Thursday, June 27, 2013 - To Not Trade in Principles

To Not Trade in Principles

by Sinclair Noe

DOW + 114 = 15,024
SPX + 9 = 1613
NAS + 25 = 3401
10 YR YLD - .05 = 2.48%
OIL + 1.35 = 96.85
GOLD – 24.40 = 1201.80
SILV - .01 = 18.61

First some economic news, then we'll head to Ecuador.

Consumer spending rose a seasonally adjusted 0.3% in May, reversing a 0.3% decline in April. So, for the past 2 months, it's a wash. Adjusted for inflation, the numbers are slightly lower. Consumers bought more cars and trucks in May and spent a bit more on gasoline, reflecting higher prices at the pump. They also ate outside the home more often and shelled out extra cash for housing, financial advice, insurance and recreational activities. Since incomes rose faster than spending in May, the savings rate of Americans climbed to 3.2% from 3%. That’s the highest level since December and well above the 2013 low of 2.2%.

In a separate report, the Labor Department reported a 9,000 drop in first-time jobless claims for the last week.

The National Association of Realtors reports pending home sales jumped in May to reach a six-year high, The NAR's pending home sales index climbed 6.7% to 112.3 in May, from a downwardly revised 105.2 in April. The index was up 12.1% from May 2012 levels. 

Freddy Mac reports the average rate for the 30-year fixed-rate mortgage rose to 4.46% in the week ending June 27, the highest rate in a couple of years, and up from 3.93% in the prior week. That gain of 53 basis points is the largest weekly change since 1987. A year ago, the 30-year rate averaged 3.66%.

Earlier this week, Dallas Fed President Richard Fisher likened market participants to “feral hogs” for pushing bond yields higher. Today, three more top Federal Reserve officials took issue with the increase in interest rates. William Dudley, the president of the New York Fed, Fed Gov. Jerome Powell and Atlanta Fed President Dennis Lockhart were less colorful but more pointed.

Dudley said expectations of an earlier rate hike were “quite out of sync” with both FOMC statements and the expectations of most FOMC participants,” and he said any rise in short-term rates “is very likely to be a long way off.”

Powell, in a separate appearance, said the spike in bond yields over the past month is “larger” than would be justified by any “reasonable reassessment” of the path of Fed policy. Powell said that if the market is now pricing in an increase in rates in 2014, “that implies a stronger economic performance than forecast either by most FOMC participants or by private forecasters.”

And Lockhart said that some in the markets appeared to mishear what Bernanke said. The three Fed officials were generally upbeat about the economic outlook despite what Lockhart admitted were “weak inflation readings, mixed vital signs, and choppy quarter-to-quarter growth statistics.”

As expected, the Commodity Futures Trading Commission said it is suing Jon Corzine, who was MF Global’s chief executive, and the firm’s former assistant treasurer Edith O’Brien for the unlawful use of about $1 billion in customer funds that “harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale.”

The CFTC, cites internal MF Global phone recordings as evidence in alleging that Corzine knew the company was running out of cash and directed it to keep paying out obligations without asking where the money came from. The CFTC cites one MF Global official’s comment that “we have to tell Jon that enough is enough. We need to take the keys away from him.”

CFTC said Corzine is charged with being more than a passive actor in the downfall of MF Global. The CFTC is seeking financial penalties against Corzine and O’Brien and also to ban them from trading and registering to work in the derivatives markets overseen by the agency. MF Global has agreed to settle with regulators and payback any customers who are still owed money as well as pay a $100 million fine. I still have a hard time understanding how this is not a criminal matter.

The SEC is now investigating the relationship between Thomson Reuters and the Institute for Supply Management. ISM manufacturing data was sent out early on June 3^rd to Thomson Reuters high-speed clients, or high frequency traders, and there were trades based on the early release of data; by some estimates more than $28 million in trades in a matter of 15 milliseconds prior to the official release.

Earlier this week President Obama announced his plans to fight global warming. The GOP response was that it would kill jobs. Today, Christine Lagarde, the managing director of the International Monetary Fund, said that climate change will drive job creation. “Climate change will create jobs. It will create disasters before it creates jobs, but it will create jobs.” Clean up on Aisle 3.

Where in the world is Edward Snowden? Right now, it looks like Snowden is doing his best imitation of Tom Hanks in the movie “The Terminal”; remember that Hanks played a guy who's country was lost while he was on an airplane, and when he landed, his passport was no longer valid; he ended up stuck in a no-man's land in the terminal of an airport. The best guess is that Snowden is in the terminal of the airport in Moscow, not quite admitted into Russia. At some point he will leave the terminal. Where will he go?

Well, he's already been in Hong Kong and Moscow; and in each location the governments of China and Russia have refused extradition; certainly a bit of a slap on the diplomatic wrist, but that's China and Russia. And if Snowden were to stay in China or Russia, at some point the State Department would step up pressure, and he might be extradited. So, where will he go?

The possible candidates for an ultimate landing spot include Iceland and Ecuador. Why would either country accept Snowden? Well, for Iceland the thinking is that they've already kicked out the bankers; they have no real reliance on the US or for that matter, on our European allies. Iceland is reverting back to fishing, and they really just don't care. For Ecuador, it's a little bit different.

The US is Ecuador's largest trade partner. Ecuador now sends about 40 percent of its exports to the United States, including crude oil, seafood, fruit and nuts, cocoa and flowers. The nation’s total exports to the United States tallied up to $9.6 billion in 2011. Right now, Ecuador has two major trade deals with the US; the Andean Trade Practices and Drug Eradication Act, which is scheduled to expire this summer; and the General System of Preferences, which gives Ecuador and about 100 other countries duty free entry for certain products.

Today, Ecuador's Communications Minister announced that Ecuador was renouncing trade benefits with the US because of American pressure not to offer asylum to Snowden. He claims the trade pact has become a “new instrument of blackmail” and says Ecuador “does not accept threats from anybody, and does not trade in principles, or submit to mercantile interests, as important as they may be.”

Meanwhile, the Washington Post has jumped into the fray with an editorial accusing Ecuadorian President Correa of suppressing media while aiding the self-proclaimed whistleblower of another country.

President Correa responded with a tweet saying “The nerve! Do you realize the power of the international press? They have managed to focus on Snowden and the 'evil' in countries that 'support' him, making us forget the terrible things done against the American people and the entire world.”

You may recall that Julian Assange, the founder of Wikileaks has spent the past year in an Ecuadorian embassy in London to avoid extradition. What's the deal with Ecuador?

One thing you probably won't hear in the Washington Post is the back story, which involves a 20-year battle against Chevron, the oil company. Texaco, now owned by Chevron, dumped 16 billion gallons of toxic water into streams from the early 1970s until 1992, harming the environment and the people who used them for drinking water, cooking and cleaning. Texaco never tried to prevent this from happening, never cleaned up the contamination or compensated victims. That is a fact even Chevron does not deny.

An Ecuadorian court has held Chevron liable, to the tune of $19 billion. Chevron refuses to pay because it says the Ecuadorian judiciary and American plaintiffs’ lawyers conspired in a vast racketeering plot to extort from the multinational. And rather than pay the Ecuadorian judgment, Chevron sued the Ecuadorian plaintiffs (the indigenous indians) and the lawyers. Chevron itself stripped almost all of its assets from Ecuador in recent years in anticipation of losing the case. And since Chevron has removed all assets from Ecuador, the Ecuadorians are now forced to seek judgment through third countries. That's not so easy.

Chevron has roughly $15 billion in assets in Canada. In Toronto, in an unusual decision without any precedent in Canadian law, a court found that because Chevron operates only through subsidiaries, the case must be stayed. The vast majority of Chevron's assets lie with its subsidiaries, not in its corporate shell. Chevron also operates via its subsidiaries in dozens of countries around the world that could be targeted. The company does not even own its own building housing its headquarters near San Francisco.

Knowing it cannot win the Ecuador battle on the merits, Chevron also exercised improper political influence over governments and courts. In Argentina, after an order to freeze Chevron's assets in that country, Chevron suddenly decided to "invest" $1.5 billion in a large gas field with the local state-owned oil company, YPF; followed by an advertising and a lobbying campaign – freeze lifted.

The battle between Chevron and Ecuador has more twists and turns than a bag full of pretzels; the same could be said of the strange story of Edward Snowden, Booz Allen Hamilton, and the Carlyle Group. What is becoming more apparent is the growing corporate influence on issues which were once considered the purview of governments.