Friday, December 21, 2012 - If You Are Not a Member of an Organized Political Party, You Just Might Be a Republican

If You Are Not a Member of an Organized Political Party, You Just Might Be a Republican

by Sinclair Noe

DOW – 120 = 13,190
SPX – 13 = 1430

NAS – 29 = 3021
10 YR YLD - .05 = 1.75%
OIL – 1.24 = 88.89
GOLD + 9.80 = 1658.00
SILV + .04 = 30.06

The world as we know it did not end today. This means that I have a lot of Christmas shopping to complete in a very short period of time.

Last minute might working for shopping but it's no way to run a country.

Let's take a look at Plan B, excuse me, I think we've now moved on to Plan C. Will Rogers once said: “I'm not a member of any organized political party, I'm a Democrat.” Well, times change and now the unorganized party is the GOP. Consider: last week, Mitch McConnell tried to filibuster his own bill; this week John Boehner couldn't line up enough votes for a vote on Plan B, let alone Plan A.

Plan B was really a brilliant piece of legislation; it was sold as a tax cut for everybody with incomes under $1 million, except it actually raised taxes on everybody except the income earners between $200,000 and $1 million; everybody else would have been staring down a tax increase; low income earners and high income earners alike.

There were some other little dirty secrets in Plan B. House Republicans want to cut wasteful spending, so Plan B offered to eliminate the Office of Financial Research. Why that obscure little office? Because that’s where the Dodd-Frank Wall Street Reform & Consumer Protection Act provided for the breakup of too-big-to-fail banks that actually fail by means of an Orderly Liquidation Authority. Why would they want to axe that? Better question is how much did the big banks pay the politicians to try to kill that.

Maybe they think it would be impossible for the too big to fail banks to actually fail. No. The Office of the Comptroller of the Currency just had a closed-door “convention” to talk with bank directors about how safe the banks really are. Nineteen of the country’s biggest banks were looked at; they all failed.

Another big plan to cut spending contained in Plan B was to cut funding for the newly formed Consumer Financial Protection Bureau. The CFPB actually gets its funding from the Federal Reserve's Operating Expense Budget, not directly through Congress, so this was just a bald-faced attempt to kill the the CFPB because consumers don't need protection from the banksters, or because some politicians needed to boost their campaign coffers.

So, Speaker Boehner trotted out Plan B for a vote. Paul Ryan supported it; Eric Cantor supported it; Grover Norquist gave it his blessing, saying it wasn't really a tax increase. And even with the GOP stars of the House lining up in support, Boehner couldn't rally enough support to justify a vote.

Meanwhile, the guy sitting across from the negotiating table just won the Time Magazine Person of the Year Award. I'm guessing he'll put the award up on the shelf next to his Nobel Peace Prize. In case you have felt comfortable with reality, this is the new reality; and in this new reality, John Boehner now has lost his bargaining chips. He has shown he is unable to deliver votes in the House. Why would you even negotiate with someone who can’t deliver on a promise?

The two man game between Boehner and Obama is finished for now. Look for a shift to the Senate to make a deal with the White House. If that gets done, then the House will be left with nowhere to hide; meaning that if the House then fails, they will get the blame. Boehner had a horribly designed Plan and then he executed it in the worst possible manner, and after a quick Christmas recess he's going to come back and have a compromise plan that is likely to splinter the House Republicans even more.

And eventually a deal will get done, because taxpayers are getting fed up with this dysfunction, and because big business wants a deal. Which changes the old Will Rogers quote to a Jeff Foxworthy punchline; if you are not a member of an organized political party, you just might be a Republican.

NRA executive vice president Wayne LaPierre addressed the Sandy Hook shootings today for the first time since the massacre, and called for universal disarmament and a total ban on the sale of assault weapons. Just kidding.

LaPierre blamed video games and the media for the violence, because guns don't kill people, movies do. And the whole thing might have been avoided if we had armed police and armed teachers in every classroom.

In 1998, the SEC announced “Reg. ATS,” which authorized electronic communication networks to be used between traders to make deals outside exchanges. In 2001, the SEC made another big move, requiring stock prices to be quoted in decimals rather than fractions. This changed the minimum difference between stock prices from 1/16th of a dollar to 1/100th, preventing exchanges from making extra money on the spread between the price at which they sell a stock and the price at which they buy stocks. Then in 2005, the regulator implemented a set of rules collectively known as “Reg. NMS,” which, among other things, required brokers to route trades to the venue that offers the very best price; this regulation further squeezed the margins that the traditional exchanges and crated more competition among exchanges and upstart trading platforms.

Then, the rapid development of computer technology allowed upstart firms to set up their own trading platforms, and the new trading platforms attracted the high frequency traders using powerful computers located right next to the exchanges in order to cut down transmission times, allowing the high frequency traders to use algorithms to front-run consumer trades and scalp a fraction of a decimal from each trade.

So, the old, traditional stock exchanges don't make much money anymore, and that raises the question; why did a small Atlanta-based commodity and derivatives exchange called Intercontinental Exchange, or ICE, purchase the NYSE Euronext for $8.2 billion?

It's not for the stock exchange; it is for the derivatives exchange that the NYSE owned and operated out of London, called Liffe (pronounced LIFE), which stands for the London Interantional Futures and Options Exchange. There are relatively few derivatives exchanges, they tend not to compete directly with each other, they tend not to compete on price, and they’re extremely profitable. What do they do to make all this profit? They trade derivatives, which are not really equity positions or not really debt positions but more like a form of risk insurance, without claims paying reserves. This means the derivatives actually increase risk because of the false sense of security offered by having insurance, even if all the traders know the insurance is likely unable to pay off in the event of a problem, which just encourages far more risk than if someone actually had skin in the game.

But never-mind that that massive moral hazard. The derivatives can be traded, in a largely unregulated environment and that means big bucks for the traders. It also means systemic risk for the global economy, and that is why ICE bought the NYSE. How does this help the economy? How does this help finance companies to grow and employ people? Well, it doesn't. That's just old school thinking. As far as the iconic, historic trading floor of the New York Stock Exchange, well, it's nothing more than a tourist attraction.

Now, let's take a look at Banks Behaving Badly: The Year in Review. With thanks to : (Reuters)

Bank of America: the US Justice Department is seeking $1 billion in fines for troubled loans sold to Fannie and Freddie; MBIA’s lawsuit against Countrywide, which was disastrously acquired by BofA, rolls on; BofA is one of five banks participating in the $25 billion national mortgage settlement.

Bank of China: the families of Israeli students killed in a 2008 terrorist attack are suing the BOC for $1 billion “intentionally and recklessly” handling money for terrorist groups.

Bank of New York Mellon: a subsidiary paid $210 million to settle claims it advised clients to invest in Bernie Madoff’s ponzi scheme; the DOJ continues to investigate possible overcharges for currency trades that it says generated $1.5 billion in revenue.

Barclays: $450 million settlement in the Libor scandal; also fined by the FSA for mis-soldinterest rate hedges.

BBVA: settled overdraft suit for $11.5 million.

Citigroup: settled CDO lawsuit for $590 million; one of five banks participating in the $25 billionnational mortgage settlement; paid $158 million to settle charges it “defaulted the government into insuring” risky mortgages.

Credit Suisse: sued by NY state for allegedly deceiving investor in the sale of MBS.

Deutsche Bank: settled a DOJ mortgage suit for $202 million; FHFA fraud case is ongoing.

Goldman Sachs: FHFA fraud case is ongoing; after a ruling by federal appeals court, a class action lawsuit over MBS will go forward.

Crédit Agricole: sued by CDO investors two times.

HSBC: settled money laundering charges for $1.9 billion; set aside $1 billion for future settlements related to mis-selling loan insurance and interest rate hedges in the UK; Libor settlement still to be reached.

ING: settled charges that it violated sanctions against Iran, Cuba, etc. for $619 million.

JP Morgan Chase: being sued by NY state for MBS issued by Bear Stearns; class action lawsuit and criminal probe over failed derivatives trades in its Chief Investment Office; one of five banks participating in the $25 billion national mortgage settlement. And then there was this notice in the Murdoch Street Journal today: The Office of the Comptroller of the Currency, led by Comptroller Thomas Curry, is preparing to take a formal action demanding that J.P. Morgan remedy the lapses in risk controls that allowed a small group of London-based traders to rack up losses of more than $6 billion this year, according to people familiar with the company’s discussions with regulators. The OCC, the primary regulator for J.P. Morgan’s deposit-taking bank, isn’t expected to levy a fine, at least initially.

Mitsubishi UFJ: paid an $8.6 million fine for violating US sanctions on Iran, Sudan, Myanmar and Cuba.

Morgan Stanley: fined $5 million for improper investment banking influence over research during Facebook’s IPO.

Royal Bank of Scotland: $5.37 billion shareholder lawsuit related to 2008 rights issuance; set aside $650 million to cover claims it mis-sold payment protection products; also fined by the FSA for mis-sold interest rate hedges.

Santander: fined by the FSA for mis-sold interest rate hedges.

Société Générale: rogue trader Jerome Kerviel loses appeal his appeal 3-year sentence for trades that generated $6.5 billion in losses.

Standard Chartered: $340 million fine paid to NY state department of financial services for allegedly hiding the identity of customers in transactions with Iran and drug cartels; $327 millionpaid to the Federal Reserve and US Treasury’s anti-money laundering unit.

State Street: fined $5 million for lack of CDO disclosure.

UBS: $1.5 billion Libor fine and two traders criminally charged; rogue trader responsible for $2.3 billion loss found guilty of false accounting. The fine for Libor? Anything under $2 billion is considered a victory for UBS, or as they say at UBS, “half a Adoboli”.

Wells Fargo: Federal lawsuit over mortgage foreclosure practices ongoing; paid $175 millionover mortgage bias claims; one of five banks participating in the $25 billion national mortgage settlement.

Thursday, December 20, 2012 - Plan B, Plan S

Plan B, Plan S

by Sinclair Noe

DOW + 59 = 13,311
SPX + 7 = 1443
NAS + 6 = 3050
10 YR YLD un = 1.80%
OIL -.03 = 89.95
GOLD – 18.70 = 1648.20
SILV – 1.06 = 30.02

I'm thinking we just go over the cliff. Why not? It looks more and more that they aren't going to get anything done. They say they are close, they say it is possible, but really, I don't have confidence.

President Obama held a press conference. And he said he had gone at least halfway in meeting some of the Republican concerns. At least halfway? So he's admitted that he's already met them in the middle, and likely gone past the middle into Republican territory. And we're still two weeks out from the fiscal cliff deadline, with Republicans sitting around waiting for the inevitable further concessions Obama will make. Why didn't Obama say something like, "I made a more than fair deal. The GOP rejected it. So now I'm pulling the offer off the table and waiting to see what the GOP has to offer. Clock's ticking!" Instead, the GOP will bank the concessions he's already made, then demand more. Rinse. Lather. Repeat.

Meanwhile, Speaker John Boehner is just playing with himself. He's offered up a Plan B for a vote in the House. One of the touted benefits of "Plan B" is that it only raises taxes for those making $1 million or more. Eric Cantor said this morning, the plan would raise revenue "without hurting many small businesses" or taxpayers. Not exactly.

But a closer look at the tax impacts of Plan B shows that while it raises taxes on most million-plus earners, it also raises taxes for many low-income earners. The non-partisan Tax Policy Center found that the average taxpayer earning $1 million or more in cash income would see their taxes go up by an average of $72,000. A small number of those million-plus earners will see a tax cut, due to an anomaly in the Alternative Minimum Tax.

But lower income earners will also see a tax hike. People making between $10,000 to $20,000 will see their taxes go up by an average of $262. People making $20,000 to $30,000 will see their taxes go up by $219. Some of those low-income earners could see a sizable increase. One in five of Americans who earn less than $20,000 a year will see an increase of $1,070 -- a sizeable amount for low-income earners.

In fact, the only taxpayers who will get an overall tax cut under Plan B are those who earn between $200,000 and $1 million. People making between $200,000 and $500,000 will see an average tax cut of $301. Those making between $500,000 and $1 million will see their taxes go down by $164.

The reason is that Plan B has two parts; raising taxes on high earners and eliminating deductions for low earners. The plan raises the tax rate for those making $1 million or more to 39.6 percent from its current rate of 35 percent. It would also raise the capital gains and dividend tax rates for those earners to 20 percent from 15 percent. Plan B also eliminates many of the Obama-led tax credits that largely benefit low-income earners, including the 2009 enhancements to the child tax credit, the earned income tax credit and others.

Which is just another way of saying that Boehner is playing games because he knows that Plan B will never get through the Senate and never get signed into law. Apparently, it is nothing more than an effort to show some Republicans are willing to stand up to Grover Norquist and vote for a tax increase, for everybody not earning between $200,000 and $1 million; which is something that is so far out of the mainstream conversation that it is absurd. The Democratic leader in the Senate, Harry Reid, at an earlier press conference, said the bill was an empty gesture: "We are not taking up any of the things that they're working on over there now. It's very, very, very unfortunate the Republicans have wasted an entire week on a number of pointless political stunts. The bill has no future, if they don't know it now, tell them what I said.”

The impasse comes at a time when the differences between Obama and Boehner appear to be minimal, with agreement reached on principle and divided only over the final figures. Obama wants the tax increases to kick in at $250,000 rather than $1 million. He is proposing $800 billion in spending cuts whereas Boehner is looking for $1.2 trillion.

Claiming it was not about the figures,Democrats identified the problem as Boehner being unable to deliver Republicans behind a tax-raising measure, and that is probably the reason for the crazy Plan B vote. It might just be a way to measure how everybody might be expected to vote, you know, in a real vote.

Hong Kong financial authorities are investigating Swiss bank, UBS over possible misconduct related to the Hibor, the Hong Kong benchmark interest rate.

Th Hong Kong Monetary Authoritym the city's de facto central bank said on its website that it has launched a probe to determine whether there was any wrongdoing by UBS when it submitted information used to set the Hong Kong Interbank Offered Rate. It will also try to find out if the misconduct had any "material impact" on setting the Hibor rate.

Everyone who has ever claimed that the financial industry is overregulated should be forced to read the United Kingdom's Financial Services Authority final notice on UBS's manipulation of the London interbank offered rate.

UBS disclosed cooperation with antitrust authorities more than a year ago, so it's no surprise that the bank was penalized, though the $1.5 billion penalty was nothing more than the cost of doing business, particularly because UBS had been granted leniency or some parts of the Libor probe. What's most striking about the FSA's filing on UBS is the brazenness of the reported misconduct. According to the FSA, 17 different people at UBS, including four managers, were involved in almost 2,000 requests to manipulate the reporting of interbank borrowing rates for Japanese yen. More than 1,000 of those requests were made to brokers in an attempt to manipulate the rates reported by other banks on the Libor panel.

According to the FSA, the bank's rate manipulation, whether to improve UBS's trading positions or to protect the bank's image, was so endemic that one employee who was supposed to submit rates complained in 2007 of being caught between demands by two different traders who wanted two different fake submissions. "I got to say this is majorly frustrating that those guys can give us s*** as mu c h as they like.... One guy wants us to do one thing and (the other) wants us to do another," he told a UBS manager, according to the FSA. Even after The Wall Street Journal first broke news of suspected Libor manipulation in 2008, UBS managers discussed continuing their rate-rigging, this time with the goal of staying in the middle of the pack of rate reports so it would look as though they weren't engaged in rigging.

The New York Stock Exchange has agreed to an $8.2bn takeover that will hand control of the icon of American capitalism to an Atlanta-based energy trader.

The stock exchange's holding company, NYSE Euronext, has agreed to an offer of $33.12 a share in cash and stock from IntercontinentalExchange (ICE). ICE was founded in 2000, NYSE in 1817. The combined company would have headquarters in both ICE's home of Atlanta and in New York.

The National Association of Realtors reportes sales of existing homes rose 5.9% in November to a seasonally adjusted annual rate of 5.04 million, reaching the highest rate since November 2009, when a tax credit was expected to expire.

First-time claims for unemployment benefits climbed 17,000 in the latest week, that's a level that suggests the labor market is continuing its steady but painfully slow improvement.

The US economy grew more quickly than previously stated in the July-to-September quarter due to stronger trade, faster health-care spending and increased local government construction. The Commerce Department said third-quarter gross domestic product grew at a seasonally adjusted annual rate of 3.1% in the third quarter, which is the fastest rate of growth since the 4.1% pickup in the final quarter of 2011.

Personal consumption is now pegged to have grown at a 1.6% rate, up from a previously estimated 1.4% rate and faster than the 1.5% advance in the second quarter. The change from the previous estimate was due to an upward revision to health-care services, and the growth during the quarter came from durable-goods spending on vehicles.

Other differences between the third-quarter reports: Trade was a bigger help, with exports 0.8 percentage point higher due to revised export prices as well as more goods, and imports 0.7 percentage point lower due to downward revisions to travel and to royalties and license fees.

Government spending also was stronger than previously estimated, showing 3.9% instead of 3.5% growth, due to local and state government construction. The big increase in government spending during the third quarter is expected to be a one-time affair, driven by a temporary surge in defense maintenance costs. Business investment was a drag in the third quarter, dropping by 1.8%. So, now we know what the economy did five months ago.

The Treasury has announced plans to get out of General Motors."GM will purchase 200 million shares of GM common shares from Treasury for $27.50 per share" translates into news reports as “Treasury will lose a gazillion dollars on GM Deal” since after all Treasury paid rather more than $27.50 per share originally, but there are other ways to look at it. One is that Treasury seems to have agreed a deal with GM after the 12/18 close at $27.50 for a stock that had closed at $25.49 and hasn’t touched $27 in ten months; in other words, GM overpaid for stock by $400 million.

Here's the official explanation: GM’s repurchase will be accretive to earnings per share, reducing the auto maker’s total shares outstanding by about 11%. GM expects to take a charge of approximately $400 million in the fourth quarter, which will be treated as a special item.

Getting rid of shares reduces shares outstanding and is accretive to EPS. It’s somewhat less accretive when you overpay for the shares by $400 million and that $400 million is a charge to income. But at least you can call it a special item. Isn't that how all of us do our tax returns?

Wednesday, December 19, 2012 - You Can't Kill a Bank, Even With a Bushmaster

You Can't Kill a Bank, Even With a Bushmaster

by Sinclair Noe

DOW – 98 = 13,251
SPX – 10 = 1435
NAS – 10 = 3044
10 YR YLD -.03 = 1.80%
OIL + 1.49 = 89.42
GOLD – 5.00 = 1666.90
SILV - .66 = 31.08

All right, let's start with a refresher course; Libor stands for the London Interbank Offered Rate. It’s the rate at which banks are able to borrow money from each other. The lower a bank’s rate (banks submit their own rates) the healthier it’s deemed to be. If you're balance sheet is healthy, you get a low rate when you borrow. If your balance sheet is known to contain toxic assets, you have to pay a higher rate to borrow. The rates were especially indicative of banks’ health during the peak of the financial crisis when the markets were all but frozen and access to funds were limited.

The Libor rate is determined daily; sixteen banks submit their rates to an agency; the four highest rates are wiped out and the four lowest rates are wiped out. The result is averaged and the daily Libor rate is published. It would take more than one bank to manipulate the rates. But once the rate is published it affects trillions of dollars of financial instruments around the globe.

More than a dozen banks in the U.S. and Europe are under investigation for Libor rate rigging. Even though it is not really surprising, the sheer scope and audacity of the market manipulation involved in the latest bank scandal still manages to inspire a sense of awe and nauseum.

In July, Barclays reached a settlement on manipulating the Libor rate, and they paid a $450 million fine. Today, as expected, UBS, the Swiss bank agreed to a settlement of $1.5 billion for its role in manipulating Libor. The charges made against UBS show the bank not only manipulated the Libor rate to make itself look healthier to outsiders but also to make money by colluding with other banks. From a regulator’s perspective that’s a lot worse than lying a bit to appear in better condition.

According to the regulators, at least 45 different managers and traders were involved in a scheme to manipulate Libor. The manipulation was so pervasive that the U.K.'s Financial Services Authority says every single trade in which UBS was involved over five years was suspect. Regulators found at least 2,000 instances of certain manipulation. Where did they find this damning evidence? Emails. And the dumbest email is credited to an eager young trader trying to entice a banker to submit a fraudulent Libor rate. How do you entice a banker to commit a fraudulent act? Apparently bribery works.

“I will f***ing do one humongous deal with you ... I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want."

There is strong evidence to suggest that the UBS traders were incredibly stupid, including this exchange over IM: “dude don’t IM about all the Libor manipulating you’re doing.” Or, one way to read a lot of these exchanges is that many UBS Libor manipulators genuinely didn’t know that it wasn’t okay to lie about Libor, they had no sense of morality or right and wrong, and they felt not a twinge to ask other banks to lie about Libor, and offer bribes to interdealer brokers to get them to get other banks to lie about Libor. Libor was a number, and someone made it up, and so why wouldn’t you make it up to suit you, as opposed to otherwise?

The important thing about this settlement is not the fine, which UBS should have no trouble paying, even though it is going to cause the bank to take a loss in this quarter. The bank's share price was up 1 percent this morning, if that tells you anything about how much financial damage the settlement is going to do. What matters is that criminal charges are finally starting to be filed. Three former UBS traders have already been arrested in the U.K., and more arrests are coming in the U.S. So far, all the arrests are lower level traders, not the executives who clearly authorized and perhaps encouraged the collusion.

On top of that, prosecutors broke a taboo and actually filed a criminal charge against UBS itself, something they are typically too terrified to do. Of course, this charge was designed to do minimal damage; it was limited to UBS's unit in Japan, which pleaded guilty to one count of fraud, and it doesn't affect the rest of the bank. Still, a criminal charge is a criminal charge. Authorities are loath to prosecute big banks criminally because they consider it a "death sentence" for banks. Something we're not sure is completely accurate because, well, these banks never get killed off do they?

But prosecutors don't dare take the chance, because toppling these behemoths might crush the financial system. Of course, given that UBS and other big banks are constantly getting themselves into massive amounts of trouble, a death sentence might leave us all better off in the long run.

Still, the policy is to be nice to banks, even if they are evil. We need look no further than the money laundering bank HSBC. Bank regulators and Treasury opposed having HSBC admit the truth – that it violated the money-laundering statutes; that it was in business with drug cartels and terrorists. Not only would the truth lay bare the hypocrisy of the War on Drugs but it might not be nice to the money laundering bank. They warned that such a guilty plea could cause a systemic crisis because HSBC was too big to fail; it is systemically important. When Treasury warns DOJ that a prosecution could cause a global crisis there is no chance that the AG will override Treasury’s warning on his own initiative. That is why line prosecutors urged AG Holder to meet personally with Secretary Geithner to urge him to withdraw his objections to the proposed prosecution, but Holder apparently declined to seek a meeting. Instead, the DOJ accepted Treasury’s warning that HSBC was too big to prosecute because doing so would cause a global systemic crisis.

Libor manipulation cost Fannie Mae and Freddie Mac more than $3 billion, according to an estimate by a government watchdog, who recommends the government-owned mortgage giants sue the big banks.

That estimate and legal advice were made in a private report by Steve Linick, the inspector general for the Federal Housing Finance Agency, the regulator for Fannie and Freddie, which were taken over by the U.S. government during the financial crisis. Now, $3 billion isn't enough to keep us from going over the fiscal bunny hill, but it's nothing to sneeze at.

And yes, if you have a mortgage through Fannie or Freddie, it means that you are a victim of the Libor rate rigging scandal.

If you still think Libor fraud is a victimless crime, the muni-bond market has 6 billion reasons it begs to differ. States, cities and other municipal borrowers have lost at least $6 billion as a result of banks manipulating Libor.

This $6 billion in losses would come on top of the $4 billion that muni borrowers have already paid big banks to close out derivatives trades that went bad, partly because of Libor manipulation. This is all part of a study released in October.

The Libor investigations have implications for states and cities that are still contending with the fiscal legacy of the recession, which left them grappling with falling tax revenue and rising costs. States have had to deal with combined deficits of more than $500 billion since fiscal 2009, according to the Washington-based Center on Budget & Policy Priorities.

The losses came not because Libor manipulation affected borrowing costs, but because these bond issuers entered some $500 billion in interest-rate swaps with banks, according to some estimates. These swaps were a type of derivative, essentially an insurance policy the muni-bond issuers bought to protect themselves against interest rates rising. When interest rates -- Libor specifically -- fell instead, the muni-bond issuers lost a boatload of money on the swaps.

In other words, in the eyes of the muni-bond issuers, these banks tricked them into betting that interest rates were going to rise and then sold them derivatives to insure against rising rates, and then they colluded to manipulate the rates lower.

States and cities have been lawyering up, preparing to sue the banks over Libor manipulation, lawsuits that could ultimately cost the banks billions of dollars.

And finally,

Walmart sells almost everything inside its stores, including guns and ammunition and assault rifles. But some things are too dangerous to be sold in WalMart, including: a pregnant Barbie doll, a book by George Carlin, and the debut album by Sheryl Crow (because it includes lyrics about buying a gun at WalMart and shooting children). Proving once again that ideas are still more dangerous than the sword, or the Bushmaster assault rifle. I'm not sure how they measure up against an RPG, and it is my understanding that drones do not discriminate.

 

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.

Monday, December 17, 2012 - Unconnected Dots

Unconnected Dots

by Sinclair Noe

DOW + 100 = 13,235
SPX + 16 = 1430
NAS + 39 = 3010
10 YR YLD +.05 = 1.76%
OIL +.71 = 87.44
GOLD + 1.90 = 1699.10
SILV -.03 = 32.38

President Obama and House Speaker Boehner met at the White House today. Aides from both parties said they were optimistic that a deal could be reached in the coming days to avert the "fiscal cliff," as lawmakers set the stage for action before a year-end deadline.

A senior Republican aide said: "There's been too much progress at this point and neither guy wants to go over the cliff." Although both sides still had major differences, investors were cheered by signs of progress. Major market indices moved higher in the afternoon, and some of that was the feel good part of the news cycle; we certainly need some good news. Now, we sit back and see whether it was yet another rumor.

Boehner, the speaker of the Republican-controlled House of Representatives, has edged closer to Obama's demand to raise taxes on the wealthiest Americans. In return, Obama is considering a measure that would slow the rate of growth of Social Security retirement benefits by changing the way they are measured against inflation.

Boehner has put forward a tax increase for those earning over $1 million annually, while Obama wants that threshold set at $250,000. Republicans could probably stomach a tax hike on incomes above $500,000. Boehner could float the broad outlines of a deal with rank-and-file members on Tuesday. If there are no strong objections, he could try to finalize the deal on Wednesday, the Republican aide said.

Votes could be held in Congress next week. Both sides declined to say what Boehner and Obama discussed at the meeting, which was also attended by Treasury Secretary Timothy Geithner.

However, the White House said Boehner's latest proposal doesn't meet its standards. Republicans want substantial spending cuts in return for increased tax revenue, but any proposal to trim popular benefit programs like the Medicare health insurance plan for seniors will face fierce resistance. Obama could also face strong opposition from Democrats if he agrees to Boehner's proposal to slow the growth of Social Security benefits by changing the way the cost-of-living increases are measured against inflation, an approach that could save $200 billion over 10 years. Obama also wants to head off another confrontation over the government's debt limit, which will need to be raised in the coming months. Republicans insist that any increase in the government's $16.4 trillion borrowing authority must be paired with an equal reduction in spending. Apparently jobs were not a big talking point in the negotiations.

The National Credit Union Administration , the regulator of credit unions has sued JPMorgan Securities and Bear Stearns over $3.6 billion in mortgage securities the bank allegedly sold to credit unions that collapsed because of losses from the securities.

The lawsuit by the National Credit Union Administration is its second against JPMorgan involving losses to credit unions. In June 2011 the agency sued it over some $1.4 billion in securities in which JPMorgan was the underwriter and seller. That suit is still pending. The actions add to a growing list of cases JPMorgan fighting over conduct by Bear Stearns, which JPMorgan acquired in 2008. The New York Attorney General sued JPMorgan in October alleging that Bear Stearns deceived investors buying mortgage-backed securities in 2006 and 2007.

In today's lawsuit, the NCUA alleged that Bear Stearns made misrepresentations in connection with the underwriting and subsequent sale of mortgage-backed securities to U.S. Central, Western Corporate, Southwest Corporate and Members United Corporate federal credit unions. The lawsuit, filed in federal court in Kansas, is the largest such lawsuit the regulator has filed to date. A JPMorgan spokeswoman declined to comment.

In the past two years the agency has brought similar actions against Barclays Capital, Credit Suisse, Goldman Sachs, RBS Securities, UBS Securities, Wachovia and others. Most of the cases are pending, but it has settled claims against Citigroup, Deutsche Bank Securities and HSBC for around $170 million.

The credit union regulator has been trying to recover losses related to the failure of five institutions that it seized in 2009 and 2010 after they ran into trouble due to the crumbling housing market. The wholesale credit unions have experienced more troubles than their retail counterparts because they did not face the same restrictions on permitted investments, leading to big losses during the financial crisis.

UBS will pay around $1.5 billion to settle charges that a group of traders at its Japanese unit rigged Libor interest rates. The fine, to be imposed by the United States and Britain, would be the latest blow to UBS after a $2.3-billion rogue trading loss in London last year, a $780-million fine after a U.S. tax investigation in 2009 and its near collapse in 2008 under the weight of losses on U.S. sub-prime mortgage lending.

UBS will admit that roughly 36 of its traders around the globe manipulated yen Libor between 2005 and 2010. The settlement talks are reportedly now centering on a fine in the region of $1.5 billion - somewhat higher than geusstimated last week and three times the $450 million levied on British bank Barclays Plc in June for similar manipulation of benchmark interest rates.

The fine against UBS would be the second-largest ever levied against a bank for wrongdoing, after Britain's HSBC last week agreed to pay $1.92 billion to settle a probe in the United States into laundering money for drug cartels.

UBS earned $4.6 billion in net profit last year and the bank has spent much of this year and last bolstering its capital. Paying $1.5 billion to settle the Libor probe would shave 50 basis points off UBS's capital ratios, but even after the fine, UBS would still be better capitalized than other banks.

UBS is expected admit to criminal wrongdoing by its Japanese arm, where one of its traders manipulated yen Libor and euro yen contracts. Admitting to criminal wrongdoing can be fatal for a bank, as it can lose its license. But by admitting to wrongdoing only at its Japanese subsidiary, where UBS employs 1,000 staff, it effectively ring-fences the damage, sparing its bigger units.

Individuals are also being targeted, mainly lower-level traders, offered up as sacrificial lambs. The UBS investigation centers on former UBS trader Thomas Hayes, but also includes other UBS bankers. Hayes, who joined Citigroup after leaving UBS in 2009, is one of three British men arrested last week by London police but later released on bail.

More than a dozen banks have been caught in the international inquiry into Libor rates, with most of the focus being on how rates were set between 2005 and 2008.

Royal Bank of Scotland is also expected to shortly reach a settlement on Libor manipulation. The bank will receive a penalty of more than $564 million.

Morgan Stanley, the lead underwriter for Facebook's initial public offering, will pay a $5 million fine to Massachusetts for violating securities laws governing how investment research can be distributed.

Massachusetts' top securities regulator charged that a top Morgan Stanley banker had improperly coached Facebook on how to disclose sensitive financial information selectively, perpetuating an unlevel playing field between Wall Street and Main Street.

Morgan Stanley has faced criticism since Facebook went public in May for revealing revised earnings and revenue forecasts to select clients before the media company's $16 billion initial public offering. This is the first time a case stemming from Morgan Stanley's handling of the Facebook offering has been decided.

Facebook had privately told Wall Street research analysts about softer forecasts because of less robust mobile revenues. A top Morgan Stanley banker coached Facebook executives on how to get the message out.

A Morgan Stanley spokeswoman said the company is "pleased to have reached a settlement" and that it is "committed to robust compliance with both the letter and the spirit of all applicable regulations and laws." The company neither admitted nor denied any wrongdoing.

The investigation into the Facebook IPO is far from over and other banks were involved. Goldman Sachs and JP Morgan also acted as underwriters. The underwriting fee for all underwriters was reported to be $176 million.

The state said a Morgan Stanley banker helped a Facebook executive release new information and then guided the executive on how to speak with Wall Street analysts about it. The banker rehearsed with Facebook's Treasurer and wrote the bulk of the script Facebook's Treasurer used when calling the research analysts. A number of Wall Street analysts cut their growth estimates for Facebook in the days before the IPO after the company filed an amended prospectus. Facebook's treasurer then quickly called a number for Wall Street analysts providing even more information.

The banker "was not allowed to call research analysts himself, so he did everything he could to ensure research analysts received new revenue numbers which they then provided to institutional investors." The consent order also says that the banker spoke with company lawyers and then to Facebook's chief financial officer about how to prove an update "without creating the appearance of not providing the underlying trend information to all investors."

The banker and all others involved with the matter at Morgan Stanley are still employed by the company.

Retail investors were not given any similar information, just in case you ever wondered whether the market is rigged against you.

In light of the HSBC money laundering settlement last week it is worth reading a report I found in the Guardian entitled Arizona funnels business to CCA through its school-to-prison pipeline