Monday, May 06, 2013 - Wall Street Loves the Mushy Jobs Report

Wall Street Loves the Mushy Jobs Report

by Sinclair Noe

DOW – 5= 14968
SPX + 3 = 1617
NAS + 14 = 3392
10 YR YLD + .02 = 1.77%
OIL + .18 = 95.79
GOLD - .40 = 1471.30
SILV - .09 = 24.14

Friday's jobs report was great for Wall Street. The Dow Industrials briefly topped 15,000 and managed to close at a record high. The S&P 500 hits new records as well. The actual jobs report was only semi-good. The economy added 165,000 net new jobs in April. The February and March reports were revised higher. That's certainly better than losing 700,000 jobs, but it wasn't enough to get the economy up to cruising speed. Wall Street loved it; just enough job growth to avoid recession; not enough job growth to cause the Fed to exit QE to infinity.

Wages are still basically flat. Since the financial collapse of 2008, 9.5 million Americans have simply left the workforce. Once you leave the workforce, you stop being counted, you become invisible. About 22 million Americans are unemployed or under-employed or working part-time because they can't find full-time work. The Federal Reserve last week told us they are pretty well tapped out as far as their ability to fix things; they said: “fiscal policy is restraining economic growth.”

A new report from the Brookings Institute puts numbers on fiscal policy. In the 46 months since the official end of the Great Recession, state, local and federal governments have cut about 500,000 jobs. In contrast, in every other U.S. recession since 1970, the government hired approximately 1.7 million people, on average. That means the U.S. is an estimated 2.2 million jobs in the hole. An extra 2.2 million jobs added to the labor force would mean the unemployment rate would be about 6.1% instead of 7.5%.

President Obama set a goal of 1 million new manufacturing jobs in his second term. Last month we added zero. Not one. Nada. Zip. We did add low-wage jobs, though. Maybe we can talk about a national manufacturing strategy now?

In the 2012 campaign President Obama set a goal of creating 1 million new manufacturing jobs. (This goal comes after the country lost 5.5 million manufacturing jobs between 2000 and 2009.) Manufacturing jobs bring money into the economy. Manufacturing jobs also bring along with them many jobs in other sectors that support manufacturing, from the supply chain to the maintenance to the marketing and sales of the goods. This is what the president understood when he set this goal. But with the March jobs numbers the economy has created a total of only 39,000 manufacturing jobs this year -- zero in March. That leaves the country with 961,000 manufacturing jobs to go in the time remaining.

So, today, President Obama headed out on a jobs tour, touting who knows what, trying to build suport for who knows what. He's going to Austin Texas. He'll visit a high school and a technology company, and will talk with entrepreneurs and workers about proposals he made earlier this year to boost jobs and training. In February, Obama said he wanted to invest in manufacturing "hubs" around the country, spend $50 billion on roads, bridges and other infrastructure, and raise the minimum wage to $9 per hour from the current $7.25. Most of the proposals require Congressional approval, but that's not going to happen.

And for now, Wall Street loves the slightly mushy, slightly tepid jobs reports. One hallmark of a bull market is that the money doesn't leave the market. Over the past seven weeks or so, there were ample opportunities for the market to correct. It didn’t, and now it has broken higher once more.

All the indexes have broken higher at this juncture. It will correct at some point, but a lack of selling dooms those looking for a correction. Until that fact changes, it is more of the same.

Bull markets rotate, especially as they age. What was outcast becomes vogue and that which was hot becomes cold. The past couple of months has seen this process at work, with the safety sectors of health care, consumer durables, and utilities beginning consolidations while technology became hot once more.

Remember the National Mortgage Settlement? A little over a year ago, 5 major US banks worked out a deal with 49 state attorneys general to cut mortgage debt amounts and restructure troubled loans; it was a $25 billion dollar deal, although the banks were allowed to count things like short sales as part of their penalties. The banks were supposed to improve their services and not leave people in limbo when requesting loan mods or other services. So, how are they doing?

Well, New York State Attorney General Eric Schneiderman says that Bank of America and Wells Fargo “have flagrantly violated those obligations, putting hundreds of homeowners across New York at greater risk of foreclosure," and he intends to sue them for violating the terms of the settlement. Schneiderman said he would seek injunctive relief and an order requiring the two banks to comply with the settlement. His statement did not say he was seeking damages or penalties. No word on how the other banks (JPMorgan Chase, Citi, and Ally) were performing.

There was a monitor assigned to track the banks' performance or lack thereof, and they are expected to issue a report in the next couple of months; then attorneys general have a chance to file enforcement claims following a 21-day notice to the monitoring committee.

Meanwhile, there was a New York Times report over the weekend that said there was a 70-page government document that the Federal Energy Regulatory Committee, or FERC, sent to JPMorgan in March, alleging the bank manipulated the power market in California and Michigan in 2010 and 2011. FERC investigators found JPMorgan devised "manipulative schemes" that transformed "money-losing power plants into powerful profit centers." The Times report indicates the bank has until mid-May to respond.

FERC has already put together a case against Barclays which includes $470 million in proposed penalties.FERC has jurisdiction over physical power and trading in natural gas, but several of its recent cases - including the one against Barclays - hinge on demonstrating that traders may have manipulated physical prices in order to profit on derivatives. Barclays has disputed the FERC allegations and said it will defend itself in court if FERC issues a final order seeking to impose the fine. To date, FERC has not issued a final order.

FERC has not moved publicly to charge JPMorgan, but it looks more and more likely. FERC normally does not disclose investigations but last summer they subpoenaed internal emails and other documents as part of an ongoing investigation focused on bidding practices that may have raised electricity prices about $73 million in California and Midwestern power markets.

In November, FERC imposed a temporary ban on JPMorgan's ability to trade physical power at market-based rates for six months, starting in April, for failing to disclose information to the FERC and the California ISO in a market manipulation investigation.

The 70-page document took aim at Blythe Masters, a top executive who is known on Wall Street for helping expand the boundaries of finance. The document cites her supposed “knowledge and approval of schemes” carried out by energy traders in Houston. The investigators claimed she had “falsely” denied under oath her awareness of the problems. 

In addition, the bank faces showdowns with other agencies, like the Office of the Comptroller of the Currency, which is considering new enforcement actions against JPMorgan over how it collected credit card debt and that the bank relied on faulty documents when pursuing lawsuits against delinquent customers; who may or may not have been delinquent.

In a recent report examining a $6 billion trading loss at the bank, Senate investigators faulted JPMorgan for briefly withholding documents from regulators. The trading loss has spawned several law enforcement investigations into the traders who created the faulty wager.

Also under investigation is the bank's possible failure to alert authorities to suspicions about Bernard L. Madoff. The Times reports at least eight federal agencies are investigating the bank.

Meanwhile, Bank of America has reached a settlement with MBIA. Here is the basic situation at the heart of the dispute; prior ot the meltdown in 2008, MBIA wrote insurance on many mortgage securitizations and credit default swaps that ultimately went bad, including obligations that seemed likely to force it to pay as much as $3 billion toMerril Lynch. The insurer claimed that it had been misled by Countrywide Financial regarding the quality of mortgages it was insuring, and sought as much as $5 billion from Countrywide.

The settlement calls for BofA to pay $1.6 billion in cash and return about $100 million in bonds.

In an interview on CNBC, Charlie Munger, Warren Buffet's right hand man, said that Cyprus demonstrates, “an old truth, you can’t trust bankers to govern themselves. A banker who’s allowed to borrow money at X and loan it out at X plus Y will just go crazy and do too much of it, if the civilization doesn’t have rules that prevent it.” Munger added, “What happened in Cyprus was very similar to what happened in Iceland, it was stark raving mad in both cases. And the bankers, they’d be doing even more if the thing hadn’t blown up. I do not think you can trust bankers to control themselves. They’re like heroin addicts.”