reason.

The Fed and the markets are generally acting like exit from QE and the Zero Interest Rate Policy will be easy. It won’t, but QE and ZIRP have mainly been a benefit for the bankers and the wealthy. Loose monetary policy is just another policy benefiting the rich… bringing undesirable consequences.

This is a moment where you might hear the phrase: “Well, don’t throw the baby out with the bath water.” Meaning we would still need loose monetary policy while we deal with other policies that directly benefit the rich. Well, loose monetary policy not only directly benefits the rich, it reinforces the other policies being criticized; and if you look closely, that isn’t a baby in the bath, it is a rich person acting like a baby.

And that brings us to today’s edition of Banks Behaving Badly, again. The banking industry was already bludgeoned by accusations that it “robo-signed” its way through mortgage default paperwork, shuttling struggling homeowners closer to foreclosure without giving them their due process. Now, fresh accusations that banks engaged in similar practices with credit card customers.

The latest development comes in the form of a lawsuit filed last week by Miami resident Ruth Moya against JPMorgan Chase.  According to her, she fell behind on her credit card payments after her husband’s business failed in late 2008. So the following year, JPMorgan filed two collection lawsuits against her.

The problem, Moya says, is that her paperwork, and that of thousands of other customers, got hurried through JPMorgan by bank employees who were less-than-concerned about getting things correct. Her lawsuit alleges that the bank’s collection lawsuits against credit card customers have contained numerous errors and are often missing relevant information, such as bankruptcies or consumer disputes. It describes an office of nine or 10 employees in San Antonio, Texas, who were FedExed paperwork for 50 to 100 collection actions per state per day. The employees, the lawsuit says, signed affidavits attributing to the papers’ accuracy without reading through them.

The lawsuit claims the “affidavits were executed by Chase employees en masse, often thousands at a time, one-after-the-other, without the affiant reviewing or verifying the information attested to in the affidavits.”

California and Mississippi have sued the bank over the way it collects credit-card debt.  The Mississippi lawsuit accused the bank of pursuing consumers for debts that had already been paid. The California lawsuit said that JPMorgan had committed “debt-collection abuses” against some 100,000 California credit-card borrowers over about three years.

Yesterday, the Consumer Financial Protection Bureau released a report on debt collection complaints. Consumers told the agency they had been hounded for debts they did not owe, or told they would be arrested or thrown in jail if they did not pay. The CFPB received more than 30,300 complaints about debt collectors in the second half of last year alone.

Fitch Ratings today upgraded its outlook for the US AAA credit rating, removing the nation from a downgrade watch after politicians put off another debt limit battle until next year. The company, one of three major credit rating firms, changed the outlook for the rating to stable from a negative watch put in place in October. Fitch said at that time political brinkmanship over raising the debt limit had increased the risk of a government default, raising the probability of a rating downgrade.

Last month's debt limit deal was a key reason for upgrading the outlook.  Fitch also cited the improved federal fiscal situation, including the shrinking budget deficit and brightening economic picture.

When you hear claims that government spending is out of control, you might want to consider that there has been a big shift, including 4 major pieces of deficit-reduction legislation enacted since the fall of 2010 were the Budget Control Act of 2011, the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, and this year’s farm bill.

Altogether, they cut projected deficits over 2015-2024 by $4.1 trillion: about $3.2 trillion from program cuts, including the associated interest savings; and $950 billion from higher revenues, including the interest savings. Program cuts outweigh revenue increases by 77% to 23%, or about 3 to 1. In fact, total federal spending has already fallen from 23.9% of gross domestic product (GDP) in 2009, at the bottom of the recession, to a projected 20.2% of GDP in 2013.  While total federal spending will remain high throughout the coming decade under current policies, that’s mostly because of a marked increase in interest payments.  In particular, as the economy recovers, interest rates will also rise, simultaneously increasing the interest we must pay on any given amount of debt.

Wednesday, March 12, 2014 - The Next 25 Years

The Next 25 Years

by Sinclair Noe

DOW – 11 = 16,340
SPX + 0.57 = 1868
NAS + 16 = 4323
10 YR YLD - .04 = 2.72%
OIL – 1.96 = 98.07
GOLD + 17.70 = 1368.20
SILV + .43 = 21.42

Let’s run through some of the economic and business news and then we’ll get to today’s anniversary.

Stocks were flat. People are still trying to make heads or tails of this mixed up world. The situation in Ukraine is not improving. The EU agreed a framework for its first sanctions on Russia since the Cold War. Protesters battled soldiers in the streets of Caracas, Venezuela; two more protesters were shot; dozens were injured. Riot police clashed with demonstrators in several Turkish cities for a second day as mourners buried a teenager wounded in protests last summer.

The Senate Banking Committee announced an agreement on legislation to wind down the government-owned mortgage financiers Fannie Mae and Freddie Mac. Share price cratered.

Herbalife says the Federal Trade Commission has opened an inquiry into the company. The FTC confirms the inquiry, but not the nature of the inquiry. Share price cratered.

Copper prices dropped to the lowest level in almost 4 years; this goes back to China, and is a canary in the coal mine for industrial demand. China is one of the metal’s biggest customers and there has been recent poor trade data out of China. Two Chinese solar companies have defaulted in the past week. The general risk from here is that this move in metals prices further destabilizes the Chinese financial system and will raise concerns of a hard landing in China if the authorities can’t get ahead of the pressures and potential contagion effects this move is generating.

A Senate subcommittee plans to hold a hearing in early April on GM's recall last month of more than 1.6 million vehicles with the faulty ignition switches which have been linked to 12 deaths. Most of the affected cars were sold in the United States. Even after the long delayed recall, GM says drivers should not use big, heavy key rings. Not a good repair job.

It is illegal for Tesla to sell cars in New Jersey, other than traditional auto dealerships, which is not the Tesla business model. Guess who pushed that law through the New Jersey legislature; this, even though Tesla does not limit the number of keys you can safely have on a key ring.

Citigroup recently discovered they had made $400 million in fraudulent loans to a company in Mexico, now they’ve uncovered three new sets of problems loans, each at about $10 million.

Fabrice Tourre, the Goldman Sachs trader convicted of defrauding investors in a subprime mortgage product that failed during the financial crisis has been ordered to pay a fine of $825,000. The SEC accused Tourre of concealing from investors how Paulson & Co, the hedge fund of billionaire John Paulson, had helped put together a fund of subprime mortgages called Abacus, and had bet it would fail.  Paulson made a cool $1 billion by shorting Abacus, while investors lost the same amount. Goldman, the company, in July 2010 reached a related $550 million settlement with the SEC. It did not admit wrongdoing but acknowledged and expressed regret that its marketing materials were incomplete. Tourre resigned from Goldman in December 2012, and is pursuing a doctorate in economics at the University of Chicago.

Boeing says the missing 777 Malaysia Airlines jetliner was not subject to a new US safety directive that ordered additional inspections for cracking and corrosion on certain 777 planes. They still have no idea where the jet is.

This week, we’ve been looking at anniversaries: the 5^th anniversary of the bull market, the 14^th anniversary of the bear market, the 3^rd anniversary of the Fukushima disaster. Today marks the 25^th anniversary of the World Wide Web. This is actually a somewhat questionable anniversary; not because of the malware, the misinformation, the internet trolls, the time wasting, and the tedious social media that passes as actual human interaction.

No, this is a questionable anniversary because the world wide web must be differentiated from the internet and even after we had the web, we waited until 1993 to actually have a web page. The web was built on top of the internet. On the internet, the connections are between computers using cables and other physical links; on the web, connections are hypertext links. The web is a way to present information from a software application known as a web browser using Hypertext Markup Language or Hypertext Transfer Protocol, HTML or HTTP. The web was based on a proposal written on March 12, 1989 by Sir Tim Berners-Lee, and then we had to wait until December 1990 for Berners-Lee to release the first web browser, called the WorldWideWeb.

So, what will the web look like in the next 25 years? That is part of the question posed on this anniversary by none other than Berners-Lee in an interview published today in the Guardian; he believes the web should be "accessible to all, from any device, and one that empowers all of us to achieve our dignity, rights and potential as humans." He hopes to re-invent the Web through the "Web We Want" initiative, which would create a universal "Internet Users Bill of Rights"; think of it as an online Magna Carta.

The initiative would build support for national and regional campaigns to create a world where everyone is online and free to participate in the flow of knowledge, ideas, collaboration and creativity over an open Web. Without an open, neutral Internet, we can't have an open government, good democracy, healthcare, connected communities and a diverse culture. And Berners-Lee says: "It's not naive to think we can have that, but it is naive to think we can just sit back and get it."

Among the obstacles to an open, neutral internet, Berners-Lee cites principles of privacy, free speech, responsible anonymity, the impact of copyright laws, and the overhaul of how security services are managed especially in light of American and British spy agency surveillance of citizens.

The web has become an indispensable tool for communications, science, education, health, democracy, entertainment, finance, advertising, and commerce. It has been well argued that the internet is the most significant contribution to spreading knowledge since the introduction of Gutenberg’s printing press, but this web is much faster; Martin Luther’s 95 theses can now be pinned on someone’s Facebook wall and travel round the world in the blink of an eye. The growth of the web has been exponential; actually that is not a strong enough word to describe the growth.

The Web has brought tremendous innovation, but how do we measure innovation’s impact on our standard of living? We can look at the web and easily see that it has been very profitable for many; fortunes have been made, and lost. The most recent fortune will likely go to the innovators behind the Candy Crush game, King Digital; today they announced an initial public offering that values the company at $7.6 billion; and Wall Street analysts immediately started whining that the valuation was low based on trailing 12 month PE of 13.3. This is for a video game. What is the net contribution to economic growth from a video game?

Another way of looking at innovation is price. It is fairly easy to assess the value of innovation if it lowers the price of something, such as a car or food. How do we measure an improvement in quality for something that already exists? The internet has provided people with tremendous information on health and medicine; surgery is more likely to be successful now than before this information was available. How do we measure that?

The financial industry has claimed to embrace innovation. Yes, you can get your bank statement online and businesses can accept digital payments online, but it also led to bankers devising better ways of manipulating markets and the so-called innovation of the vast world of ticking time bombs known as derivative. You can also make the case that the net social contribution from so-called financial innovation was negative.

And for all the good things that we get from the internet, you have to wonder if we’ve squandered this gift of technology. So much effort has gone into advertising and marketing and targeting customers; this makes sense because you have to make money in order for the technology to be viable, but has this emphasis detracted from directing our efforts to improve our standard of living? How can we compare Facebook and Twitter and Candy Crush with the invention of powered air flight, the development of the interstate highway system, the polio vaccine?

This is not to say that social media has a negative social contribution (I’ll leave that distinction to the bankers). Social media can do amazing things: a spike in Twitter posts about upset tummies can alert the doctors to a salmonella outbreak, an amber alert on my phone may save a child’s life, there are massive online campuses that can provide an education comparable to the best universities, great thoughts abound on Redditt, the libraries of the world are now available at the click of a button, and the great cacophony of millions of voices may someday come together in crowd sourced harmony to create beautiful music.

In the past 25 years, we’ve seen some amazing innovation, lots of cool stuff, lots of silly stuff, and a fair amount of bad stuff on the internet. In the next 25 years, maybe we’ll do better.

Friday, January 31, 2014 - January Out

January Out

by Sinclair Noe

DOW – 149 = 15,698
SPX – 11 = 1782
NAS- 19 = 4103
10 YR YLD  - .03 = 2.67%
OIL - .76 = 97.47
GOLD + 2.80 = 1246.90
SILV + .03 = 19.27

The Dow started the year and the month at 16,572 (-926). The S&P 500 started the month at 1845 (-63). The Nasdaq Comp, for the month, went from 4160 (– 57).

For the week, the Dow fell 1.1 percent, the S&P 500 slipped 0.4 percent and the Nasdaq dropped 0.6 percent. In January, the Dow slumped 5.3 percent, the S&P 500 lost 3.6 percent and the Nasdaq fell 1.7 percent. January marked the worst month for the Dow and the S&P 500 since May 2012, and the worst for the Nasdaq since October of that year.

Yield on the 10 year Treasury note dropped from 2.99% to (- 32bp). And this is a little telling, the Vix, the volatility index went from 14.32 to 18.22    (-3.9)

The Vix might be indicating that the market is not sufficiently scared of the emerging market contagion; certainly the Vix is higher than the start of the month, but remember that December saw record highs for the major indices, and a really scary Vix reading would be around $49, for those of you who remember the beginning of 2009. In other words, there are a whole bunch of people who haven’t figured out that we’re in a downturn in the markets. So far the US markets are just experiencing a small move, but the rest of the world is taking a bigger hit. About $17 billion has poured out of emerging market funds this month.

Right now, there is growing angst regarding the emerging markets. The Dow was down more than 200 points to start the session today. And really, none of this should be a surprise. We know that emerging markets have been struggling with the Fed’s taper and other stimulus plans of developed economies. Things tend to unravel slowly and then all at once. It’s hard to figure out where we are in the unravelling. When will this little downturn end? I don’t know but I’m guessing the Vix will be higher than today.

A new State Department report on the proposed Keystone XL oil pipeline finds that the project would have a minimal impact on the environment, an assessment likely to increase pressure on the White House to approve it. But the report sets no deadline for doing so. The proposed pipeline would carry crude derived from oil sands in Canada to refineries in the United States. The evaluation fell to the State Department because the proposed $7 billion project by TransCanada Corp would cross the US-Canada border.

A New York State judge has approved an $8.5 billion agreement by Bank of America to settle most of the claims by nearly two dozen mortgage securities investors.  In a 53-page decision, Justice Barbara R. Kapnick of State Supreme Court in Manhattan ruled that the 2011 settlement was reached in good faith.

The settlement had been challenged by the American International Group, an investor in the mortgage securities, which contended that the trustee overseeing the bonds did not push aggressively enough for more money from Bank of America. AIG argued that the settlement shortchanged investors and accused the trustee, Bank of New York Mellon, of conflict of interest and of shirking its duties. The judge determined that the trustee did not abuse its discretion in entering into a settlement.

There’s something rotten in Denmark, and it’s Goldman Sachs. Denmark gave the global financial giant Goldman Sachs the go-ahead on Thursday to buy a stake in its state utility. Some members of the Socialist People’s Party were so upset, they withdrew their ministers from the country’s governing coalition. Some party members said the deal ceded too much power to Goldman. Thousands of people have taken to the streets in recent weeks to protest the deal; a prominent banner featured the vampire squid that has become a symbol for Goldman Sachs. Nearly 200,000 Danes signed an online petition against the deal, a record.

Under the terms of the deal, Goldman would invest about $1.45 billion for an 18% stake in Dong Energy, the state utility. Dong Energy has a number of businesses, including offshore wind farms, drilling for oil and gas in the North Sea. The utility has about one million gas and electric customers and operates coal and biomass power plants. The deal does not buy Goldman a controlling share, but the minority stake would come with special privileges. Goldman would get a seat on the utility’s board. And the bank, along with two Danish pension funds, would have veto power over changes in the utility’s strategy or its executive suite; specifically the utility’s chief executive or chief financial officer. The Danish pension funds are investing about $550 million.

Among the questions about the deal is whether it is being structured to avoid taxes. Goldman’s investment will be made through a company based in Luxembourg. And that Luxembourg company is then owned in part by companies in Delaware and the Cayman Islands. So, the deal boils down to either a big tax evasion scheme by Goldman or a significant investment in renewable, green energy. Time will tell but I’m guessing it’s a bit of both.

Officials in California said that for the first time in the state’s history, they won’t be able to provide any water to contractors that supply two-thirds of the population and a million acres of farmland. The California Department of Water Resources, which had predicted it would be able to supply about 5 percent of the amount requested, said it now projects that it won’t be able to provide any of the 4 million acre-feet of water sought by local agencies.

The reduction means that agencies will have to rely on existing water supplies such as ground water or what is in storage behind dams. The Los Angeles-based Metropolitan Water District, serving 19 million people in Southern California, and the San Francisco Public Utilities Commission, which supplies much of the Bay Area, have built up water reserves and won’t be as hard hit as places such as Sacramento and the Central Valley farming region. About two-thirds of Californians get at least part of their water from northern mountain rains and snow through a network of reservoirs and aqueducts known as the State Water Project. State Department of Water Resources Director Mark Cowin said: "Simply put, there's not enough water in the system right now for customers to expect any water this season from the project."

Farmers and ranchers throughout the state already have felt the drought's impact, tearing out orchards, fallowing fields and trucking in alfalfa to feed cattle on withered range land.  Agricultural production accounts for most of the state's water use and is expected to be hit the hardest by the reduction. At the same time, many cities have ordered severe cutbacks in water use.

If you watched the State of the Union address this week, you might rightly assume that Congress can’t do anything, which would only be partially correct. The House this week passed a Farm Bill. Big whoop. The Farm Bill is normally the most uncontroversial bit of legislation Congress deals with. Not anymore. The bill is 959 pages long and would cost $956 billion.

That cut is twice what the Senate originally proposed, but a fraction of the nearly $40 billion the GOP House voted to cut last year. Those cuts didn't go into effect, but a cut of $5 billion in the current fiscal year was implemented via Congressional inaction last November. The bill budgets $16 billion less than what would have been spent under current law, with the Food Stamp program absorbing almost half those cuts, or right at $8 billion. In a great big federal budget, that might not sound like much but it worls out to 21 fewer meals per month for a family of 4.

The bill also makes some policy changes for famers. It’s a neat little bait and switch. What the bill takes from the ag lobby with one hand, it largely gives back with the other. Of $41 billion in projected savings (over 10 years) from eliminating direct payments to farmers, the bill restores $27 billion via enhanced crop insurance subsidies and a new program that “insures” against adverse price movements. Supposedly necessary to secure the nation’s food supply at a time of record farm, this federal largess flows almost regardless of how much money its recipients already have. People making up to $900,000 per year in adjusted gross income can qualify for payments. The total commodity-program take for any individual “actively engaged” in farming is capped at $125,000, or 2½ times the national median household income. But your definition of actively engaged is probably different than the definition in the farm bill.

Farm prices and farm revenues and net profits had been at record highs, so old-style farm prices that put the floor under prices were no longer effective. So they racheted up the guarantees, converted into a kind of revenue insurance, allowing the money to continue to flow. The insurance scheme also preserves the current incentive structure of large-scale US agriculture, which is to grow as much corn and soybeans as possible. That's great for the corporations that supply inputs to industrial-scale farmers—seed and pesticide companies like Monsanto, DuPont, and Dow. And in the event of floods or drought, the results could get shaky. Depending on the payouts, any savings from cuts in the Farm Bill could be wiped out.