Tuesday, May 07, 2013 - Good Times Roll

Good Times Roll

by Sinclair Noe

DOW + 87 = 15,056
SPX + 8 = 1625
NAS + 3 = 3396
10 YR YLD + .01 = 1.78%
OIL - .64 = 95.52
GOLD – 17.70 = 1453.60
SILV - .08 = 24.06

The fun started in Asia as a weak yen sent Tokyo stocks to their highest level in almost five years while Australian shares closed lower after briefly erasing declines following the Reserve Bank of Australia's to cut key interest rates. The yen has now lost one percent since Thursday; the result is a rally in the Nikkei, supported by upward revisions in earnings expectations for Japanese companies. Japan's Nikkei 225 is up more than 50% in the past six months and overnight breached 14,000 for the first time since 2008. This is known as Abenomics, named after Shinzo Abe, the Japanese prime minister who has instituted a very aggressive form of monetary easing, much more aggressive than what the Federal Reserve is doing in the US; the plan will double Japan's monetary base by the end of 2014.

Later in the week, we'll see if Abenomics is gaining traction as Japanese automakers report earnings; of course, it may still be too early to see Abenomics result in stronger earnings, but over time, a weaker yen should result in more car sales for the likes of Toyota and Honda. The world has done OK while Japan has stagnated. If Japan were to go back to something like a 3% growth rate, that would make a big difference to the global economy. This might be a potentially serious opportunity to improve the pace of global growth.

Then the fun spread to Europe. ECB President Mario Draghi has said he'll do whatever it takes to push the euro zone economy forwards. Last week the ECB cut rates, keeping downward pressure on the euro although the stronger German data pushed it back above $1.31 against an easing dollar. Germany, the region's largest economy, reported a rise in industrial orders in March, confounding expectations for a drop. The German DAX Index finally topped the highs of 2007. For the first time in a couple of years, Portugal completed a sale of 10-year bonds. The bond sale puts Portugal on course to exit its bailout on time, and qualifies it for a ECB debt support program. The 10-year note yields 5.6%, safely below the 6% level that is considered a danger zone. The MSCI Global Index edged past its June 2008 high.

The good times then spread to the US, where Wall Street saw new record highs. There isn't much economic news to move the markets this week. The economic news last week wasn't great but it was better than expected, and so everything is moving higher. Small caps moved to new highs; Dow Transports are confirming with new highs; even emerging markets are pulling out of a skid; the S&P 500 has been up 11 out of the past 13 sessions; we've seen 10 record highs this year. It has been an impressive run. Will it last forever? Of course not. Will it continue longer than you think? Probably, or it could end tomorrow.

More than 400 earnings reports from S&P 500 companies are now in the books, with 47% beating estimates on sales, 72% beat on earnings per share; the aggregate earnings per share beat is 5.4%, and year to year earnings per share grew by 2.5%. Annual sales growth is negative 1.4%; that indicates companies are still cutting costs; there are limits to this strategy.

Of course, it's difficult to make sense of earnings reports these days. A new report from Ernst and Young surveyed 3,500 staff in 36 countries; 20% said they had seen financial manipulation in their companies in the last 12 months. In addition 42 percent of board directors and top managers surveyed said they were aware of "some type of irregular financial reporting".

And despite scandals and regulatory failures in the wake of the credit crunch, almost a quarter of top financial services staff surveyed said they were aware of manipulation and almost 10 percent of all staff said their companies had understated costs, overstated revenues or used unprincipled sales tactics.

At some point demand has to increase or the fun stops. Consumer credit expanded at a slower pace in March. Non-revolving debt led the way; things like auto loans and student loans. Credit card debt fell by 2.4%.

In a follow-up to last Friday's jobs report, today the Bureau of Labor Statistics released its Job Openings and Labor Turnover Summary, also known as the JOLTS report. There are about 3.8 million job openings in the country; there are about 12 million unemployed people looking to fill those jobs. Employers aren't firing people any more, but they're not hiring people, either. Employers still see demand as too weak to justify ramping up hiring. Consumers have been too busy picking through the wreckage of their finances to spend a lot of money.

So the stock market is flying high even as customers are pulling in their wings. What's keeping the markets at these highs? Central banks keep pumping up the bubble. This year is a year where all market behavior is basically nonsense. In an environment where you have the central banks pushing down all yield levels on whatever is supposed to be a fixed-income investment. With key economies like the United States seeing a patchy recovery but others struggling to maintain growth, major central banks around the world have shown over the last few weeks they intend to keep stimulus flowing freely for the time being. Let the good times roll.

A follow-up to reports that New York Attorney General Eric Schneiderman will sue Bank of America and Wells Fargo for violating terms of the National Mortgage Settlement; this was the $25 billion dollar settlement for allowing banks to overcharge people, use fake documents and otherwise abuse customers; and it wasn't really $25 billion because the banks could write off full amounts of short sales and loan mods; and this will shock you – most of the write-offs are short sales. Part of the deal would require the banks to actually respond to loan modification requests and to stop losing paperwork and stop abusing customers. This has proved to be too much for Bank of America and Wells Fargo, so the New York AG has said he'll sue; not for money; apparently he'll sue for equitable relief.

What is equitable relief? Apparently it would be an injunction to force BofA and Wells to comply with the servicing standards in the Settlement. Now, they didn't comply with the original settlement, so why would they comply with an injunction? Who knows.

“I'm going to put if very bluntly. I regard the moral environment as pathological...these people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients... to counter-parties in transactions. They are tough greedy aggressive and feel absolutely out of control...and they have gamed the system to a remarkable extent.”

That's a quote from a recent speech by economist Jeffrey Sachs. It's only remarkable because Sachs is considered part of the establishment; a former economic advisor for the IMF and the United Nations. But the abuses by the banksters have become so blatant that they can't be overlooked. The Too Big To Fail Banks have admitted to money laundering to the worst drug cartels and terrorist organizations. No indictments. The banksters admit to millions of separate counts of perjury in the robo-signing scandal. No indictments, instead they reach a settlement and then violate the settlement. Again, no indictments. 

And if the Big Banks don't comply with the injunction to make them comply with the settlement..., well, I'm not sure but I'm guessing there won't be any indictments, just another limp wet noodle lashing.