Wednesday, April 09, 2014 - Feeding Time at the ZIRP Trough

Feeding Time at the ZIRP Trough
by Sinclair Noe

DOW + 181 = 16,437
SPX + 20 = 1872
NAS + 70 = 4183
10 YR YLD un = 2.68%
OIL + 1.04 = 103.60
GOLD + 4.30 = 1313.30
SILV  - .22 = 19.95

In an otherwise light week for economic news, the big report is today’s release of the FOMC minutes from last month’s meeting. No surprises. You may recall that after the last meeting, Chairwoman Janet Yellen talked about the possibility of raising the fed funds target rate after a “considerable time”; when pressed she indicated a “considerable time” was about six months after the Fed ends it asset purchases under Quantitative Easing. That would mean late spring or summer of 2015.

Fed policymakers were unanimous in wanting to ditch the thresholds they had been using to telegraph a policy tightening; no hard and fast target of 6.5% unemployment or 2% inflation. The minutes indicate the Fed would like to see more improvement in the economy; the emphasis on quality rather than quantity. In other words, the Fed remains dovish, and they will taper but they will also keep rates low for a long time. And also, those “dots” are over-rated.

The dots are actually charts suggesting the fed funds rate would top 2% by the end of 2016. In the minutes published today, several policy-makers claim the charts overstated the shift in projections, which would suggest the Fed is not ready to tighten policy. A couple of the voting members wanted to commit to keeping rates low if inflation remains persistently below the Fed's 2-percent goal.

Wall Street loves feeding at the Zero Interest Rate Policy trough. Stocks were up. Despite the three-day selloff, the S&P 500 index managed to hold above its 50-day moving average around 1,840, a key support level. The Nasdaq Composite is in positive territory year to date.

In other economic news, Commerce Department data showed that wholesale inventories rose at a slower pace of 0.5% in February, in line with expectations, after a revised gain of 0.8% in January, which could support views that restocking did not help the economy in the first quarter. You recall that companies were overstocked on inventory in the fourth quarter; we haven’t worked our way through those full shelves, and that likely means that the economy is slogging along in the first quarter.

The IMF, the International Monetary Fund says the global economy is strengthening but emerging markets still face challenges from outflows of capital and the big threat for the global economy is super-low inflation, or low-flation.

The IMF expects the global economy to grow 3.6% this year and 3.9% in 2015, up from 3% last year. Those figures are just one-tenth of a percentage point below the IMF's previous forecasts in January. And the forecasts will likely be revised lower as more months pass; that seems to be the tendency. The IMF made no changes to its forecasts for US growth, which it estimates at 2.8% this year and 3% in 2015. Overall, the recovery seems to be broad, fairly strong and more stable.

The IMF and the World Bank will hold their spring meetings in Washington this weekend. Finance ministers and central bankers from the Group of 20 leading economies will meet Thursday. The IMF is expected to reiterate the message that central banks should be more aggressive.

Inflation in the 18 countries that use the euro currency fell to an annual rate of 0.5% last month. Though consumers can enjoy flat prices, ultra-low inflation can stifle growth. People and companies postpone purchases knowing that prices will be little changed months later. Debts become harder to pay off. That's a particularly severe problem in Europe, where many governments remain squeezed by debts. Super-low inflation also raises the risk of deflation; a decline in wages and prices that slams the brakes on economic growth.

Another topic at the meetings is expected to be inequality. The IMF’s new interest in income distribution coincides with other, seemingly unorthodox positions coming from the fund and some of its experts since the financial crisis of 2008. It has come to support some controls on cross-border capital flows. Its research has argued in favor of fiscal stimulus, pointing out its positive impacts on economic growth.

In the latest edition of the World Economic Outlook, the fund makes the case that inflation in the United States and other developed nations should be higher to help pull the world economy out of its morass. IMF Director Christine Lagarde now argues economic policy cannot be only about promoting low inflation and robust growth. Healthy, stable economies also depend on a reasonably equitable distribution of the rewards. The study concludes a flatter distribution of income contributes more to sustainable economic growth than the quality of a country’s political institutions, its foreign debt and openness to trade, its foreign investment and whether its exchange rate is competitive.

Deep inequality breeds resentment and political instability, discouraging investment. It can lead to political polarization and gridlock, as it cleaves the political system between the interests of the haves and the have-nots. And it can make it more difficult for governments to deal with brewing crises and economic imbalances. An analysis published last year by economists in the IMF’s fiscal affairs department concluded that efforts to curb budget deficits increase inequality, especially if they take the form of spending cuts. It suggested that targeted government spending and progressive taxes could offset some of these effects.

Fears that High Frequency Traders have been rigging the stock market went mainstream last week when 60 minutes ran a story on Michael Lewis’s new book “Flash Boys”. Then the FBI announced it would investigate; my guess is that this will slowly fade away in the light of the Holder Doctrine, which basically says that the Department of Justice and other supposed law enforcement types only arrest petty criminals, and if you have enough money and provide jobs, you are entitled to a “get out of jail” card.

Anyway, the High Frequency Traders are nothing new, they've been around for a long time. The major exchanges lease high speed access. Perhaps less well known are the dark pools. So much trading is now happening away from exchanges that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is. And this problem could cost investors far more money than any shenanigans related to high frequency trading.

When the average investor, or even a big portfolio manager, tries to buy or sell shares now, the trade is often matched up with another order by a dealer in a so-called "dark pool," or another alternative to exchanges. Those whose trade never makes it to an exchange can benefit as the broker avoids paying an exchange trading fee, taking cost out of the process. Investors with large orders can also more easily disguise what they are doing, reducing the danger that others will hear what they are doing and take advantage of them. 

The rise of "off-exchange trading" is terrible for the broader market because it reduces price transparency. The problem is these venues price their transactions off of the published prices on the exchanges; and if those prices lack integrity then "dark pool" pricing will itself be skewed. Around 40% of all US stock trades, including almost all orders from "mom and pop" investors, now happen "off exchange," up from around 16% six years ago.

A brokerage has several ways to fill customers' orders. It can match buy and sell orders from its own customers, known as "internalizing," or sell its orders to another broker that can do the same. Brokers also send trades to "dark pools," which are similar to exchanges, except the fees are lower and they are anonymous, with orders going unreported until after they have been executed. And finally, they can send trades to exchanges, where they will have to pay higher fees. A major concern with off-exchange trading is that brokers who internalize trades and offer dark pools do not provide any data to the market before the trade is executed.

On a stock exchange, when an order is sent in, the price of the stock is adjusted and everyone with a data feed sees it. Dark pools only report data after a trade has occurred. At that stage, information about the trade has little influence on the price. In other words, dark pool trading is priceless, and you actually need prices to have a marketplace; price discovery is an essential element; cut that out of the equation, and you can see some serious manipulation and distortion.

And finally, in today’s edition of “Banks Behaving Badly”, Bank of America has agreed to pay nearly $800 million in fines and restitution to settle allegations of deceptive marketing and unfair billing involving credit card products. The Consumer Financial Protection Bureau and Office of the Comptroller of the Currency said the bank had misled roughly 1.4 million people about the cost of two credit card payment protection products, which allow consumers to suspend minimum card payments if they lose their job or suffer a severe illness, and the amount of time they would receive benefits from them.

The bank also billed customers for identity protection products before they received them and did not provide some fraud-monitoring services consumers thought they were buying. About 1.9 million people were unfairly billed. The fines work out to about $5 million the rest in restitution. The bank says it has already issued refund payments to most customers who were affected. Bank of America neither admitted nor denied wrongdoing.

Wednesday, April 02, 2014 - Speak Your Mind by Blowing Your Wad

Speak Your Mind by Blowing Your Wad
by Sinclair Noe

DOW + 40 = 16,573
SPX + 5 = 1890
NAS + 8 = 4276
10 YR YLD + .04 = 2.80%
OIL – 33 = 99.29
GOLD + 10.10 = 1290.90
SILV + .22 = 20.08

The S&P 500 closed at another record high.

The Commerce Department reported that orders to US factories rose 1.6% in February, the most in five months. January's durable goods orders were revised to show a larger drop of 1.0% instead of the previously reported decline of 0.7%. Yesterday, the Institute for Supply Management said its manufacturing index rose in March.

A private survey showed that US companies stepped up their hiring in March. Payroll processer ADP said private employers added 191,000 jobs. ADP also revised February's job creation up to 153,000 from the 139,000 figure reported earlier. The report comes ahead of the government's monthly jobs report, scheduled to be released on Friday; the over-under number for Friday is 200,000 net new jobs.

We know the Federal Reserve will be watching the jobs report. St. Louis Fed President James Bullard speaking to reporters at his branch of the central bank, said a formal rate rise is "still a considerable distance away." Federal Reserve Bank of Atlanta President Dennis Lockhart said today: “Based on my working medium-term outlook, I see the latter half of 2015 as the likely time frame for the first move to higher rates,” but if the economy doesn’t grow as he current expects, Lockhart thinks, “a later liftoff date… will likely be appropriate.”

Lately bad weather was cited as the reason that Walmart and FedEx and Delta’s earnings were disappointing.  If it isn't one-time charges that happen every quarter being removed from reported results, it's the weather being blamed. Of course, even if the weather truly was awful enough to prevent people from shopping, or buying a house, that demand should simply show up in a later month. A certain amount of productive capacity is lost, but pent up demand should rev things right back up again. The March jobs report won’t be the final word on the weather and the economy, but if we don’t see some sort of significant improvement, then we are running out of bad weather excuses.

Russian, American, and European diplomats continue to talk about settlement talks that might halt further Russian military action in Ukraine; Crimea is a done deal, but Ukraine is another matter. NATO will suspend "all practical civilian and military cooperation" with Russia because of its annexation of Crimea, saying it has seen no sign that Moscow was withdrawing troops from the Ukrainian border.

Meanwhile, Gazprom, the Russian energy company has fired a shot across the bow, raising the price it charges Ukraine for natural gas. The price jumped from $268 per 1,000 cubic meters of gas to $385, or about a 44% increase. Gazprom execs attributed the price increase to an unpaid debt for gas. This is not the first time energy has been used as an economic weapon, nor will it be the last.

The US has been undergoing an oil and gas renaissance; the White House has promoted exploration and drilling, and output has jumped. When it comes to natural gas, the US is being compared to Saudi Arabia, or Saudi America. Of course, that provided no advantage to thwart Putin’s aggression in Crimea. One reason Saudi America has failed to instill fear in Russia is that we lack the capacity to export LNG to Europe, and probably won’t be able to export in any significant quantities for a few more years; and then it would probably be a few more years before Ukraine could build facilities to receive such exports.

Meanwhile, we ran into a rash of reports in the past week or so, all telling us that our reliance on fossil fuels is killing us. The American Association for the Advancement of Society, the Intergovernmental Panel on Climate Change, and the World Meteorological Organization all confirmed that the planet is getting hotter; 13 of the past 14 years have been the hottest ever recorded. The Antarctic ice shelf is melting, Greenland too; the rain forests are dying and the Gulf Stream is collapsing. It’s not just the melting ice and the poor polar bears; the reports warn of very human problems of hunger, disease, drought, flooding, refugees, violence, and war.

Necessity is the Mother of Invention, and the time is now for innovation; and the good news is that there are inventors who have been working on these problems and have created solutions; the bad news is that the status quo and the powers that be are entrenched. This is a defining moment, and energy is being used as an economic weapon, and that weapon is pointed directly at our own foot.

And the entrenched powers just became more entrenched. The Supreme Court has struck down the aggregate campaign contribution limits, opening the gates for even more money to flood into the political system. The good news is we have the best politicians money can buy. The bad news is we have the best politicians money can buy. The 5-4 ruling in McCutcheon v. Federal Election Commission was penned by Chief Justice John Roberts and joined by justices Anthony Kennedy, Samuel Alito and Antonin Scalia; Justice Thomas went a step further and called for a complete end to campaign finance reform.

The decision relies heavily on the assertion in the 2010 Citizens United ruling that influence and access are not a corruption concern. This means that a single donor will soon be able to contribute millions of hard dollars in limited contributions, to political parties, candidates and political action committees.

Federal law sets certain limits, so you can't just go write a candidate a check for a million dollars and call it a day. That means you can't give more than $2,600 to any one candidate per election. Even if you were to donate once in the primary election and again in the general, the absolute most you could give to an individual candidate's campaign is $5,200. And you can’t, or couldn’t just spread money across the board. For the 2013-2014 election cycle, Federal Election Commission rules state that a donor can give no more than $123,200 to all political committees, with two sub-limits of $48,600 to candidates and $74,600 to political parties and political action committees. In other words, there was a limit, a cap on aggregate spending. Those limits are no more.

 Now, a single donor can now give more than $5 million in individually limited contributions to every House candidate, every Senate candidate, every state party committee, every national party committee and every leadership PAC connected to one political party. The McCutcheon ruling also did away with the aggregate limit on donations to political action committees, or PACs, which can give money directly to candidates. While there's a limit on how much PACs can give to each candidate, there's no limit on the number of PACs that can exist. Without the aggregate limit, one donor can now give $5,000 each to 1,000 different PACs. And those 1,000 PACs can turn around and funnel that money straight to one candidate. Which means that one candidate could haul in $5 million in direct contributions from one donor, funneled through a network of PACs.

So, if you have a big wad of money that you would like to waste on buying politicians, the Supreme Court has just ruled that you can blow your wad just a freely as you can speak your mind.

The new Michael Lewis book, “Flash Boys” looks at High Frequency Traders front running trades, using technology to jump in front of a trade and skim some profits. The uproar from Wall Street has been hilarious. There are claims that front running isn’t really bad; it doesn’t hurt ordinary investors; it may actually add to liquidity, blah, blah, blah. This is kind of like saying a mafia hit man is good for the neighborhood because he spends his money at the local grocery store and he hasn’t killed anybody on my street.

As we said the other day, High Frequency traders front running the market is not new; it has been going on for years, but the book and the 60 Minutes interview and the publicity finally caught the attention of otherwise somnambulant sleuths at the FBI who are investigating front running, which is a criminal offense. Where this could get interesting is that the High Frequency Trading firms set up shop in close proximity to the stock markets in New York, and they pay for high speed access to the exchanges’ computer systems and data.

The New York Stock Exchange calls it “fully managed co-location space next to the NYSE Euronext’s US trading engines in a new state of the art data center”. The NYSE is the landlord. And they can set up the “super high density” fiber optic connections for an initial fee of $7,000, or a onetime upgrade fee of $9,200. In other words, the New York Stock Exchange and the Nasdaq are complicit in the skimming operation. I didn’t hear Lewis or 60 Minutes talk about that, but that is the ugly truth.

The other funny thing about the Michael Lewis book and interview is the notion that some clever fellows, backed by hedge fund guru David Einhorn and a few other Wall Street big dogs, had come up with a clever technical fix in a new and better exchange called IEX.  Protected by a spool of fiber to ward off the high frequency traders like garlic against vampires. Free market triumphs, mission accomplished. Don't even think about a minimum transaction tax, a speed bump rule such as a minimum order duration, or anything more comprehensive than that.

Friday, August 23, 2013 - QE Giveth and QE Taketh

QE Giveth and QE Taketh

by Sinclair Noe

DOW + 46 = 15,010
SPX + 6 = 1663
NAS + 19 = 3657
10 YR YLD - .08 = 2.82%
OIL + 1.39 = 106.42
GOLD + 21.70 = 1398.80
SILV + .90 = 24.18


Yesterday, the Nasdaq crashed for about 3 hours; trading was halted; we still don't know why. It now has a snappy name, the Flash Freeze. It happened after shares of Apple got stuck at $498, then everything froze. In time we'll hear a good story about why it happened. My best guess for now is that it has to do with high frequency traders; the algo traders have a tendency to clog the trading pipes with all their bids, offers, and canceled orders as they try to scalp and front run trades. The market exchanges claim the high frequency traders provide liquidity, but I didn't see any liquidity for about 3 hours yesterday; zip, nada.

The markets had a pleasant and quiet day today, following a couple of weeks of fretting about Fed taper. America has created a whopping entitlement for the biggest Wall Street banks and their top executives, who, unlike most of the rest of us, are no longer allowed to fail. They can borrow from the Fed at almost no cost, then lend out the money at 3 percent to 6 percent or 30 percent; or they can take the money and gamble in markets they have rigged: derivatives, interest rates, energy, aluminum. It's all rigged; the big wheel spins round and round and the little ball always falls in the same spot. All told, Wall Street's entitlement is the biggest offered by the federal government, even though it doesn't show up in the budget. And it's not even a public good. It's just private gain.

And this whole idea of a taper, according to the primary dealers in the Federal Reserve banking system the taper is likely to start in September and wind down by the middle of 2014; well, it's not a done deal, and even if it is done there might be unintended consequences. Today, Christine Lagarde, the head of the International Monetary Fund, speaking at the Fed's Jackson Hole soiree, she noted that central bank policies “in one corner of the world can reach all corners.”

There’s little question that the Fed’s unprecedented flood of cash into the financial system since the financial crisis has rippled across the globe. Earlier that sometimes prompted complaints from developing nations that there was too much capital flowing into their markets, bringing inflationary pressures and hurting exports as their currencies rose in value. Now the concern for Lagarde and many others is on the other side and the increased risks of a sharp economic slowdown in emerging markets.

Bearish sentiment has gripped emerging markets in recent weeks. Cash is flowing out, pushing down the values of stocks, bonds, and currencies in India, Indonesia, and elsewhere; the Indian rupee has thrown itself off a cliff. Brazil's problems have been well documented and are boiling over. China's long guaranteed growth is unsure but likely quite a bit slower. Europe is starting to show signs of life but don't look for a V-shaped recovery; there are too many imbalances between the various economies of the Euro-zone. There's still too much debt, and too much bad debt, and the demographics are worse than in the US. Lagarde is correct on one point, the US economy doesn't operate in a vacuum.

And then there is the whole question of whether the Fed's QE has actually worked. There is little question that it has had an effect, but has it worked?

A secondary goal of QE is to accelerate the housing recovery. There are some signs that has happened. Home prices bottomed out in 2012 and have been rising by double-digits, year over year. Existing home sales are up 17% from last summer. But new home sales figures out this morning fell to a 9-month low. That might be a fluke, but it might also be the first tangible sign that rising mortgage rates are slowing the housing recovery before it gathers much momentum. It's hardly a ringing endorsement for tighter money.

The primary goal of QE is to prop up the banks, and to this end the Fed has done quite well. Refi's soared earlier in the year, and that is a big moneymaker for the banks. They write the refi's, extract the fees and dump the mortgages onto the lap of the government owned Fannie Mae and Freddie Mac. Refi's accounted for 70% of all mortgage lending in the first half of this year, but now they're drying up. Mortgage rates have jumped a full percentage point since early May. Wells Fargo Bank is the biggie in mortgage lending, and the refi business is down 50%, so they're firing 2,300 workers. QE giveth, and QE taketh away.

Elsewhere, retail sales aren't shining; even Wal-Mart is struggling. Car sales are up, but so are gas prices, and newer cars are more fuel efficient, so you buy a new car and cut your gas bill – it's a wash.For the Fed, the trick is to put the brakes on QE in the early stages of an economic rebound, because waiting too long could flood the economy with too much money, causing inflation, asset bubbles or worse. Yet it’s remarkably tricky to know in real time where the economy is headed, which is why the Fed and many other forecasters have misjudged the recovery during the past few years.

And then don't forget the Fed's dual mandates of price stability and maximum employment. We do not have maximum employment; not even close. Maybe it's too much to expect the Fed to deliver jobs; certainly it is too much to expect the Fed to deliver jobs with the tools of QE. Maybe it would be easier if the Fed just waits until they hit their target of 6.5% unemployment; clear, clean, and unambiguous

 It’s understandable that everybody wants more clarity, especially as we approach the end of the Bernanke era. But the Fed itself probably doesn’t know what it’s going to do, given the conflicting picture painted by all the data it looks at. And when the Fed finally does change policy, it will probably be incremental, and I'm not confident it has been priced in, not yet; that cake hasn't been baked yet.

Speaking of half-baked; financial reform has been on a back burner for years. Earlier this week President Obama called the regulators to the White House for a progress report, something, anything that might provide assurances that there won't be a repeat of 2008. Administration officials and some lawmakers have expressed frustration that the Dodd-Frank act, remain unenforced as an alphabet soup of federal agencies wrangle over how to adopt it, and the bank lobbyists constantly try to rewrite it.

Last month, Treasury Secretary Jack Lew complained in a speech that the regulators were moving too slowly to confront the dangers of banks that are so large that governments cannot allow them to fail for fear of bringing down the economy. The administration has said it wants to end the era of Too Big To Fail; they have stated flatly that there will be no more bank bailouts, but they still don't have the actual reforms in place. For too long, financial watchdogs were asleep on the job, allowing Wall Street megabanks to become too complex to manage and regulate and ‘too big to fail. As the banks have returned to profitability there has been growing impatience with the pace of bank regulation.

The banks have been feeding at the trough of QE, and now the Fed is talking about removing QE. This means the banks had damn well better be strong enough, they had better set aside enough reserves to weather problems. It wouldn't look good to pull away QE, have a big bank fail, and then have to go through this whole bailout process all over again. And make no mistake, QE1, QE2, and QE3 have all been an ongoing, drawn out bailout for the banks.

If we could ever get past the fear of another global financial meltdown scenario, maybe we could take all the trillions of dollars that have been funneled to the banskters, and instead funnel that money onto Main Street. Theoretically of course.

Speaking of half-baked; Congress is in recess, so they haven't been messing things up. Actually, this Congress hasn't done anything even when they are in session. This has been the most gridlocked Congress in decades. When they get back from recess they might actually do something; and that is not necessarily a good thing. There is a decent chance Congress might close down government. Yesterday,  about a third of the Republican caucus sent a letter to House Speaker John Boehner and Majority Leader Eric Cantor urging them to oppose any annual spending bills that include funding for Obamacare.

Today Boehner responded by saying that when Congress reconvenes on September 9 after the summer break, “Our intent is to move quickly on a short-term continuing resolution that keeps the government running and maintains current sequester spending levels."

This weekend you'll likely hear quite a bit about the 50^th Anniversary of the March on Washington; it was August 28, 1963, and it was actually called the “March on Washington for Jobs and Freedom”. The march was intended to raise awareness of civil rights and economic issues, because social and economic justice are just branches of the same tree.

Ticking Away

by Sinclair Noe

DOW + 180 = 15,176
SPX + 23 = 1636
NAS + 44 = 3445
10 YR YLD - .06 = 2.17%

OIL + .83 = 96.71
GOLD – 2.70 = 1386.70
SILV + .07 = 21.95

Let's spend the next few minutes together, shall we? It's a strange expression, isn't it? Spending time? Turns out you can buy time. Well, you can if you have enough money. You can't buy much, but you can buy a little, and it turns out that buying a little time can be very profitable. High frequency trading outfits and other traders and investors buy time, just a second or so, or even milliseconds.

And this gives them a profitable advantage. A few milliseconds to look at the latest economic report; maybe the market moving report on consumer confidence; maybe the market moving report on growth in the service sector. And if you have enough money, you can get this information at the same time as the high frequency traders who pay to get early access.

It sounds like a type of insider trading, but it's not. It's legal; routine even. Thomson Reuters buys data points from various sources that compile the consumer confidence numbers and the purchasing managers surveys and such, and then they charge their news-feed customers a fat premium to get that information passed to them, just a smidge faster than everybody else. It's called news feed trading or event jumping, and apparently the SEC and the other regulators don't seem to mind. Of course, it's not like it adds to a fair and orderly market, but that doesn't seem to be a concern.

It's not that the regulators don't do anything. I just read that FINRA is going to look into dark pool trading. FINRA is the self-regulatory which is financed and full of broker-dealers and brokerages that channel your trades from your desktops and through brokers, whom FINRA is responsible for registering and regulating, to various exchanges for execution.

Dark pools are are off-exchange trading venues where stocks are traded “blindly.” That’s supposed to mean buyers and sellers don’t know who’s who. But the truth is, even dark pool customers are blind to how these shadow operators really operate. Three of the biggest operators of dark pools are Goldman Sachs, Credit Suisse, and Barclays. Collectively, as calculated by market research firm Tabb Group, about 13% of daily trading volume happens in dark pools.

FINRA has just recently announced that it is going to look into dark pool trading, because apparently there are some shenanigans going on in the darkness. The Wall Street Journal reported: “In 2011, the SEC fined Pipeline Trading Systems LLC, a now-defunct New York dark-pool operator, $1 million for allegedly failing to disclose that a secretive trading unit interacted with the vast majority of client orders. Pipeline didn’t admit or deny wrongdoing. Last October, a dark pool operated by several large Wall Street banks, LeveL ATS, settled SEC allegations, without admitting or denying wrongdoing, that it improperly shared confidential client trading information with a unit of Citigroup, one of its investors.”

So, FINRA is sending out examination letters to 15 dark pool operators. They are just politely asking what happens in the dark pools; and if FINRA gets lucky, the dark pool operators might even answer a few questions, such as:

Do dark pool customers know how operators may be operating on them, without them knowing?

Are dark pool operators playing their customers by manipulating prices at public exchanges to influence trading orders and execution prices in their dark pools?

Are dark pool operators who act as market-makers – meaning they trade for themselves based on where the orders they are “seeing” are coming from to buy and sell and how big those orders are – using the “order flow” their big customers believe is “blind” to their inside advantage?

Yep, that's what's happening in the dark pools.

Dark pool operators are employing high-frequency trading computer technology to read incoming quotes and orders going to the public exchanges so they can do what high frequency traders do, manipulate quotes and orders, including in their dark pools, where they have captive customers trading blocks. Customers who don’t know that, most of the time, the trader on the other side is going to skim off some profit before they place your trade.

Now, your next question might be, why do these dark pools exist? The most obvious answer is they make money for their operators. They don't seem to provide any value for regular investors; they don't do anything to make a more fair and orderly market.

I could save FINRA some time; it's insider trading 100%. The only real question is why FINRA is the regulator asking questions. The questions should really be coming from the SEC or the Department of Justice, which actually has some authority to do something, if they ever grew a spine. Until then, we'll just see how much the high frequency traders and the dark pools can skim.

When the big banks say their trading desks posted a profit every single trading day for an entire quarter, it seems hard to believe; and yet, JPMorgan Chase and Bank of America recently reported perfect trading records in the first quarter of 2013. Goldman Sachs was right there with only 2 negative trading days, and Morgan Stanley was the slacker, with 8 negative trading days. Such perfection, or near perfection, would seem remarkable from one Big Bank, much less all of them. I mean, how many investors can come out ahead every single day for 60 days or more?

This is not new. Back in 2010, for example, JPMorgan had a perfect trading record in three out of four quarters, losing money on only eight days in the second quarter. A reporter from Bloomberg calculated the odds of posting a net gain 63 days in a row at 5.7 billion to one. That's the odds of a perfect trading quarter (not 3) for one bank (not 2).

So, maybe you're thinking these people running the banks trading desks must be the greatest traders of all time, a trained group of elite economic minds. Not exactly. How do they do it? Will Jamie Dimon reveal his trading secrets in a 5 DVD box set that he sells on late night TV? They do have certain tricks up their sleeves, such as buying time; that split second advantage to jump in front of news and plop down a trade; they do have the advantage of operating dark pools; that edge that comes from jumping in front of a customer's order to skim off a little profit.

And they have another advantage. The big banks don't just have one trading desk; they have multiple desks stretched around the globe. The bottom line is the net of the combined desks, and there are some days when a trading desk may or may not choose to report their bottom line. There is nothing to indicate the traders mark-to-mark their positions.

One of the things we learned from the London Whale was that they don't reveal their trading books. One of the things we learned is that there might be losses that aren't recorded in the way most businesses would report a loss. And this is one more reason why the banks utilize dark pools and why they avoid the sunlight of transparency and why they fight regulation tooth an nail. There's something about the reported profits that just doesn't square with facts. If the banks can turn in perfect, or near perfect trading quarters, then they should be sitting on big stacks of capital reserves. Why would they fight the idea of higher capital reserve requirement? If they always win, why do they need to bet with FDIC insured money? If the banksters were really making all that money, then why do they even need the Fed's Quantitative Easing.

And then there's on more trick the banksters have used to turn in perfect trading records – they had insurance, in the form of the Federal Reserve QE, which buys mortgage bonds and Treasuries; that has driven trading volumes higher, boosted asset values, and provided backup liquidity in the markets. It gives traders a buyer of last resort and confidence that they have an outlet if something goes wrong.

These banks have the advantage of an unlevel playing field. They can borrow money for next to nothing at current rates and lend it for more, simply by buying longer-term Treasuries; any dolt could make money with that kind of deal. They have access to information that their clients lack. They have computer-trading platforms that operate in milliseconds.

The Federal Reserve has been trying to stimulate the economy back to a virtuous circle of economic growth with a targeted unemployment rate of 6.5% and inflation rate not to top 2.5%. The Fed has expanded their balance sheet to nearly $4 trillion. Which is another way of saying that we're paying for their trading profits.That's money that could have been used for things like infrastructure, roads, bridges, electrical grid, education; hell, they could have wiped out $1 trillion in student loan debt with just a snap of their fingers. Of course, if the Fed did that, then they couldn't serve as the safety net for the banks.

The term “animal spirits”  refers to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

When we talk about an economic recovery, when the Federal Reserve talks about ending stimulus, there is one more target that has not yet been reached, and until we get there, we will never fully recover.

And if you have a few more minutes to spend with us today, let's take a look at what else is going on in the world.

A US military proposal for arming Syrian rebels also calls for a limited no-fly zone inside Syria. Military planners have said that creating an area to train and equip rebel forces would require keeping Syrian aircraft well away from the Jordanian border. To do that, the military envisages creating a no-fly zone stretching up to 25 miles into Syria which would be enforced using aircraft flown from Jordanian bases. The limited no-fly zone wouldn't require the destruction of Syrian antiaircraft batteries.

American and European intelligence analysts now believe that President Bashar al-Assad’s troops have used chemical weapons against rebel forces in the civil war in Syria, an assessment that will put added pressure on a deeply divided Obama administration to develop a response to a provocation that the president himself has declared a “red line.” The White House says U.S. intelligence concluded that the Assad regime used chemical weapons, including the nerve agent Sarin, against rebel fighters in the last year.

Applications last week for unemployment benefits fell and retail sales rose 0.6 percent in May from April. The number of Americans seeking unemployment benefits dropped 12,000 last week to a seasonally adjusted 334,000, a decline that suggests steady job gains will endure.

The less volatile four-week average decreased 7,250 to 345,250, the Labor Department said on Thursday. Both figures are roughly 7,000 higher than a month ago, which were the lowest in five years. Separately, the Commerce Department said that retail sales increased 0.6 percent last month, showing that consumers remained resilient despite higher taxes and could drive faster growth later this year.

Chalk up a very dubious distinction for Congress: Americans’ confidence in the institution has fallen to its lowest level ever. That’s according to Gallup on Thursday, in a new poll ranking the combined House and Senate dead last on a list of societal institutions for the fourth year in a row. Confidence in the legislative branch is at just 10%, down three percentage points from last year’s poll. The lowest rankings of 16 institutions included: the criminal justice system, banks, TV news, newspapers, big business, organized labor, HMO's, and in last place – Congress; all at less than 30%. The highest rankings went to the military and small business.

The Supreme Court has ruled that human genes, isolated from the body, can't be patented. The case involved Myriad Genetics which holds patents related to two genes, known as BRCA1 and BRCA2, that can indicate whether a woman has a heightened risk of developing breast cancer or ovarian cancer. Justice Clarence Thomas, writing for the court, said the genes Myriad isolated are products of nature, which aren’t eligible for patents. The high court’s ruling was a win for a coalition of cancer patients, medical groups and geneticists who filed a lawsuit in 2009 challenging Myriad’s patents. Thanks to those patents, the Salt Lake City company has been the exclusive U.S. commercial provider of genetic tests for breast cancer and ovarian cancer.

Last week, the Supremes ruled that police can take a DNA sample from someone who has been arrested and charged but not convicted of a serious crime. They just can't patent it. The Supreme Court did not announce decisions today in hotly anticipated cases on affirmative action, the Voting Rights Act and gay marriage.

We might be hearing more about Syria in the next few days. The next likely declaration of war will come from the G-8 meeting in Northern Ireland. They've been getting ready for the world economic leaders by putting posters over shuttered small businesses to make it look like Northern Ireland is economically robust. The G-8 is expected to declare war on tax cheats. Also on the agenda is a trade deal between the Euro-Union and the US. They might even discuss how the US is clearly spying on all non-US telephone and internet communications. That should make the Europeans feel good about establishing a trade deal.

The census estimates, as of July 2012, show that would-be retirees are opting to stay put in urban areas near jobs. Rural counties are losing population for the first time ever because of waning interest among baby boomers in moving to far-flung locations for retirement and recreation. Long weighed down by dwindling populations in farming and coal communities and the movement of young people to cities, rural America is now being hit by sputtering growth in retirement and recreation areas, once residential hot spots for baby boomers. About 46.2 million people, or 15 percent of the U.S. population, reside in rural counties, which spread across 72 percent of the nation's land area. From 2011 to 2012, those non-metro areas lost more than 40,000 people, a 0.1 percent drop.

Wednesday, March 06, 2013 - Hollowed Out

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877.

Hollowed Out

by Sinclair Noe

DOW + 42 = 14,296
SPX + 1 = 1541
NAS – 1 = 3222
10 YR YLD +.04 = 1.94%
OIL - .39 = 90.43
GOLD + 8.70 = 1585.10
SILV + .34 = 29.04

I have to admit to a hollow feeling in these celebrations. The High Frequency Traders are probably having fun. The Wall Street banksters are swimming in waves of liquidity, freakishly similar to 2007, when they leveraged everything and then leveraged the leverage, and then leveraged the risk on the leverage. And after they burned the place to the ground, they took a bailout to rebuild, and they left the grounds slathered in debt.

So, the Fed has cut interest rates to near zero, which is the optimal level when you are getting buried in debt. The low interest rate has the combined effect of lowering debt issuance and servicing costs, as well as increasing bank margins. The side effect is that currency debasement boosts competitiveness, investment and inflation. A few jobs result from increased competitiveness, but not enough to create a virtuous cycle. ADP said the private sector added 198,000 jobs last month; tomorrow we get the government's monthly jobs report; and the word we now associate with the jobs report is “modest”.

Here we are again; the Fed is juicing asset values and telling us they're doing it to prop up the economy, while all it really does is juicing the banksters and the corporate cronies. Not so much for the rest of America; still struggling to stand straight after taking a sack of bricks to the belly. And while the economy is showing signs of improvement, it is hollow, absent the middle class; workers pay has been shrinking as a part of the total GDP ever since the meltdown.

You've probably heard that household income is down 8% from 2007, but that's just part of the story. The gap between the richest one percent and the bottom 80 percent has grown exponentially over the past 30 years. With 53% of the population earning $30K or less per year, there is no question there is an asset bubble. The inequality is far worse than you think. The top 1% has 40% of the nation's wealth. While 80% of us have just 7%. And the top one percent own 50% of the stocks , bonds and mutual funds. So, this celebration of the market high is like throwing gasoline on the fire. There will be more and more attempts at redistribution until the whole thing pops. Enjoy the ride 

So, the record high for the Dow is more a reflection of how the corporations have squeezed workers, and how this is supposed to be the new normal. A new report by MIT on innovation and production seems to capture the desperation and how this has left the country at a competitive disadvantage. It says, in part:

One of the key danger points identified in these reports is the declining weight of the U.S. in the global economy. Even though the U.S. share of world manufactured output has held fairly steady over the past decade, economists have pointed out that this reflects good results in only a few industrial sectors. And even in those sectors, what appear to be productivity gains may be the result of underestimating the value of imported components. A close look at the composition of a worsening trade deficit shows that even in high-tech sectors the U.S. has a deteriorating picture. While the output of U.S. high tech manufacturing is still the largest in the world and accounted for $390 billion of global value added in high-tech manufacturing in 2010, U.S. share of this world market has been declining, from 34 percent in 1998 to 28 percent in 2010, as other countries made big strides ahead into this market segment.

Jobs are another huge concern. The great spike in unemployment over the past five years was disproportionately due to loss of manufacturing jobs. And as the economy revived, such jobs were very slow to return. In fact it is clear that many of them never will.

And the loss of jobs in manufacturing does not mean that the sector is now lean and mean. Nope, it has been gutted and it might not recover. What manufacturers we still have left in this country are having a hard time with innovation because they have lost the rest of the manufacturing community. Turns out that innovators need other innovators. They were not finding any complementary capabilities they could draw on in the industrial ecosystem as they tried to develop new components: no outside funding, no connections with community colleges, no trade associations, no research consortia.

It's called internal integration. A designer could go down the street in their hometown and talk to a manufacturer about the ease or difficulty of producing a new product. But now, the shop down the street is boarded up or torn down. To actually produce something requires a social ecosystem in which ideas can flourish and be tested with fairly low risk, at fairly frequent intervals, before they develop into actual products. Some might claim that the innovative process has gone high tech, and to some extent that is true, but it has also become fragmented across firms and geographies.

What we do not know, though, across different industries—and particularly for emerging new high-tech domains—is whether the separation of innovation from manufacturing will allow innovation to continue full-bore at its original home, or whether separation comes at the price of learning and creation of capabilities that might produce future innovation at the original home base. Separating innovation and manufacturing—in different companies, or in different locations—might make it unlikely that a firm would gain full advantage from implementing technological advances within manufacturing.

And of course, when jobs are lost, the experience of the worker is also lost. This at a time when many workers have finally mastered their trade and might have the ability to think beyond mere competency and look at innovations. And the longer the worker is unemployed the greater the probability the worker will become unemployable. Skills unused diminish over time.

Outsourcing and offshoring are not about improving flexibility and innovation, but about what managers usually say it is about: lowering labor costs. It’s actually a form of looting, just not the financial kind. The reduction in manufacturing floor costs is partially offset by an increase in managerial coordination, so it’s actually a transfer from blue to white collar workers, particularly the very top executives. And it increases risks of the enterprise. One glitch in the supply chain can wipe out profits claimed from lowering labor costs. And the longer-term effect is to hollow out the middle class which once formed the core of the customer base.

Not to worry, the Fed will continue to juice Wall Street and perpetuate the asset-based economic growth model, which in turn gives the Washington politicians a fig leaf to hide their dysfunction. Bernanke has stated he will use proper monetary policy until there is a recovery per employment; therefore, we will get a recovery. Perfectly logical. And I’ll keep flapping my arms until I begin to fly; therefore, I will make myself fly at some point.

The stock market is not a proxy for economic activity. Rather, it is a proxy for leveraged speculation using cheap borrowed money. The low volume and extreme volatility suggest a very dangerous top. Those now getting up the courage to plunge in will most likely be buying from those now hoping to get out before the next crash.

None of this means the crash will not be delayed for a year or two, or even longer. Nobody has any idea what will happen next. The real things we know about the economy is that taxpayers got stuck with Wall Street's gambling debt, and the employment shortfall, and the rents being extracted by the financial sector. And so far, we have done next to nothing to change the system.