Friday, October 12, 2012 - Peace Out

Peace Out

by Sinclair Noe

DOW + 2 = 13,328
SPX – 4 = 1428
NAS – 5 = 3044
10 YR YLD -.01 = 1.66%
OIL - .43 = 91.64
GOLD – 12.90 = 1755.30
SILV - .52 = 33.58
PLAT – 23.00 = 1660.00

Two down, two to go; debates that is. So far, it has been great entertainment; and we all get to play critic; too polite, too disrespectful, too vague, too mendacious, big flag pin, little flag pin, too much style and not enough substance. In addition to a dearth of veracity, there were other glaring omissions, such as details, specifics, and of course, the Federal Reserve. Pay no attention to the man behind the curtain.

Maybe the marching orders came from Jamie Dimon, speaking before the CFR the other day, Dimon discounted all this QE stuff. Dimon says QE1, 2, and 3 added together are only about $3 trillion dollars,... so far. Now that might sound like a significant sum to a bumpkin like me, but Dimon puts it in perspective; it is just a small part of the total financial assets of America, $80 trillion dollars. I didn't see much in the itemized columns about that $80 trillion but it seems that much of it is securitized debt, backstopped by the Federal Reserve, and without the Fed “Put”, that $80 trillion in financial assets might just be so much paper; in other words, it remains susceptible to massive deleveraging.

Profit for JPMorgan rose 34% to $5.71 billion, or $1.40 a share, up from $4.26 billion, or $1.02 a share, earned in the year-earlier quarter, as revenue reached $25.86 billion, up 6.1%. Consensus estimates called for $1.21 a share for quarterly profit and $24.42 billion for revenue. The bank's retail services business, which handles consumer and small-business clients, reported a profit of $1.4 billion, up 21% from a year earlier but down 38% sequentially. Mortgage loan originations were $47 billion, up 29% from the prior year and 8% from the second quarter. So, maybe this QE3 is actually a little bigger than Dimon is willing to admit. JPMorgan's investment banking arm turned a profit of $1.57 billion, down 3.9% from a year earlier and 18% from the second quarter.

And so, another quarterly earnings report, and slowly but surely the bank is distancing itself from the London Whale trading fiasco. After the biggest trading loss in Wall Street history, they come back with billions in earnings and a case of investor amnesia. The tarnish of the “London whale” and the $6 billion in trading losses are now overshadowed by questions about how fast the bank can increase its investment banking revenue, how quickly it will unleash reserves ($900 million this quarter) and how soon trading revenue will revive. The whale? The trading position is effectively closed, with only $449 million in additional costs booked during the quarter.

Earlier in the week, the New York Times wrote a PR-slash-news story:

The scope of the inquiry suggests that the problems were isolated to a handful of executives and traders in an overseas division, and did not reflect a fundamental weakness with the bank’s culture and leadership. The investigation does not appear to touch the upper echelons of the executive suite, notably Ina Drew who oversaw the chief investment office. The findings could insulate JPMorgan and its chief executive, Jamie Dimon, from further fallout.

Not exactly. Under Sarbanes-Oxley management is responsible for internal controls, as well as public reports, which were woefully inaccurate. Dimon almost seemed cocky when he told an analyst that the bank’s $700 million litigation fund would remain high. Still, it looks like Jamie Dimon has immunity.

Perhaps Dimon's best line from the CFR news conference was that politicians need to separate morality from economics. I don't know why he believes that is a good idea; I only know that on this score he is dead wrong.

New York Attorney General Eric Schneiderman is suing JPMorgan for fraud in mortgage bonds sales by Bear Stearns, which JPMorgan acquired during the financial crisis. The New York AG might just be playing softball with the banks, hoping for a quick and easy settlement; but investor suits could have a bigger impact, and some analysts question whether the bank has set aside enough reserves for legal problems.

Wells Fargo is also being sued by the New York AG for fraud in mortgage bond sales. Wells Fargo also reported Q3 earnings today; net income rose 22 percent from a year ago to a record $4.9 billion, or 88 cents per share, topping estimates of 87 cents. Total revenue of $21.2 billion missed the $21.47 billion analysts expected.

Both Wells Fargo and JPMorgan share prices dropped today.

Wells Fargo is also being sued by the New York AG for fraud in mortgage bond sales, hundreds of millions in damages for what is described as a decade of fraudulent behavior. Wells Fargo apparently certified more than 100,000 mortgages as being eligible for federal mortgage insurance, but the loans were actually of extremely poor quality. The problem was Wells Fargo management's singular focus on increasing the volume of FHA originations, and the bank's profits, rather than the quality of the loans being originated. Mass loan approvals without regard to quality. If you could fog a mirror, you got approved, and the bank made a fee.

Just to recap the suit, Wells Fargo spent a decade committing mass fraud and dumping a hundred thousand garbage loans on the taxpayer; they then received $36 billion in federal aid after the crash and got a massive push from the government to help it buy up zombie megabank Wachovia for $12.7 billion, which included a $25 billion dollar tax break for the deal; which allowed it to become the second largest bank in the country; and then they received $25 billion in TARP funds.

JPMorgan and Wells Fargo, both are saying that they won’t make home loans much cheaper for consumers. Their bottom lines have been padded by the Federal Reserve, which is trying to encourage Americans to buy homes with cheap rates, but the statements from the two banking giants illustrate the limits of the government’s reach to stimulate the economy; and that its policies may generate more benefits for banks than borrowers. Since the Fed announced it would pump $40 billion a month to stimulate the mortgage lending, rates have ticked down, but the cost of making the loans has fallen much more. And the banks are taking the spread as profit. The banks say they are overwhelmed with demand right now, giving them little reason to lower rates further; they might even raise rates.

Europe’s economic outlook turned a tad gloomier as economists cut growth forecasts for Germany and warned that public support for more financial aid to struggling countries was evaporating.

In a report for the Economy Ministry, leading economic research institutes said they now expect gross domestic product, or GDP, to increase by only 1 percent in 2013 instead of 2.0 percent. They said financial woes in other euro-zone nations were weighing on business confidence in the currency bloc’s largest economy, hurting spending on new equipment and production facilities. The regimen of austerity they've tried to impose on their so-called lazy southern neighbors is now coming back to bite. And it almost sounded like Chancellor Angela Merkel had an epiphany, saying it was incumbent upon Germany “to do things to stimulate the European economy. If we manage to keep our domestic consumption up, then that has of course the advantage that we can increase imports from other European Union countries.” So, yesterday, IMF chief Christine Lagarde abandons austerity and today Merkela embraces stimulus.

Next thing you know, these crazy kids will win the Nobel peace prize.

Oh, come on. Seriously?

The 2012 Nobel peace prize has been awarded to the 27-nation European Union for its role over six decades in building peace and reconciliation among enemies who fought Europe’s bloodiest wars, even as the Continent wrestles with economic strife that threatens its cohesion and future.

Thorbjorn Jagland, the former Norwegian prime minister who is chairman of the panel awarding the prize, said :“The union and its forerunners have for over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe.” There are some who think the prize is not appropriate; the EU's policies have exacerbated the fallout of the financial crisis and led to social unrest. The streets of Athens and Madrid are not exactly picture postcards for peace and harmony.

It raises several questions; did somebody call Europe this morning to wake them up and tell them they won the prize? Of course, the big question now is who will accept the award on behalf of Europe? I suspect the matter could be solved with a bare-knuckles cage match.

While the whole idea of a peace prize for Europe may be a slight reach, we should let them have it; I mean it's not like the European Union is ever going to win a Nobel Prize for Economics.

This afternoon, Spain said a European bond-buying plan was fully ready to use and that there was no political resistance from within the Euro-zone to a Spanish bailout request; not counting the Spaniards on the streets of Madrid, of course. Spain Economy Minister said the funding mechanism is real and it is ready to be used at any moment; he declined to say if Spain would actually request aid.

There is a game of chicken between Spain and Germany. Germany wants to be sure that Spain is serious about reforms before going to parliament and Spain wants to be sure that German lawmakers will sign off on the plan before it makes a request. And off to the side, the IMF is now pushing for a softer deficit reduction path with the newfound insight that austerity only makes things worse.

RealtyTrac reports foreclosure activity dropped in September to the lowest level since July 2007. Activity was down 7% compared with August, and down 16% compared with a year ago, the online foreclosure marketplace reported. Foreclosure filings were reported on 180,427 U.S. properties. Filings include default notices, scheduled auctions and bank repossessions. The number of properties entering the foreclosure process dropped 12% over the month and 15% over the year. It’s the second month in a row that foreclosure starts were down over the year.

Twenty of the 24 states with a non-judicial foreclosure process had annual decreases in foreclosure activity in the third quarter. Meanwhile, activity increased in 14 out of the 26 states that have a judicial foreclosure process. Florida now has the highest foreclosure rate in the country. Foreclosure starts in the state increased 24% in September, compared with a year ago. That’s the 11th month in a row Florida had an annual increase in starts.

The University of Michigan-Thomson Reuters consumer sentiment gauge rose to 83.1 in a preliminary October reading — the highest level since September 2007 — from a final September reading of 78.3. Consumers’ sentiment has been increasing since August, with September seeing a four-point gain. a gauge of consumer expectations rose to 79.5 in early October from 73.5 in September, while the barometer of consumers’ views on current conditions increased to 88.6 from 85.7. The sentiment gauge covers how consumers view their personal finances as well as business and buying conditions; the gauge averaged about 87 back in 2007.

Producer prices rose 1.1% in September after an increase of 1.7% in August. The core wholesale price index, which excludes food and energy prices, was flat in September after a 0.2% gain in the prior month. The PPI is designed to track inflation at the wholesale level. The gain in producer prices was due to continued higher energy costs, particularly gasoline. Energy prices advanced 4.7% in September after having risen 6.4% in August. A 9.8% gain in gasoline prices accounted for more than 80% of the September gain. Food prices were up 0.2% for the fourth consecutive increase.

In Thursday’s USDA supply/demand report nearly all the corn variables were adjusted and when the dust settled, ending stocks were projected at below pipeline minimum. This means that, if everything stays exactly the same, at some point next summer we would run completely out of corn. Of course, that's not going to happen but corn prices will likely be higher or at least remain high. Most of the big price action occurred in June, although yesterday, corn jumped 40 cents a bushel.

The EPA may shift corn away from ethanol use to reduce demand on drought-impacted farms. Only months ago, the EPA was pressing hard to expand the use of ethanol in the nation’s gasoline supply, but in the wake of this summer’s fierce drought, the agency may soon reverse course and actually trim back because of shortages of corn used to produce the renewable fuel.

The Michigan Farm Bureau is opposing the request. Some farm states are hoping to see corn prices rise in the months ahead to help offset declining yields in their local crops that could put some farmers out of business. A report in the Detroit News noted that Michigan’s five ethanol refineries used 98 million bushels of corn annually – compared to a combined 70 million for livestock, dairy and poultry feed. The EPA is expected to rule on the ethanol waiver request by early November.

The United States government reported a budget surplus for the final month of the 2012 fiscal year, but the tiny bump in revenues did not prevent the country's deficit from exceeding $1 trillion for the fourth year in a row. The 2012 budget gap was $1.089 trillion, narrower than last year's deficit of $1.297 trillion because of higher corporate income tax receipts and less spending. The deficit equaled 7.0 percent of U.S. economic output, down from 8.7 percent last year. And in case you're wondering, no these kinds of deficits are not generally considered sustainable.

One of the nation's top credit rating agencies announced Tuesday that it will review dozens of California cities for possible downgrades amid mounting concern over municipal bankruptcies and bond defaults. Moody's Investors Service says it will review 30 California cities for possible downgrades. They will scrutinize the ratings of various types of bonds.. The agency also announced that it already had downgraded eight municipal pension obligation bonds. Cities under review include Danville, Santa Monica, Sacramento and Fresno. Moody's will examine an array of factors, including falling tax revenue and increased spending. Any downgrades would increase borrowing costs for cities and could hinder their ability to borrow for infrastructure projects. The announcement follows an August report in which Moody's predicted more municipal bankruptcies and defaults in California, the nation's largest issuer of municipal bonds. Moody's warned that some cities are turning to bankruptcy as a new strategy to tackle budget deficits and abandon obligations to bondholders.

The United States isn’t making things that the world wants to buy. You've heard it before; maybe even said it yourself. That is an all-too-common sentiment, a kind of fatalist view of America’s place in the modern global economy. The shred of truth in it is the fact that the nation has maintained large and persistent trade deficits with the rest of the world for the past two decades or so, with little end in sight.

The latest numbers from the Commerce Department would seem, at first glance, to confirm that gloomy assessment. The trade deficit widened in August to $44 billion, from a revised $42.5 billion in July, as imports were little changed and exports fell 1 percent. Recent trends for exportshave been weak but they mask some more promising signs.

American exporters are reasonably successful on the global stage, selling overseas everything from soybeans to jet aircraft, banking services to Disneyland vacations. Last year, U.S. exports totaled $2.1 trillion, a 14 percent rise from 2010. That activity accounted for many millions of jobs and about 14 percent of the nation’s economic output.

If the world economy is going to come into better balance, with fewer vast sums of money sloshing around the globe fueling bubbles like the ones that imploded disastrously in 2008, it will be in part by getting that number up over time, and there has been progress. For the first eight months of the year as a whole, there was meaningful progress. That slowed in the summer, and the question is how lasting the downturn will be.

Strong growth is evident in a number of categories of exports, particularly of sophisticated, complicated manufactured goods. Civilian aircraft exports are up 38 percent in the first eight months of 2012; telecommunications equipment up 7 percent; drilling and oilfield equipment up 24 percent; agricultural equipment up 23 percent; pharmaceuticals up 7 percent. Some of the big losers among US exports appear to be one-time problems tied to the drought in the American heartland: Wheat exports were down 34 percent and corn exports down 22 percent. For US exports to show strength, we'll need to see the economies of China and Europe to show signs of life, and a little rain in Iowa would be a good thing. 

Peace Out