Monday, April 15, 2013 - Have a Great Day

Have a Great Day

by Sinclair Noe

DOW – 265 = 14,599
SPX – 36 = 1552
NAS – 78 = 3216
10 YR YLD - .02 = 1.70%
OIL – 3.97 = 87.32
GOLD – 124.40 = 1353.40
SILV – 3.16 = 22.79

I hope you're well. I hope you're day has been blessed, because in many ways this has been a lousy day, and the stock market was just a minor part of it.

There has been another act of violence, possibly a terrorist bombing; this time in Boston. Two bombs exploded near the finish line of the Boston Marathon; about a half hour later, another bomb exploded near the JFK Library. Boston Police confirm there were a couple more explosive devices that were found and defused. It looks like three people are dead and more than 100 injured, some very seriously, including about a dozen people who have lost limbs.

The blasts took place about four hours after the start of the race, which meant that there were still several thousand runners yet to finish the race. The first two bombs exploded just before 3PM Eastern, one after another, and within about 100 yards of each other, very near the finish line of the marathon race. There have been unconfirmed reports that a suspect is in custody, possibly a Saudi national, but clearly it is an ongoing investigation at this time.

It's tax day of course. I hope that doesn't come as a surprise. File now, file an extension, file anything, except of course if you are a major multi-national corporation; in which case, just present your tax dodgers card, along with one or more addresses from an off-shore tax haven, and no worries. But for the rest of us, file now and send money. What do you get for your money? Well, there's an app for that, courtesy of the White House and some research organizations, and it will tell you just what you bought with your tax dollars.

Let’s say that you paid $20,000 in income taxes last year. According to the White House app, you would have spent about $7,000 on defense, including the military operations in Afghanistan and Iraq. The second-biggest category is health spending, on programs like Medicaid and Medicare. That accounted for about $6,400. After that comes “job and family security,” which includes unemployment insurance and programs for the working poor, which you spent about $5,000 on last year. Net interest on the debt is also a major category, accounting for about $2,300.

Then, there are many much smaller categories. Humanitarian aid, for instance, cost you only $228 out of your $20,000. You spent about $1,300 on programs for veterans and $190 on agriculture. Education and job training cost you about $940 and NASA about $170. Disaster response worked out to about $120.

There are a few things to note here. One is that “mandatory” spending – including government funding for Social Security, Medicaid, Medicare and interest on the debt – and military spending together significantly outweigh “discretionary” spending. That is upside down to many Americans’ perceptions of the budget. (It is also worth noting that the White House separates out tax revenue for and spending on Social Security and certain parts of Medicare.)

And the other thing is that if you still have your calculator clutched in your sweaty palm, and you just happened to be punching in numbers as I was speaking, you realize that all those numbers add up to more than $20,000. If you go to the White House calculator and say you paid $5,000 in income taxes, it will break it down into an equivalent $5,000 in spending. But that doesn’t really make sense. Last year, Washington spent far more than it took in; about $1.1 trillion more. That means that for every tax dollar it collected, it spent about $1.43. By the same logic, your $20,000 in income taxes translated into about $28,600 in spending.

Now if you went to the grocery store and spent $20,000 and you received $28,600 in groceries, you'd be very happy, but you spend the same amount with the taxman and you feel like you've been abused. You gotta lighten up. It's good to remind ourselves of some realities. First, the taxes we pay are, by international standards, fairly modest. Second, despite what some would have you believe, the wealthy are not crushed by the burden of taxation. And third, though nobody particularly enjoys giving part of their income to the government, taxes are the price we pay for having an advanced, democratic society; which works well more days than not.

Alright, let's talk about gold. Not that I have all the answers. Gold took a big drop today. We've seen similar declines in the summer of 2008 and the third quarter of 2011. Of course, 2008 preceded the collapse of Lehman; 2011 brought about a globally coordinated central bank intervention. In both instances, gold moved lower and the S&P 500 followed with a slight lag; and in both instances, gold moved higher. Still, this is the biggest single day sell-off in about 30 years. There were rumors of a big sale of gold in London (about 100 tons on Friday, followed a few minutes later by a 300 ton sale – which has all the markings of a short sale push to drive prices lower); there has been talk that the Central Bank of Cyprus was trying to sell it's gold reserves, which may or may not be separate from the other big sale. Nothing confirmed right now. If Cyprus is forced to sell, the concern is that it will be a template, and there are plenty of troubled Euro-countries with much bigger gold reserves than Cyprus.

There are plenty of debates today about the reasons for such a big move in gold today. There are people trying to defend gold and others trying to tear it down. Gold is the ultimate antithesis to central banks. The Bank of Japan has recently pulled out the Quantitative Easing bazooka; maybe this will be the template for central bankers moving forward. Maybe the economy is purring along on the road to recovery, and the central bankers can step back from QE in the near future. Of course, none of that has anything to do with the physical demand for the metal.

If someone is selling, someone is also buying. At this point I haven't heard anything conclusive about the selling pressure; all I can really say is that something seems a bit fishy. The markets may be selling, but the public is buying. One report had public buying of physical gold outpacing sellers by 50 to 1 at bullion dealers, and the premiums over spot are the highest we've heard about in years.

However, you may recall that right after the Federal Reserve’s Open Market Committee leaked valuable inside information to big banks, Goldman told its clients to initiate a short on gold. So, it appears to be a concerted attack on gold, or maybe there is something we haven't heard yet.

It's earnings reporting season. Citigroup posted earnings of $1.17 per share and revenue topped $20 billion. The fun or infuriating part of banks reporting earnings is to try and figure out what they are actually reporting; assumptions for loan loss reserves and adjustments for hedging and off-balance sheet holdings can make most analysis and comparisons meaningless. So, let's just consider price. When you account for Citi's reverse stock splits and price declines, Citi trades at a split adjusted $550, which means it would have to increase share price 12-fold, just to get back to break even.

We have seen and discussed the pathetic lack of federal regulators to regulate the big banks, and so it is left to private investors to fill the void. You are already familiar with JPMorgan's London Whale trading fiasco. The Police Retirement System of St. Louis filed the lawsuit against Chairman and CEO Jamie Dimon, as well as other executives and board members, in State Supreme Court in Manhattan. The suit alleges the bankers breached their fiduciary duties to shareholders by failing to block the risky trades, which ultimately lead to more than $6 billion in losses. In their court papers, lawyers for the St. Louis pension fund highlighted letters from a union pension adviser, CtW Investment Group, that they said "warned the board multiple times that the company's lack of internal controls and severely flawed risk oversight structure posed serious threats" to the bank. The letters were from the spring and summer of 2011.

The quote of the day goes to a lawyer for the plaintiff, who said: "Although the purpose of JPM's CIO was to hedge against risk, the company's board and senior management oversaw its transformation into a high-stakes casino. That's like filling a fire extinguisher with gasoline."

Tuesday, April 17, 2012

DOW + 194 = 13,115

SPX +21 = 1390
NAS + 54 = 3042

10 YR YLD +.04 = 2.01%

OIL +.07 = 104.27
GOLD – 2.90 = 1651.00
SILV +.18 = 31.81
PLAT + 8.00 = 1589.00

Tax Day, and you still have a few hours to get the forms filed. We talk a lot about taxes on MoneyRadio; how to legally minimize the tax bill, how to defer the tax bill. We talk about annuities, life insurance, harvesting losses, IRA's, 401K's, corporate entities and more. And that's all good, but if you really want to cut your tax bill, there is a sure fire way to do it. If you are looking to stick it to the IRS, I'll tell you the secret. You don't need accountants, you don't need financial planners, you don't need tax software, you don't even need a mailbox in the Grand Caymans.

You need a lobbyist. The top eight companies that spent the most on federal lobbying from 2007 to 2009 all saw their reported tax rates decrease from 2007 to 2010; these top eight firms spent $540 million on lobbying from 2007 to 2009. They filed 332 lobbying reports that mentioned taxes and named 491 different tax bills in those reports.

The top eight companies that spent the most on lobbying were Exxon Mobil, Verizon Communications, General Electric, AT&T, Altria, Amgen, Northrop Grumman and Boeing. Exxon Mobil spent the most, some $81.92 million from 2007 to 2009.

AT&T recorded the largest tax reduction, with its tax rate falling from 34.0 percent to negative 6.4 percent from 2007 to 2010, or an estimated reduction of more than $7.3 billion. Altria, the parent company of Philip Morris, had the smallest decline from 2007 to 2010, with its rate declining from 28.9 percent to 27.4 percent. Six of the top eight companies saw declines of at least 7 percentage points. The likelihood of six of the top eight companies lowering their rates "by at least seven percentage points purely by random chance is less than 1 in 100,000." The lobbyists earn their money.

President Obama has proposed lowering the corporate tax rate from 35% to 28% and eliminating loopholes and deductions. Romney has proposed lowering the corporate tax rate to 25% and repealing the alternative minimum tax. And if you believe that – you are a dolt. Those proposals wouldn't lower taxes they would raise taxes. Nobody pays the full tax rate.

While you've probably heard that the United States has the highest corporate tax rate in the developed world, you know that only schmucks pay the full amount; U.S. corporate taxes that were actually paid (the effective rate) fell to a 40 year low of 12.1% in fiscal year 2011. The U.S. both taxes its corporations less and raises less in revenue from corporate taxes than its foreign competitors: the U.S. Is about 25% below the OECD average.

We hear about the effective tax rate for wealthy individuals; Warren Buffet pays a lower effective tax rate than his secretary; President Obama pays a lower effective tax rate than his secretary. The Buffet Rule died this week.

This year, federal taxation will take up less than 15 percent of total national economic activity. That’s the lowest level in 60 years. In fact, total revenue as a share of gross domestic product has now been under 15 percent for three straight years—the first time that has happened since before World War II.

What is this really telling us? We're missing a great opportunity, folks. Clearly, there is an one area of the economy where Americans excel, where we generate enormous Return on Investment; I'm talking about the Lobbyist Industry. Embrace it; export it to other countries; share the prosperity. This is obviously the path to big time profits. Are they teaching this in business schools? Forget about innovation, forget about best practices, forget about technology, forget about production, forget about making something that people need. The best ROI anywhere is to lobby. If we really focus out attention on this industry, we can push the effective tax rate even lower. Refunds for everybody. We'll change Tax Day into Refund Day. Yea, that's it.

Speaking of not doing anything productive; Goldman Sachs reported 1^st quarter profit fell 23% as sluggish demand for deal-making put a damper on results.Goldman posted a profit of $2.11 billion, compared with a year-earlier profit of $2.74 billion. Lighter client demand for trading and investment banking has been a sore spot for Goldman in recent quarters, putting pressure on two of the firm's prized sources of revenue. Maybe demand fell because nobody wants to be a Muppet.

After the close, Yahoo said first-quarter earnings rose 28%, beating expectations despite relatively flat revenue for the period. Yahoo reported net income of $286 million, or 23 cents a share, compared with net income of $223 million or 17 cents a share same quarter last year.

Intel reported a profit of $2.74 billion, or 53 cents a share, compared with $3.16 billion, or 56 cents a share, in the year-earlier period. Revenue was $12.91 billion, up from $12.85 billion. Adjusted profit was 56 cents a share. I don't know what adjusted profit means. Intel has been really good at beating estimates, so good that the game is catching up with them. It's not good enough that Intel beats estimates, they have to beat big.

IBM said it earned $3.07 billion, or $2.61 a share, on revenue of $24.7 billion, compared with earnings of $2.86 billion, or $2.31 a share, on $24.6 billion in sales in the same period a year ago. Excluding one-time items, IBM would have earned $3.3 billion, or $2.78 a share. One-time items are also known as the cost of doing business.

The International Monetary Fund warned today that the European debt crisis could flare up again at any time and send the global economy back into deep recession. The Fund's chief economist said there was currently "an uneasy calm" following the tensions in financial markets at the end of 2011, with hopes of a gradual recovery dependent on keeping the single currency in one piece. The Fund said that there was a risk of a 1930's style slump. "In the current environment of limited policy room, there is also the possibility that several adverse shocks could interact to produce a major slump reminiscent of the 1930s." In the absence of a euro meltdown, the IMF predicted that weak recovery was likely to resume in developed countries. The best we can hope for is lousy and the worst is truly dreadful. So thanks and have a nice day. Spain managed to sell a few billion dollars worth of bonds, which is a remarkable accomplishment considering nobody expects Spain to survive. Remarkable until you consider the ECB and the IMF are buying the bonds.

John Paulson, is a billionaire hedge-fund manager; he made a fortune betting US mortgages would turn sour; they did. Last year he almost lost his shirt, now he's seeking to reverse record losses in 2011, by shorting European sovereign bonds. Paulson said he is buying credit-default swaps on European debt, or protection against the chance of default. Spanish banks are of particular concern as their holdings of the country’s debt and client withdrawals make them overly dependent on European Central Bank financing.

Sometimes economics just seems bizzaro; case in point from the Murdoch Street Journal:

Thirty-six of the 51 economists surveyed, not all of whom answer every question, say the central bank will refrain from another round of large-scale bond buying in 2012. The number who expect no action is up from 30 in the January survey. “An entrenched upturn in growth, albeit anemic relative to history, is entering a sweet spot,” said Allen Sinai of Decision Economics. He noted that with the economy expanding at an adequate pace, the Fed should remain on the sidelines.

OK, we are in the sweet spot of an “anemic recovery”; I never knew you could have an anemic sweet spot. But we don’t need monetary stimulus. And why not? Because we have an “adequate recovery.” That seems to pretty much sum up macroeconomics circa 2012.

Wells Fargo has been busy expanding its stake in the GEO Group; Wells Fargo is the company's second-largest investor, holding 4.4 million shares valued at about $86 million. Unfortunately it's a safe investment. GEO is the second larges private jailer in America. The private prison industry grew by more than 350 percent over the last decade and a half. Overall, more than 2.3 million people are currently behind bars, up 50 percent in the last 15 years, the land of the free now accounting for a full quarter of the world’s prisoners.