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.

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.

Tuesday, April 02, 2013 - Correlation and Divergence

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. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

Correlation and Divergence

by Sinclair Noe

DOW + 89 = 14,662
SPX + 8 = 1570
NAS + 15 = 3254
10 YR YLD + .02 = 1.86%
OIL - .16 = 96.91
GOLD – 23.20 = 1577.20
SILV - .76 = 27.36

Yesterday I told you the big economic report this week will be the jobs report on Friday. Many people like to discount the jobs report, claiming it doesn't give a thorough picture of the labor market; and there is some validity to this complaint. The Philly Fed has produced a slightly more comprehensive report, known as the Coincident Index; this measures  four variables (nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and real wage and salaries) wrapped into one index, designed so that it roughly reflects gross domestic product growth. Nationally, the Philadelphia Fed’s coincident index rose 0.3% in February for a 2.8% year-on-year gain. They also provide state by state breakdown. Alabama, Illinois, and New Mexico saw declines in the February report; 45 states notched advances.

With the stock market, or at least the Dow Industrials and Transports, and the S&P 500 hanging out around record territory, you might think we would see more signs of an improving economic cycle; bond yields should be rising at the margin, and commodities should be catching a bid. None of that is happening. While the big stock indices have been climbing other parts of the broader market have broken down since the end of January; areas that should have a correlation to stocks. One of the most common correlations is copper. If the economy is thriving, then copper should be in big demand. Copper is used extensively in construction and electronics and many other uses that would signal a booming economy. When gold outperforms, you can think of it as a risk off play, money is looking for a safe haven. So, if the economy is really strong, you would expect to see copper higher and gold flat or down. Since the start of the year, both copper and gold have been down; possibly indicating a weak economy mixed with complacency. Of course, it's easy to be complacent when the Fed is pumping $85 billion a month into the market.

This is not to say I'm bearish, certainly not bearish on a market that is consistently hitting new highs. I'm just saying that nothing has changed with the old idea of Sell in May, and the pattern of the past couple of years for a sell-off in summer. Much of the move higher can be attributed to the Federal Reserve QE to infinity, which also explains many of the divergences we're seeing from other areas. One of the big concerns is the hit stocks might take once the Fed begins to tighten. If Bernanke and Co. were crazy enough to surprise everyone by suddenly raising rates or pulling back on quantitative easing, equity markets would tank big time. But the Fed won't do that. They'll instead be very careful and transparent and appropriately plodding about unwinding precisely to avoid that melt down. "No surprises" has to be their watchword these days. Of course the Fed doesn't completely control corporate earnings, and there are usually a few surprises during reporting season.

The euro is steady even though the Cypriot central bank confirmed that large depositors at the largest bank in Cyprus would lose approximately 60% of their savings over 100,000 euros. This is well above the initially stated reduction of 30% to 40%. Other than that there was no new bad news out of the euro zone.

Fears remain that the deal to rescue Cyprus will not be enough to totally eliminate the risk of default later. Last summer at the height of the panic over Spain’s banks, the euro zone embarked on the initial step towards banking union. The idea was to break the “doom loop” under which weak banks were dragging down weak governments and vice versa. Leaders agreed that the European Stability Mechanism (ESM), the zone’s bailout fund, could be used to recapitalize bust banks, but only once an effective supervisory mechanism was in place. The European Central Bank was chosen to be that supervisor. But the countries with money didn't like the idea of bailing out the countries without money, not to mention their faltering banks. The result is that the Euro zone doesn't have a good plan in place to have banks go bankrupt.

The core countries took a hard line that no taxpayers’ money could be used to bail out the banks, meaning large depositors will face big losses. And the losses for the Cypriot depositors is looking like 60% above and beyond the 100-thousand euro insured amounts. And the Eurogroup president has let slip that this is the new template for resolving bank busts. Of course, the Cyprus banks had multiple problems, but their biggest problems came from holding Greek bonds, and when Greece imploded, the bondholders took a haircut, resulting in 2.7 billion-euro in losses for the Cypriot banks.

The bottom line to this story is that the Eurogroup doesn't have a working plan in place to deal with bankrupt banks. It's a dangerous situation. And the bottom line for Cyprus is even worse: capital is leaving the country. The draconian capital controls have restored a sense of calm to a disorderly situation but businesses don't have working capital. And nobody is talking about how to rebuild the economy.

Here are some of the other news headlines out of Europe:

New York Times: "Unemployment in Euro Zone Reaches a Record High"WSJ: "Sixth Quarter of Contraction Looms for Euro Zone">Der Spiegel: "Shredded Social Safety Net: European Austerity Costing Lives"WSJ: "Spain Says Budget Gap Is Wider Than Reported"WSJ: "Italy Unable to Form Government"New York Times: "Debt Rising in Europe"

So, while the US stock market hits another record high, the Eurozone is hitting a depression.  Washington seems determined to follow in Europe's footsteps. We've already had a couple of rounds of austerity ourselves -- in the last deficit deal, and now in the "sequester" cuts.  The president and the Republicans both employ pro-austerity rhetoric which argues that deficits are our biggest problem. They just disagree about where and how it should be imposed.

A Manhattan federal judge, Sidney Stein, has signaled he will not rubber-stamp Citigroup's proposed $590 million settlement of a shareholder lawsuit accusing it of hiding tens of billions of dollars of toxic mortgage assets. The judge asked lawyers for the bank and its shareholders to address several issues at an April 8 fairness hearing, including requested legal fees and expenses of roughly $100 million, and the absence of payments by former Citigroup executives.

The $590 million settlement resolved claims by Citigroup shareholders from February 26, 2007 to April 18, 2008 that the bank failed in those years to properly write down risky debt, often backed by subprime mortgages, and concealed the risks. The shareholder settlement is separate from a $730 million accord with bondholders last month.

Now, you may remember another federal appeals court judge in New York, Jed Rakoff, rejected a $285 million settlement between Citigroup and the SEC over the alleged defrauding of investors. Judge Rakoff thought the settlement was letting Citigroup off too easy. Last week, District Judge Victor Marrero in Manhattan cited that case (the Rakoff case) in delaying a decision to approve the SEC's $602 million insider trading settlement with a unit of Steven Cohen's hedge fund SAC Capital Advisors. Maybe there is a trend developing. When the regulators continue to let the banksters slide with nothing more than a slap on the wrist, well after a while, it's just unacceptable.

Monday, January 7, 2013 - I Went on Vacation and Not Much Changed

I Went on Vacation and Not Much Changed

by Sinclair Noe

DOW – 50 = 13,384
SPX – 4 = 1461
NAS – 2 = 3098
10 YR YLD -.01 = 1.90%
OIL + .21 = 93.30
GOLD – 9.90 = 1647.90
SILV - .02 = 30.26

Forty years ago, Yale Hirsch at the Stock Traders Almanac, created the January Barometer. The idea was simple: as the S&P 500 goes in January, so goes the year. This market prediction tool has been correct 89% of the time since 1950, suffering only seven major setbacks. Since 1950, stocks have finished lower for the year only three times after posting gains in January. When the Dow is positive in January, then the rest of the year is positive 83% of the time, averaging additional gains of 9.59%. Compare that to the Dow’s performance when January is negative. In those years, the February-December returns are positive just half of the time, with an average gain of 2.04%.

As with the full-year results, a positive January typically leads to a positive February. When the Dow closes higher in January, February goes on to average a return of 0.57%, and is positive 63% of the time. When January is negative, February is negative more than half the time, and averages a loss of more than 1%. However, an outsized return in January has not necessarily translated into a bigger return for February. If January is up more than 3.5%, the average February gain is not as big as if January is simply positive.

Price movement in January is also a pretty good predictor of price movement in February for individual stocks; not a perfect predictor but usually moving in the same direction about 80% of the time.

Many investors look to the first five days of January as a gauge of where the markets are going for the rest of the year. During the last 40 years when those five first days were gainers, the markets were up for the entire year 85 percent of the time. For example, last year the S&P 500 Index gained 1.2 percent in the first five days of January. As a result, the S&P 500 Index was over 13 percent. That was close to the historical average. Over the last 39 years, the markets gained an average of 13.6% when the first five days of January were gainers.

Conversely, when the first five days are negative the markets were down for the year, but only 47.8% of the time. The indicator therefore, does not work as well on down periods. You should be aware that, in general, during post-election years the markets have not done well. Only 6 out of the last 15 post-election years saw gains in the first five days of the year. It looks like 2013 will be an exception. Maybe, maybe not. That's why they play the game.

The fiscal cliff is behind us, sort of; there are still the actual implications of the implementation of the changes. Then, we have the debt ceiling, which will be the next catastrophic, OMG, here comes another massive economic sky-is-falling event, they'll shut down the government if they don't get cookies for lunch, political tantrum. Before we move to the next news cycle, let's review briefly the fiscal cliff calamity that was narrowly averted, specifically $205 billion in corporate tax breaks, subsidies and tax loopholes. One of the most egregious giveaways included in the New Year's Eve fiscal cliff deal is an extension of a loophole that allows corporations to book US profits in overseas, tax-free accounts. US companies have about $2 trillion in these offshore accounts.

Another corporate tax benefit included in the fiscal cliff deal is a provision known as bonus depreciation, which allows companies that invest in costly equipment to account for depreciation expenses much faster than they otherwise could. In other words, companies can deduct more in expenses now, lowering their taxable income.

Congress has extended the provision each year since 2008 in an effort to spur business investment during the economic downturn. Bonus depreciation is expected to cost $35 billion this year, according to the Joint Committee on Taxation, and those costs are predicted to rise significantly if Congress keeps extending the benefit. The Congressional Research Service issued a report saying that accelerated depreciation is a “relatively ineffective tool for stimulating the economy.”

I guess that avoiding the fiscal cliff is a good thing; it shows the politicians can do something; even if it's the same old, same old.

New Year, things change, but not much. Let's see what the banksters have been up to. Once again the banks are body slamming the banking regulators. The banks have beaten down the tough parts of Basel III bank-capital standards. The global liquidity standards were designed to ensure banks had sufficient capital on hand to survive another Lehman-like crisis, as well as require that capital be high-quality and liquid. There was a lot of fanfare from regulators when the regulations were first announced in 2010, and then the banks started to chip away at the regulations which might require a little cushion against a downturn. The regulators succumbed to pressure. We're all shocked, shocked I tell you. The new capital rules have been expanded to change the definition of what constitutes safe bank capital to include stocks and AAA rated mortgage backed securities.

Now, you're probably asking yourself, “Self, weren't stocks and mortgage backed securities really dangerous and excessively risky investments that were a big part of the financial crises of the recent past?” And of course the answer is – yes. “Self, didn't those risky gambles lead to a freeze on the credit markets and the near collapse of the global financial system?” And again, the answer is – yes. And then you ask: “Self, does this mean we'll see Hank Paulson getting down on his knees to beg Nancy Pelosi to save him from his errors?” And the answer is no; that's not going to happen again, but clearly we haven't learned our history lessons.

In a world of Too Big to Fail banks that have only gotten bigger, the regulators decided that if the banks were to face a crisis, like the recent crisis, the banks would only have to prepare for a world in which they lose 3 percent of their retail deposits, down from 5 percent originally proposed. Complete amnesia when it comes to Northern Rock or IndyMac. And then the banks have four years to gradually phase in the new, scaled down 3-percent requirements, down from the 2-year requirement originally proposed. The banks argued that if they were forced to provide a 5-percent cushion and do so within two years, it would be too much of a burden and they wouldn't be able to do any lending, which might actually help the global economy.

Meanwhile, federal bank regulators announced an $8.5 billion settlement with 10 large mortgage companies in a deal that will end a near worthless foreclosure review program in favor of a new program that authorities say will distribute aid to homeowners "significantly more quickly."

Under the deal, announced by the Office of the Comptroller of the Currency and the Federal Reserve, the mortgage companies will make $3.3 billion in direct payments to "eligible borrowers" whose foreclosures were handled improperly, and will make $5.2 billion available in other assistance to struggling borrowers, such as loan modifications.

This new deal is separate from the $25 billion mortgage settlement to which five large banks agreed earlier this year, though many of the allegations of misconduct are the same. Homeowners have complained for more than five years that the mortgage companies made widespread errors in the management of their home loans, and that in some cases those errors pushed them into foreclosure.

This new settlement replaces a deal struck in April 2011 that established the Independent Foreclosure Review; that program was supposed to give homeowners an unbiased third-party review before the banks could foreclose, and might even determine if homeowners qualified for a cash payout because of mortgage related bank abuses. So, that program never really happened, and today's announcement is basically saying the Independent Foreclosure Review was a complete failure.

What went wrong? Part of the problem is that the third-party independent reviewers actually worked at the banks' beck and call. So, ten different banks will pay out $8.5 billion to end the foreclosure reviews.

But wait, there's more!

Bank of America announced today that it will spend $10 billion to settle mortgage claims resulting from the housing meltdown. BofA will pay $3.6 billion to Fannie Mae and buy back $6.75 billion in loans that the bank and its Countrywide banking unit sold to the government agency from Jan. 1, 2000 through Dec. 31, 2008. That includes about 30,000 loans.

Bank of America said that the loans involved in the settlement have an aggregate original principal balance of about $1.4 trillion. The outstanding principal balance is about $300 billion. Fannie Mae and Freddie Mac, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses. So, all in all, BofA gets off really cheap.

Fannie Mae issued a statement saying they had “diligently pursued repurchases on loans that did not meet our standards at the time of origination, and we are pleased to have reached an appropriate agreement to collect on these repurchase requests."

And so, there is $8.5 billion for ten banks, and $10 billion in fines for BofA, and you might think that's real money, and it almost is, but keep it in perspective. The six biggest US banks are expected to pay employee bonuses of $38 billion for the past year.

Bank stocks led all other major stock sectors in 2012. The KBW Bank Index rose more than 30% compared to just over 13% for the S&P 500, and Bank of America shares surged 109%--more than doubling in price. And according to a new report from ProPublica, many banks are still trading below book value, despite the gains in share prices, and much of the gain is due to hedge fund speculation.

And so, you're probably asking yourself: “Self, wasn't hedge fund speculation a big part of the near meltdown of the global financial system? Isn't this just part of the multi-trillion dollar derivatives casino? Isn't this the same sort of risky stuff that the London Whale was betting on and which led to $2 billion in trading losses, or $5 billion, or $6 billion in gambling losses?” And the answer is – yes.

A funny thing is happening in the copper markets. The SEC has paved the way for investors to take a direct stake in commodities, rather than through commodities futures. The agency gave the green light to JP Morgan to launch a fund whose shares would be backed by warehoused copper. In practical terms, the SEC handed traders at JP Morgan control over 20 to 30 percent of the copper available for immediate delivery from the London Metals Exchange — the commercial market where companies that use copper go to procure last-minute supplies.

The investors purchasing shares in J.P. Morgan’s fund won’t be buying copper to use, but to store. The intricacies of the fund are complex, but its underlying rationale is straightforward: the more shares investors buy, the more copper is taken off the market. And the more copper that is taken off the market, theoretically the more valuable the copper and the shares become.

Moreover, it’s a no-brainer that this JP Morgan “innovation” will lead to the creation of copycat fund in other markets, most troublingly those for agricultural products.

The SEC asserts that its own study showed that changes in inventory levels at the LME did not have a price impact. If you've ever heard a little theory known as supply and demand, you might reach a different conclusion than the SEC.

The question regarding the LME would be to define what a normal level of inventory would be (a certain level is necessary to handle routine transactions); amounts in excess of this buffer level would be seen by economists as proof that prices were above the true market clearing price unless you had a good explanation as to why not.

Companies that use copper strongly oppose the new fund, and argue that allowing investors to hoard the metal will lead to supply shortages, create substantial price volatility, and distort the market. A group of copper users wrote to the SEC in August, saying: “The implications of this practice would be grave for our companies, our industry, and, indeed, for the U.S. Economy.”

The SEC is undermining provisions in Dodd Frank calling for the CFTC to rein in undue speculation in critical commodities. You might remember that commodities prices moved up in a coordinated manner in 2008. Remember when oil prices jumped up near $150 a barrel? It looked like a speculative bubble, and was, since prices collapsed in the second half of the year. Well, there was similar behavior in other commodities.

Here, you’re allowing investors to intervene with physical supplies. BlackRock has petitioned the agency to launch its own copper fund, one that would be twice as large as JPM’s and will get an answer by February 22. Given that its proposal is identical to JPM’s, it is well nigh certain to be waved through. If the nay sayers are correct, that hoarding by investors will drive prices up, we should see the impact, although the mere announcement of the JPM approval, particularly in light of the pending BlackRock application, may have led speculators to bid up prices in anticipation of the funds’ launch. That too should be measurable, but if the next few months proves the SEC analysis to be wrong, you can bet the agency won’t admit its error and halt the creation of more funds.

Same old, same old. 

Tuesday, December 18, 2012 - Blame It On Whatever You Want

Blame It On Whatever You Want

by Sinclair Noe

DOW + 115 = 13,350
SPX + 16 = 1446
NAS + 43 = 3054
10 YR YLD +.06 = 1.83%
OIL + .79 = 87.99
GOLD – 27.20 = 1671.90
SILV - .64 = 31.74

The markets rallied on news the fiscal cliff negotiations are closer to a resolution. No, no, wait a minute; the markets experienced a Santa Claus Rally. No, no, wait a minute; just make up whatever excuse you want.

No, no, wait a minute; the Federal Reserve announced QE4 last week, even though we're not supposed to call it QE4, and they are just printing money like banshees, although I'm not sure banshees know how to print money, but the point is they are juicing the economy to the tune of $85 billion a month, and you know that has to have some sort of effect.

Why sure; all this money just has to end up in the stock market eventually. You might also expect the dollar to fall. You might also have expected additional strength in the government bond market, because $85 billion pretty much covers all of the expected new issuance going forward, plus many entities still need to buy U.S. bonds for a variety of fiduciary reasons. With little product for sale and lots of bids by various players; one of which, the Fed, has their own printing press and so money is no object in the move to drive prices higher and yields lower; that's a recipe for rising prices. Then you might expect sharply rising commodity markets because nothing correlates quite so well with loosey-goosey monetary policy as commodities.

Last week, when the Fed made it's announcement, stocks initially climbed but then closed red. Gold was mysteriously sold in the overnight markets and again right after the announcement in big HFT blocks. Treasury bonds actually sold off on the news and yields have continued to inch higher. The dollar hardly budged. Commodities were mixed across the board but more or less flat on the day, with the exception of the metals, and especially the precious metals, which were sold vigorously. And since the announcement, stocks have started to climb, but it doesn't seem to correlate to the Fed's announcement.

Go figure.

Maybe QE4 really is a different beast. The Fed tied their monetary policy to specific targets for the unemployment rate (6.5%) and the inflation rate (2.5%). So, in a way, the monetary policy is also fiscal stimulus, meant to keep stock prices moving higher and residential homes sales climbing at a robust pace. The goal is certainly to drive economic activity, and we can expect it to continue for at least a couple of years, depending upon targets and who knows what.

We know the unemployment target will be tough to hit because as the labor market gets better, all those people who disappeared from the government statistics are likely to re-emerge; they'll jump back into the labor pool and try to find a job. A lot of people have vanished from the official statistics. So, it looks like we are going to have a long run of Fed stimulus.

Meanwhile, the fiscal stimulus gang can't seem to shoot straight. Obama made a concession to Republicans by offering to limit tax increases to incomes exceeding $400,000 per household. That is a higher threshold than the $250,000 he had sought earlier. Boehner, the top Republican in Congress, said he planned to move a "Plan B" bill to the House floor, possibly this week, but there is no clear indication he has his party's support. The Obama-Boehner talks have largely overcome stark ideological differences and are focused increasingly on narrower disagreements over numbers. It might happen, but don't count your chickens until ...

The December reading of Morgan Stanley's proprietary Business Conditions Index is out and the results are a bit counter-intuitive, but overall they appear to be bullish. The headline index jumped 15 points to 51% in December, which makes up for much of the 20 point slide over the past two months. The tumble in October and November had been attributed to elevated uncertainty caused by the fiscal cliff. Morgan Stanley's economic team says, "reports of uncertainty created by the fiscal cliff jumped dramatically in December to another new high.

Given that fiscal cliff uncertainty is up and hiring plans deteriorated, it’s unclear what drove the year’s largest increase in expectations."

I assume this is big business confidence, since small business confidence plunged last month. The hiring plans index particularly suggests that (as in it points to an improvement in hiring plans, when the small businesses, who drive employment, said the reverse).

Businesses are apparently shrugging off the fiscal cliff and they believe a deal will get done. What is difficult to understand is how these businessmen think a contraction in the Federal deficit, which is what a budget deal will presumably produce for 2013, will lead to better business conditions. But I guess we’ll have to go a few months into 2013 for the delusion to wear off.

One element of the coming budget pact that is not getting the attention it warrants is a quiet and slightly sneaky effort to gut military benefits by privatizing them. Privatization has rarely delivered on its promise of delivering better performance and/or lower costs.

The manufactured fiscal cliff crisis means that more profiteering is coming to the military. The cash flow bonanza for privatizers is the healthcare and pension budgets: Instead of using the current government-contracted HMO/PPO model, called TriCare, military personnel and their families would receive health care vouchers allowing them to either purchase whatever health care plan they chose from an array of private sector providers. Instead of earning defined retirement benefits, also known as pensions; soldiers, sailors, airmen and marines would each pay into privately held 401K programs, or simply take a lump sum of cash.

In a win-win for corporate advocates, cuts to what they call the “excessive” and “burdensome” human side of the military will simultaneously fund greater spending on expensive weapons and communications systems. And under the pretext of providing “choice” to military personnel, the programs decrease total benefits and increase private sector access to government funds and the money of military personnel.

On the healthcare side, this is simply an excuse for the medical industrial complex to get its blood suckers into the huge military budgets, for the VA system is vastly more efficient than private sector providers.

Government health care is often characterized as wasteful and inefficient. But here too the VA’s experience suggests otherwise. In 2007, the nonpartisan Congressional Budget Office (CBO) released a report that concluded that the VA is doing a much better job of controlling health care costs than the private sector. After adjusting for a changing case mix as younger veterans return from Iraq and Afghanistan, the CBO calculated that the VA’s average health care cost per enrollee grew by roughly 1.7% from 1999 to 2005, an annual growth rate of 0.3%. During the same time period, Medicare’s per capita costs grew by 29.4 %, an annual growth rate of 4.4 %. In the private insurance market, premiums for family coverage jumped by more than 70%, according to the Kaiser Family Foundation.

The VA delivers high quality medical care at a more favorable cost than the private sector, meaning veterans will get a double whammy if the privatizers succeed: lower health care allotments by virtue of spending reductions, with the impact made more severe by the use of vouchers rather than relying on the established, effective VA system.

The national average pump price of regular gasoline fell 9.2 cents a gallon last week to $3.248 a gallon today, the lowest price since December 2011. Prices have fallen each day this month and are down 16% since mid-September. Missouri posts the lowest average price in the country at $2.955. Hawaii has the nation’s highest price at $3.979. All 50 states have gas below $4 for the first time this year.

Declining oil prices, coupled with a series of encouraging economic figures, have helped ease prices at the pump for American drivers in time for the busy holiday season. This year saw seasonal anomalies brought on by hurricanes, refinery outages and geopolitical issues. The Christmas miracle of cheap gasoline, however, was anticipated by the U.S. Energy Department early last month, suggesting it’s no miracle at all.

Factory output in the United States remains below rates from early this year, though November figures suggest there's been a sharp increase as the east coast recovers from Hurricane Sandy. The Federal Reserve said the manufacturing sector saw its biggest gain in about a year with a 1.1 increase in November. While characterized as modest, the U.S. Labor Department said the consumer price index dropped 0.3 percent.

The SEC has approved plans for JPMorgan Chase to offer the first US exchange-traded fund backed by physical copper. BlackRock and ETF Securities Ltd. also have said they plan to start physically backed ETFs for industrial metals in the US. Some industrial users of copper are concerned because they fear the ETFs will disrupt the market. The SEC dismissed worries that the ETFs would result in all available copper being scooped up and warehoused, pushing civilization back into the Stone Age.

Private-equity firm Cerberus Capital Management LP said it is seeking to sell the company that manufactures a gun used in last week’s shooting at Sandy Hook Elementary School in Newtown, Conn. “We have determined to immediately engage in a formal process to sell our investment in Freedom Group…We believe that this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so,” No official word on the asking price, but there is speculation that it could sell for as little as 30 pieces of silver.