Friday, August 30, 2013 - The War Hasn't Started Yet

The War Hasn't Started Yet

by Sinclair Noe

DOW – 30 = 14,810
SPX – 5 = 1632
NAS – 30 = 3589
10 YR YLD – .02 = 2.74%
OIL – 1.15 = 107.65
GOLD – 10.70 = 1397.50
SILV - .34 = 23.63

The S&P 500 fell 3.1 percent in August and lost 1.8 percent for the week in a third decline in the past four weeks. The Nasdaq fell 1.9 percent for the week while the Dow slid 1.3 percent in its fourth straight weekly loss. For the month, the Dow fell 4.4 percent and the Nasdaq lost 1 percent. Only one of the 30 Dow components, Microsoft Corp , ended higher for the month. Very quietly, silver is up 22% since July 1^st. The price of gold touched $1,420 an ounce this week, a three-and-a-half month high.

The war has not started, yet.

Secretary of State John Kerry says the Syrian government forces killed 1429 people last week in a chemical weapons attack. UN chemical weapons inspectors are investigating the attacks and will present preliminary findings to the UN after they leave Damascus tomorrow. Mr Kerry said the US already had the facts, and nothing that the UN weapons inspectors found could tell the world anything new.

The US government has published an intelligence report which basically says the Syrian forces gassed Syrian civilians, killing 1429, and the intelligence is backed by medical personnell, witnesses, journalists, videos, and thousands of various things including social media. They are convinced the rockets came from areas controlled by the Assad regime and landed only in opposition held areas.

Over the past week, a series of intelligence community leaks have indicated that the evidence behind the chemical attack remains relatively weak, and specifically the question of what role Assad himself played in ordering the attacks. The intelligence report published today sought to address those intelligence gaps, although it did not offer specific data on the link between Assad and the attack. Instead, it focused on circumstantial indications: the fact that the chemical-laden rockets were all fired from regime-held areas into rebel-held ones, and an intercepted communication from a senior regime official that apparently confirmed the use of the weapons.

Last night, top administration officials held a 90-minute conference call with congressional leaders and the chairs and ranking members of national security committees. There has not yet been a move to seek Congressional approval for military intervention.

Kerry says that any response would not involve the US in a protracted conflict like Iraq or Afghanistan.

The UN Security Council is unlikely to approve any military intervention because permanent member Russia is a close ally of the Syrian government, and has vetoed two previous draft resolutions. The British parliament rejected a motion supporting the principle of military intervention.

Shortly after Kerry spoke today, President Barack Obama said the attack threatened US national security interests, and the US was considering a “Limited narrow act” in response. Mr Obama said he has not yet made the decision about what actions the US will take against Syria, but that it would not be an open ended commitment and there would not be boots on the ground.

In an NBC news poll, 50 percent said the U.S. should not take action against Syria in response to the use of chemical weapons, while 42 percent supported intervention. Just 21 percent said military action was in America's national interest, and 27 percent that it would improve the situation for Syrian civilians, with nearly a third or more saying they didn't know enough to answer either question. Seventy-nine percent said President Obama should be required to get approval from Congress.

Yesterday, Mr Obama was interviewed by PBS reporters and he said there was imminent danger to the US, and if we don't attack the Assad regime now, then the Assad government will use chemical weapons, maybe even work with terrorist groups to deploy chemical weapons at targets in the US.

If all this talk about imminent danger sounds sickly familiar, it's because you remember Iraq, and the lead up that invasion, or maybe you remember Iraq, the time before, or maybe because you forgot all the other times chemical weapons were used around the world and we did nothing. But now, the drums of war are beating; they are beating without the Brits; they are beating without Congressional approval; they are beating without popular support; they are beating without the case being ironclad and concrete; they are beating without the case being made; and they are beating without a good shot at peace first. Maybe peace is not possible, but it seems to me that we should try it, give it our best effort before sending in the cruise missiles. Give it a chance.

What does this mean from an economic sense? Well, Syria is a small economy with limited international trade and almost no cross-border financial links. If you are interested in evaluating where markets are on Syria, your first stop should always be oil prices. This is not because Syria is a major oil producer. It is not. With an estimated daily production of just 50,000 bpd, the standalone impact on global oil markets is a rounding error at best. Rather, Syria influences how markets perceive the security of supplies from other (major producers) in the Middle East.

I'm not sure how, but I'm pretty sure that oil is a major determinant in how sides are being taken in the conflict. There is an old saying: follow the money. I'm not yet sure how where that trail leads, but keep it in mind.

Bloomberg has recently completed a ranking of the most efficient countries for healthcare, looking at the gap between the cost of treatment and its quality and effectiveness. The US did not fare well.

It's remarkable how low America places in healthcare efficiency: among the 48 countries included in the Bloomberg study, the U.S. ranks 46th, outpacing just Serbia and Brazil. Once that sinks in, try this one on for size: the U.S. ranks worse than China, Algeria, and Iran.

But the sheer numbers are really what's humbling about this list: the U.S. ranks second in healthcare cost per capita ($8,608), only to be outspent by Switzerland ($9,121) -- which, for the record, boasts a top-10 healthcare system in terms of efficiency. Furthermore, the US is tops in terms of healthcare cost relative to GDP, with 17.2 percent of the country's wealth spent on medical care for every American. The US spends more of its money on healthcare while getting less than almost every other nation in return.

It's important to note that this data doesn't necessarily reflect the best healthcare in the world; it is simply a measure of overall quality as a function of cost. Each country was ranked on three criteria: life expectancy (weighted 60%), relative per capita cost of health care (30%); and absolute per capita cost of health care (10%). Countries were scored on each criterion and the scores were weighted and summed to obtain their efficiency scores. Relative cost is health cost per capita as a percentage of GDP per capita. 

So what can the U.S. learn from the many countries that get more bang for their healthcare buck? Unsurprisingly, there is no one formula for success when it comes to efficient medical care. The systems that rank highly on Bloomberg's list are as diverse as the nations to which they belong. The unifying factor seems to be tight government control over a universal system, which may take many shapes and forms -- a fact evident in the top-three most efficient healthcare systems in the world: Hong Kong, Singapore, and Japan.

Japan's system involves universal healthcare with mandatory participation funded by payroll taxes paid by both employer and employee, or income-based premiums by the self-employed. Long-term care insurance is also required for those older than 40. 

Singapore's system  requires individuals to contribute a percentage of their monthly salary based on age to a personal fund to pay for treatments and hospital expenditures. In addition, the government provides a safety net to cover expenses for which these personal savings are inadequate. Private healthcare still plays a role in Singapore's system, but takes a backseat to public offerings, which boast the majority of doctors, nurses, and procedures performed.

Hong Kong's universal health care system involves heavy government participation, despite the idea of Hong Kong as a bastion for free markets. All this government care isn't taking much of a bite out of the state's bustling economy: According to Bloomberg, Hong Kong spends just 3.8 percent of GDP on healthcare per capita, tied for the third-lowest among nations surveyed and good for the most efficient healthcare system in the world. 

Thursday, August 29, 2013 - Pre-Labor Day GDP

Pre-Labor Day GDP

by Sinclair Noe

DOW + 16 = 14,841
SPX + 3 = 1638
NAS + 26 = 3620
10 YR YLD - .01 = 2.76%
OIL – 1.30 = 108.80
GOLD – 10.60 = 1408.20
SILV - .52 = 23.97

No new war yet. The British parliament voted against military action in Syria. Britain was considered a key ally in any US-led coalition. PM David Cameron said the government would respect the decision of parliament which means that Britain will not take part in military strikes against Syria.

Initial claims for state unemployment benefits slipped 6,000 to a seasonally adjusted 331,000. Claims for the prior week were revised to show 1,000 more applications received than previously reported. So, modest strengthening in the labor market. Next week, we'll get the monthly jobs report.

Meanwhile, the US economy accelerated more quickly than expected in the second quarter thanks to an increase in exports. Gross domestic product grew at a 2.5 percent annual rate, according to revised estimates, up from the initial guess of 1.7% growth. The second quarter’s growth rate followed gains of 0.1 percent in the fourth quarter and 1.1 percent in the first three months of this year.

The trade deficit in the second quarter was smaller than previously estimated, reflecting the biggest gain in exports in more than two years.  Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies climbed at a 2.5 percent annualized rate in the second quarter, matching the gain in GDP. Corporate spending grew at a 9.9 percent annualized rate, exceeding the 9 percent gain previously reported. This reflected a $62.6 billion gain in stockpiles that was larger than first estimated. Investment in housing accounted for nearly a fifth of the economy's growth during the period. However, other reports have suggested that housing began to look more shaky toward the end of the quarter. Expectations that the Fed could reduce bond buying as early as next month have driven mortgage rates sharply higher since May.

The bond-buying program is one of America's last major economic stimulus programs, as the federal government's fiscal austerity began dragging on the economy in late 2010. In the second quarter, higher taxes appeared to hold consumers back. Consumer spending slowed to a 1.8 percent growth pace after rising at a 2.3 percent rate in the first quarter.

Problems remained in the US economy and the revision in GDP also highlighted some of those weaknesses. Consumer spending remained unchanged in the quarter and state and local government spending fell in the quarter as compared to being up in the initial estimate.

It's still just a 1.6% rise year over year, and that's soft. We are still down 2 million jobs and unemployment is still 7.4% and we are seeing significant drag from tax increases and spending cuts.

The GDP figures come amid a looming clash in Washington over the "debt ceiling"; the limit set by Congress on the US's ability to borrow. Treasury secretary Jack Lew warned earlier this week that if Congress fails to act soon, the US would hit its debt limit by mid-October.

Even with upward revisions to 2Q GDP, there has been a sea change in the composition of the global economies. For the first time ever, the combined gross domestic product of emerging and developing markets, adjusted for purchasing price parity, has eclipsed the combined measure of advanced economies. Purchasing price parity adjusts for the relative cost of comparable goods in different economic markets.

According to the International Monetary Fund—the supplier of this data—emerging and developing economies will have a purchasing price parity-adjusted GDP of $42.8 trillion in 2013, while that of emerging economies will be $44.4 trillion. In other words, emerging markets will create $1.6 trillion more value in goods and services than advanced markets this year. Another way to consider it is that the emerging markets have emerged, sort of, kind of.

It’s worth keeping in mind that the emerging economies have strength in numbers. Not only are there more emerging and developing nations; those nations also boast a larger combined population. As such, emerging and developing economies trail far behind advanced economies in per-capita terms. Their aggregate per-capita purchasing price parity-adjusted GDP is $7,415, while the same measure for advanced nations totals $41,369.

Those per capita numbers can be a bit deceptive for both emerging-markets and developed-markets. The Federal Deposit Insurance Corp. says the banking industry earned $42.2 billion in the second quarter, up 23 percent from the second quarter of 2012. CNNMoney reports that the nation’s biggest banks are expected to hand out more in compensation in 2013 than they did in 2009 including $23 billion in bonuses. Banks' losses on loans were down 30 percent from a year earlier to $14.2 billion, the lowest in six years. The biggest banks, with assets exceeding $10 billion make up only 1.5 percent of U.S. Banks, yet they accounted for about 82 percent of the industry's earnings in the April-June quarter.

Meanwhile, low wage workers kicked off the Labor Day holiday early in more than 50 cities, striking fast food restaurants. The demands are largely the same as in the past; a minimum wage of $15 per hour and protections against retaliation for joining a union.

Determining GDP numbers and most economic data is sketchy business at best, in part because the financial world is often sketchy at best. For example, the Tax Justice Network estimates that wealthy individuals are hiding between $21 trillion and $32 trillion in offshore accounts. Further, it's estimated that about 80% of the top 100 US companies are sitting on more than $1.2 trillion offshore to avoid paying taxes on it. How do you count that?

In 2009, UBS, the Swiss financial services company, reached a landmark deferred prosecution agreement with the US government and agreed to turn over the names of more than 4,000 American account holders. In the aftermath, the Internal Revenue Service has netted more than $5 billion from 38,000 Americans who came forward under a voluntary disclosure program.

Since then, US authorities have aggressively pursued Swiss banks they suspect of sheltering American tax cheats. A pending deal between U.S. and Swiss authorities could provoke another surge of recovered tax dollars. The agreement would require Swiss banks to disclose records showing outgoing transfers from American account holders. Authorities likely will use that information to pressure financial institutions in other popular offshore destinations.

A new report shows the last 30 years have been good for a few. CEOs saw their total compensation climb by 876 percent between 1978 and 2012. During that same period, worker compensation grew by 5.4%. And it doesn't seem that the so-called economic recovery is going to give workers a boost anytime soon. In June, the Bureau of Labor Statistics reported that hourly wages fell 3.8% during the first quarter of 2013 -- the biggest quarterly drop since the BLS started tracking wage growth in 1947.

A new report by the Institute of Policy Studies, called “Bailed Out, Booted and Busted” has come out with a listing of the 241 highest paid CEOs of the past two decades. An astonishing 38% of these titans of finance and industry have either been kicked out of their jobs, put in jail or had to have their companies be rescued from bankruptcy.

A poster child for overpaid CEOs performing poorly would be Richard Fuld, who raked in $466 million in salary and stocks in seven years as CEO of Lehman Brothers, the Wall Street investment bank, before the company collapsed in September 2008, precipitating global financial crisis. I don't mean to pick on Fuld; we could also look at the case of Dennis Kozlowski, or Eckhard Pfeiffer, or Ken Lay; Fuld is just one of 112 such CEOs whose companies were given a total of $258 billion in taxpayer bailouts, which means we all paid a little smidge of his paycheck.

It's easy to argue that there are a couple of bad apples in every cart, but if 38% of the apples are rotten, that indicates a problem. Shareholder activism doesn't seem to help, largely because shareholders are looking for the best returns and the thinking is that they can buy better returns, even though the results don't bear that out. Boards of directors are not going to change this. They are mostly made up of other CEOs who says if you scratch my back, I'll scratch yours. One idea is to change the makeup of the Boards. Another possible solution is  governments can eliminate taxpayer subsidies for excessive executive pay and encourage reasonable limits on total compensation by not giving out contracts to companies who pay excessive CEO salaries (effectively subsidized by the taxpayer) and rewarding those who pay their workers well.

Spare a thought this Labor Day holiday, when you fire up the barbecue for the last weekend of the summer and raise a beer for the workers in this country, and don't forget the almost 20 million who are unemployed or underemployed. 

Happy Labor Day.

Wednesday, August 28, 2013 - What Could Go Wrong?

What Could Go Wrong?

by Sinclair Noe

DOW + 48 = 14,824

SPX + 4 = 1634
NAS + 14 = 3593
10 YR YLD + .05 = 2.76%
OIL + 1.09 = 110.10
GOLD + 1.80 = 1418.80
SILV - .13 = 24.49

It is now almost certain that the United States, and an as yet unspecified number of its allies, will launch an airstrike against Syria and the forces of Bashar al-Assad. Let's look at how this might happen. We know that it is highly unlikely that US troops will be on the ground in Syria; that would be highly risky, very expensive, and extremely unpopular. The White House has said there will not be boots on the ground.

While the US is trying to cobble together a coalition of the willing to give some legal cover for attacking Syria, American military planners are fine-tuning a playbook that will likely focus on missile attacks and possibly bombing runs. Right now, there are four Navy destroyers waiting in the eastern Mediterranean Sea. It is expected they will lob cruise missiles toward Syrian targets; likely starting the missile barrage at night in order to limit civilian casualties. In the light of day they will assess damage and start the next round of attacks; if they need to hit harder, they'll call in the big bombers, the B-2s, which are capable of flying round trip from their base in Missouri.

The idea is to attack the command posts, communication nodes, troop and delivery systems, things like missile launchers; the command and control centers or the basic infrastructure the Assad regime uses to fight the rebels. The plan is not to bomb the suspected stocks of chemical weapons; there are two reasons why they are not being targeted: first, is because of the potential for collateral damage and second, the specific stockpiles are difficult to track and therefore difficult to declare “mission accomplished”. Also, the plan does not involve dropping bombs on al-Assad, but rather forcing him into submission; even if he is not forced from power.

The idea is that it would be limited and surgical military action. It might also be just weak enough to not change the military situation in Syria yet just enough to get the US deeply involved in a quagmire. And even if the military intervention is quick and effective, there's no idea what comes next for Syria, already torn apart by a 30 month civil war that has killed more than 100,000 and displaced millions more.

The next step is to cobble together a coalition, which would likely include the British, the French, and as many Arab countries as they can manage. The Arab League supports intervention, with the exception of Iran and Lebanon; and yes that means Hezbollah could be a big problem. The UK parliament is convening tomorrow, which means that even though military strikes could begin as soon as tomorrow, it might be a few days yet.

An American president says a Middle Eastern country has weapons of mass destruction. He builds a “coalition of the willing” for a military strike against said country. Sound familiar?

Well, it is different than 2003. This is planned to go more like Libya or Operation Desert Fox; that was the limited military intervention against Iraq in 1998. And like Libya, it would not technically require Congressional approval. And given the hyperpartisanship in Congress these days, I'm not sure what would come out of Capitol Hill. Still, if you look beyond the procedural politeness of involving the rest of government in authorizing military intervention, there is compelling political interest in spreading the responsibility for the decision.

Even if it is going to happen, and even if things go as planned, in war things don't always go as planned; things go wrong in the fog of war. Remember the 1999 bombing campaign in Serbia? Remember the bombing of the Chinese Embassy in Belgrade? Oops.

The unpleasant reality in Syria is that there are no good choices, for the US or much of anyone else. No one knows who the "rebels" are with any certainty, except that we know they are anything but a united, coherent force. We don't even know if any of them have goals worthy of support. There are many rebel groups with as many interests, most of them lethal – to each other, to their neighbors, to everyone. Getting rid of Assad might be a good thing, even if that is not the stated goal. Still, the assumption we can control reality and determine outcomes, is a hallmark of hubris.

Unquestionably we can intervene in any horrific way we choose, and no one can stop us. The US military is incredibly powerful and they will almost certainly put that power on display, but that's where our control of events ends, and the benefits of any intervention are hard to identify because there may not be any actual benefits of intervention. Of course an attack might briefly satisfy the mindless impulse to "do something," even if all we accomplished was showing that we were tough. The problem with being a tough guy is that someone will always take that challenge. Just as Assad has crossed that line in the sand, there will be some other punk that will try to do it. So taking the case to Congress, to let them share in the responsibility, that would be smart.

It looks like this whole situation has passed the point of no return, and there will likely be air strikes within the next few days.

It's been a rough month for the markets, but we can't blame it all on Syria, there were significant technical breakdowns before Syria reared its head. Still, whenever anything happens in the Middle East, the talk turns to oil. On Monday, the markets reacted badly to the growing eventuality of military action in Syria with at least one analyst saying oil prices could surge toward $150 on fears the conflict could affect oil supplies in the Middle East. We're on our way; oil topped $110 per barrel today; the highest level in 2 years. Yes it could drop just as fast, or maybe we could see $150. The global economy has enough problems without having to worry about expensive gasoline, too.

Meanwhile, the Fed's taper talk has hammered stocks and currencies in emerging markets. Traders had taken cheap money from the Fed and pumped it into developing economies that promised high returns. Some of these countries, such as India, had big current-account deficits with the rest of the world and really needed that hot foreign money. Once the Fed started talking about making money a little less easy, the emerging market trade got less profitable, and traders started collecting their winnings.

In some cases, the selling has calmed down recently. Brazil's Bovespa stock index has rebounded by about 10 percent, following a 20 percent collapse between late May and early July. Other countries haven't been so lucky -- particularly India, where the rupee is still under steady attack, falling to new lows against the dollar just about daily.

The problems with emerging markets also pose the risk of a negative feedback loop. The idea is that global capital flows are responding to the Fed's taper talk and emerging economies are slowing their pace of bond buys. As investors bring their emerging market investment back to the US, the bonds and currencies of those countries are weakening, which forces their central banks to intervene, which then accelerates the pace of US Treasury sales. So far the foreign selling of Treasuries has mainly been from private investors, but if or when emerging countries central banks jump on the sales, the result could be a feedback loop.

Here's how it plays out. As yields on US Treasuries push higher, investors pull money from emerging markets currencies and bonds in a hunt for yield subsidies; countries where investors fear ability to finance current-account deficit feel the brunt of the sell-off; and as emerging markets currencies weaken, their central banks intervene, drawing down reserves; followed by foreign central banks accelerating selling of US Treasuries as reserves decline and they sell to position against higher rates; and yields on US Treasuries push higher. Boom, loop complete.

Peace out.

Tuesday, August 27, 2013 - The Drums of War

The Drums of War

by Sinclair Noe

DOW – 170 = 14,776
SPX – 26 = 1630
NAS – 79 = 3578
10 YR YLD - .07 = 2.71%
OIL + 3.34 = 109.55
GOLD + 11.00 = 1417.00
SILV + .19 = 24.62

Yesterday Secretary of State Kerry laid out the case against Syria. Today we learned the US could be ready to take military action as soon as Thursday. Defense Secretary Hagel today said: "We have moved assets in place to be able to fulfil and comply with whatever option the president wishes to take."

This follows last Wednesday's suspected chemical attack near the Syrian capital, Damascus, which reportedly killed more than 300 people; more than 3,600 people were treated for nerve agents, and by some estimates the death toll is now approaching 500. You've surely seen the grisly videos. They are compelling, but in light of the faulty intelligence that preceded the war in Iraq, there is a call for stronger proof. White House spokesman Jay Carney says a report on chemical weapons use being compiled by the US intelligence community and will be published this week.

There is not a requirement for Congressional approval for the president to initiate military action including strikes; rather the War Powers Act requires congressional notification, and that has been happening; of course questions of legality will be debated. The UK Parliament is to be recalled on Thursday to discuss possible responses. Prime Minister David Cameron said the world could not stand idly by after seeing appalling scenes of death and suffering caused by suspected chemical weapons attacks. French President Francois Hollande said France was "ready to punish" whoever was behind the attack. The Arab League said it held Syrian President Bashar al-Assad responsible for the attacks and called for UN action.

Russia, China, and Iran - allies of the Syrian government - have stepped up their warnings against military intervention, with Moscow saying any such action would have "catastrophic consequences" for the region.

After almost 12 years of war, the public is not keen on new battles; the latest polls show only 9% support for military intervention. And an almost irresistible feeling that something needs to be done is running head-on with the reality that there is no course of action that is attractive and that does not carry significant risks. A diplomatic response seems unlikely at this point. A minimalist response of stepping up support for Syrian opposition forces has so far proven ineffective. A more likely response is strategic missile and air strikes, perhaps similar to the Bosnian campaign of 1999 or the more recent campaign against Libyan dictator Kaddafi. Regime change is explicitly not the goal of military action, and administration officials have suggested any airstrikes will be limited.

Or the whole damn thing could explode into World War III. At the very least, Syria will be a mess for quite some time; we don't know who or what will replace the Assad regime, and even a fairly smooth transition of power can prove challenging as we've learned in Egypt; the situation in Syria will be an even bigger challenge. The outlook for military action is stark.

Warships are on the move. The impending conflict is rippling across financial markets. Europe and Asia moved lower. Equity markets in the Middle East were down significantly. Syria is not considered a major player in oil, but the region is vital, and so oil prices spiked this morning, up 2.95 at 108.87 a barrel. We've seen oil prices top out at 108.00 a couple of times this summer, so a breakout above 108 is important. We're at six month highs. Post-financial crisis highs for crude sit just below $114. We're not that far off.

Gold loves fear. Yesterday, gold closed above $1400, and today it kept running, hitting an intraday high of 1425; there is a major level of resistance at 1420, and it is being challenged. We're not that far off. After that the big levels of resistance are around 1520; that is still pretty far off.

Emerging markets could absorb the brunt of the selling as this crisis continues to unfold. Money has been flowing out. Although this is more likely a result of other factors not associated with military moves in the Middle East. Many are now dubbing the BRIC countries (the grouping of Brazil, Russia, India and China) down and out, but the lower prices also make valuations more enticing. Maybe periods of pessimism are good times to buy, but only if you have a constitution suited to catching falling knives. For investors bracing for an end of cheap dollars from the Federal Reserve, emerging market currencies are getting hit hard.

Meanwhile, I went to the New York Times website today, and it was down; hacked by the Syrian Electronic Army, a group which supports Syrian president Bashar al-Assad. So I guess the war has already started.

With all the talk about war, it would be easy to overlook the banks behaving badly, but don't worry, I've got it covered. Let's start with JPMorgan; the Federal Housing Finance Agency wants JPMorgan to pay more than $6 billion to settle claims that it knowingly sold bad mortgages to Fannie Mae and Freddie Mac ahead of the financial crisis. Such a settlement would be the biggest single penalty paid by any bank for actions ahead of the crisis. It would also roughly match the $6.2 billion JPMorgan lost in the "London Whale" trading debacle in early 2012.

The FHFA regulates Fannie Mae and Freddie Mac, and they claim JPMorgan misled the mortgage agencies about the value of $33 billion in mortgage backed securities. JPMorgan expects to settle the case, but they're balking at the price.

Meanwhile, a former JPMorgan trader wanted by the United States for allegedly falsifying bank records to cover up $6 billion in trading losses was arrested in Madrid. Javier Martin-Artajo was arrested after he presented himself to police in Madrid and was later released on bail. Now there will be extradition hearings.

For years I've been saying the biggest banks should be broken up, chopped into smaller pieces, more easily digestible. It would be the best thing for the economy, and according to a new research report from the investment bank Keefe, Bruyette and Woods, it would be good for the banks' shareholders. The report says  JPMorgan's value might be 30 percent higher if it were broken into pieces. If JPMorgan were broken into four units -- traditional banking, investment banking, asset management and private equity -- the market value of those segments could total $255.7 billion -- a 29.9 percent premium over Thursday’s market valuation of $196.9 billion. The move also would unlock some $19.5 billion that the bank is setting aside to satisfy capital reserve requirements for so-called too big to fail banks. That's money the bank might make available for lending.

The report also looked at JPMorgan's legal problems, which include 13 investigations by federal regulators, not to mention some overseas legal problems on charges ranging from manipulation of energy markets to hiding large losses during the “London Whale” debacle in early 2012. The bank also faces a barrage of lawsuits from individuals and its trading counterparties. The legal uncertainties have taken their toll on JPMorgan's stock, with shares trading at 8.65 times the bank's earnings over the past 12 months. Similar institutions trade at multiples that are 25 percent to 40 percent higher. The report says the legal problems aren't enough to bring the bank down.

Ah, we can't let this one pass without notice. The New York Attorney General has sued Donald Trump for his Trump University. Attorney General Eric Schneiderman says many of the 5,000 students who paid up to $35,000 thought they would at least meet Trump but instead all they got was their picture taken in front of a life-size picture of “The Apprentice” TV star.

“Trump University engaged in deception at every stage of consumers’ advancement through costly programs and caused real financial harm,” Schneiderman said. “Trump University, with Donald Trump’s knowledge and participation, relied on Trump’s name recognition and celebrity status to take advantage of consumers who believed in the Trump brand.”

Schneiderman is suing the program, Trump as the university chairman, and the former president of the university in a case to be handled in state Supreme Court in Manhattan. He accuses them of engaging in persistent fraud, illegal and deceptive conduct and violating federal consumer protection law. The $40 million he seeks is mostly to pay restitution to consumers.

And honestly,… I’m not saying there shouldn’t be consumer protections, and fraudulent activity should certainly be punished, but if you’re paying $35,000 to go to something called Trump University the words caveat and emptor do leap to mind.

In economic data today, the Case-Shiller Home price index showed price gains of about 1% for the month and 12% year over year, roughly inline with previous gains as well as expectations. However, this is a June report for home sale closings from late spring and early summer (meaning the sales contract was signed even earlier). It contains virtually no information about how home prices are reacting to the sharp jump in interest rates this summer. That said, some details: All 20 cities posted monthly and annual gains, but prices rose faster this month than last in just 6 cities as opposed to 10 in May. Dallas and Denver hit new all-time highs. San Francisco is up 47% from its March 2009 low. Phoenix is up 37% from its September 2011 low. Las Vegas prices are up 24.9% Y/Y, San Francisco +24.5%, Phoenix up 19.8%, Los Angeles +19.9%. On the lower end, Cleveland +3.5%, D.C. +5.7%, Chicago +7.3%, New York +3.3%.

The story of the West is a story of water; droughts, floods, the development of water infrastructure. But the story of water in the West is also being told, every day, in the growing crisis facing communities, watersheds, ecosystems, and economies. This isn’t a crisis of for tomorrow. It is a crisis today. What is, perhaps, a surprise, is that it has taken this long for the entire crazy quilt of western water management and use to finally unravel. But it is now unraveling.

The old adage of the blind men describing an elephant based on their experience touching different parts of it applies to western water. In the past few years, we’ve seen bits and pieces of the puzzle: a well, and then two wells, and then a town goes dry. A farmer has to shift from water-intensive crops to something else, or let land go fallow. Vast man-made reservoirs start to go dry. Groundwater levels plummet, yet the response is to try to drill new and deeper wells and pump harder, or build another dam, or move water from an ever-more-distant river basin. Competition between industry and farming increases. And politicians run back to old, tired, half-solutions rather than face up to the fact that we live in a changed and changing world.

Here are a few pieces of the puzzle that we had better start to put together into a coherent picture if we hope to change our direction.

In January 2012, the Texas town of Spicewood Beach ran out of water. Then Magdalena, New Mexico ran out. More recently, Barnhart, Texas. Now Texas publishes a list of towns either out or running out of freshwater. In some parts of Texas, demands for water for fracking are now competing directly with municipal demands.


Because of a severe, multi-year drought (described as “the worst 14-year drought period in the last hundred years”) and excessive water demands, the US Bureau of Reclamation, this week,announced it will cut water released from Lake Powell on the Colorado River to the lowest level since the massive reservoir was filled in the 1960s. Water levels in Lake Mead have already dropped more than 100 feet since the current drought began in 2000, but even in an average year, there is simply more demand than supply.


Las Vegas is so desperate for new supplies they have proposed a series of massive and controversial ideas, including: a $15+ billion pipeline to tap into groundwater aquifers in other parts of the state, diverting the Missouri River to the west, and building desalination plants in Southern California or Mexico so they can take a bigger share of the Colorado.


Governor Jerry Brown is pushing a $25+ billion water tunnel project to try to improve water quality and reliability for southern California farmers and cities and improve the deteriorating ecosystems of the Sacramento-San Joaquin Delta, with no guarantees that it will do any of those things at a price users are willing and able to pay.


San Luis Reservoir in California, which serves the Silicon Valley and other urban users, has fallen to 17 percent because of severe drought, making business, communities, and water managers nervous. Other major California reservoirs are also far below average, though massive deliveries of water continue on the assumption that next year will be wet.


Praying for rain has become an official water strategy for some politicians in Texas, Georgia,Florida, Oklahoma, and elsewhere.


Another popular water strategy seems to be to sue your neighboring state. Here are some examples: Texas v. Oklahoma and Kansas v. Nebraska and Colorado, and outside of the west,Florida v. Georgia (and Alabama too)


Groundwater is disappearing in California, the Great Plains, Texas and elsewhere in the West, because our laws and policies ignore the fact that surface and groundwater are connected. Contributing the problem, water managers and legislators typically put no restrictions on groundwater pumping, leading to inevitable, and inexorable, groundwater declines.

There is more and more and more evidence of declining snowpack in the western US as the climate warms.

These are just a few recent examples of the growing water-related dislocations in the western US. Writ large, the entire region is at risk. Oh, one more, the Colroado River, at Lake Mead, backed up by the Hoover Dam, the lake is receding; it's estimated that in four years there won't be enough water to cover the turbines to produce the elctricity for Las Vegas. You can replace a power plant. I'm not sure how you replace a river

Monday, August 26, 2013 - And the Answer Is

And the Answer Is

by Sinclair Noe

DOW – 64 = 14,946
SPX – 6 = 1656
NAS – 0.22 = 3657
10 YR YLD - .02 = 2.78%
OIL + .29 = 106.21
GOLD + 7.20 = 1406.00
SILV + .25 = 24.43

President Obama awarded Army Staff Sergeant Ty Carter the Medal of Honor in a ceremony at the White House today. Carter is now the fifth living recipient of the decoration for heroic actions in Iraq or Afghanistan. The Medal of Honor, the nation's highest military honor was awarded for Carter's distinguished service on October 3, 2009 at Combat Outpost Keating in Afghanistan. More than 300 Afghan insurgents launched an attack against the remote, mountainous outpost; of the 53 fellow 4^th Infantry Division soldiers who defended the outpost that day, eight were killed and 25 others injured.

They were outnumbered six to one; the fact that anyone survived is a testament to the heroism of the day. In another part of the compound, former Staff Sergeant Clinton Romesha, battled against incredible odds. Romesha was the second survivor of that battle to receive the Medal of Honor. Carter risked his own life to resupply his fellow soldiers and to rescue a battle buddy; Carter was wounded but continued to fight; all this while under heavy and constant fire that lasted more than six hours. It is hard to imagine the hell those soldiers endured that day.

The wounded soldier that Carter rescued, Specialist Stephan Mace, would later die. Carter blamed himself. For Carter, the battle also resulted in a ninth fatality. A fellow survivor who struggled with post-traumatic stress disorder committed suicide a year after the attack. When he returned stateside, Carter recognized that he was suffering from PTSD. His experiences led Carter to become active in helping veterans of the Iraq and Afghan wars deal with PTSD.

Sgt Carter's citation reads: "Carter's remarkable acts of heroism and skill... exemplify what it means to be an American hero."

During the ceremony, Mr Obama said he wanted to honor Sgt Carter for the "other battle he has fought" - coping with PTSD. The president said: "To any troops or veterans who are watching and struggling: look at his man, look at this soldier… he's as tough as they come, and if he can find the courage and the strength to not only seek help but to speak out about it [PTSD], to take care of himself and stay strong, so can you."

Whenever there is war, there is a terrible price to pay.

About an hour after the president presented the Medal of Honor to Sgt Carter, Secretary of State John Kerry read a statement about the situation in Syria. Kerry said the use of chemical weapons in attacks on civilians in Syria last week was undeniable and that the Obama administration would hold the Syrian government accountable for what he called a “moral obscenity” that had shocked the world’s conscience. Kerry accused the Syrian government of seeking to cover up the use of the weapons, and he rejected its denial of responsibility for what he called a “cowardly crime.”

Kerry also said the Syrian government’s refusal to allow immediate access to the attack sites last week was a telling indicator that it was trying to hide responsibility. Even though a United Nations team was finally permitted by the Syrian government to investigate starting today, he said, the government’s authorization was “too late” to be credible. Then came word that the UN inspectors had been fired upon by snipers; although there were no reports of injuries, some of the inspectors vehicles were disabled.

Meanwhile, Russia's foreign minister warned against prejudgment, and said bypassing the UN Security Council would be a violation of international law. He warned any Western intervention would be a serious mistake.

Defense Secretary Chuck Hagel told reporters today: “if there is any action taken, it will be in concert with the international community and within the framework of legal justification.”

The New York Times reports there is a list of potential military targets in Syria. The White House could take certain military measures without the approval of Congress. We saw that move in Libya. What Congress does control is the pocketbook.

Congress is on recess until Sept. 9; when they return they will look at raising the debt limit. House Speaker Boehner said last month the Republicans wouldn’t increase the debt ceiling “without real cuts in spending” that would achieve a further reduction in the deficit. Treasury Secretary Lew has said the Obama administration won’t negotiate on the debt limit. The Bipartisan Policy Center, a nonprofit research group, has estimated the government will reach the point where it is unable to pay its bills sometime between mid-October and mid-November unless Congress increases the limit. So, enjoy the final days of Summer because things might get scary around Halloween.

POP QUIZ: Everybody close your books and take out your pencils, unless you're driving of course.

First question: Name the world's biggest fast food chain. The correct answer is Subway, which has just opened its Subway store number 40,000. McDonald's only has 34,700 restaurants. Subway claims they still have room to grow.

Next question: name the second largest stock exchange in America. Of course, the New York Stock Exchange is the largest exchange, averaging 1.28 billion in average daily volume, for a market share of 23%. The second largest stock exchange is the BATS Global Markets, which is the new and not so catchy name for the combined exchanges of the BATS and Direct Edge, which averages 1.15 billion in daily share volume, or 20.6% of the total market. The Nasdaq falls to the third spot, with 18.1% market share.

The third question is: Name the best selling new car in California over the past year. Answer is: Toyota Prius hybrid.

Bonus if you can name the eight major car brands that Tesla Model S has passed in sales in California in the past year: Answer: Mitsubishi, Lincoln, Land Rover, Fiat, Buick, Cadillac, Chrysler, Jaguar, and Porsche. That’s especially impressive when you consider that those brands are selling multiple different cars, whereas the Model S is the only Tesla vehicle in production.

Put your pencils down and pass your papers to the front of the room.

Yep, it's school days once again.

Last week was a bore. Not much in the way of economic data, just the Federal Reserve officials making a point of not saying anything at the Jackson Hole confab. Typically there is a post Jackson Hole bounce in the markets, but we warned you against any such expectations. And in the absence of other noise or significant changes in the fundamental outlook for the companies that make up most of the US stock market, the market pretty much ended exactly at the same level it ended in the previous week.

Wall Street is paying too much attention to the “taper”, the prospect of a slowing of Fed asset purchases, and not enough attention to the economy in general or the looming game of debt-ceiling chicken in specific. The stimulus campaigns of the Federal Reserve and the central banks of Europe and Japan, by depressing domestic interest rates, have helped to push trillions of dollars into developing markets in recent years.

Now that the Fed has declared its intent to start easing up on the accelerator by the end of the year, some of that money is starting to slosh out of emerging markets and some might even return to the US.

Outflows from emerging markets have exceeded inflows since the Fed’s June announcement; Bloomberg calculates that emerging-market stocks have lost more than $1 trillion in value; emerging-market currencies are depreciating rapidly. The question of what to do about it was a big topic in Jackson Hole. The answers were pleasantly realistic, as the general consensus seems to be don't worry, be happy, it'll all work out over time.

And finally, P Morgan Chase’s co-head of litigation is leaving the bank as it faces a mounting pile of regulatory headaches, lawsuits and investigations, said people close to the situation. Michael Coyne, who is responsible for all litigation and government investigations affecting J.P. Morgan around the world, will become general counsel of UnionBanCal Corp, a San Francisco based bank.  Mr. Coyne’s departure comes as J.P. Morgan tries to work its way through a litany of legal problems and a heightened period of regulatory scrutiny. The bank disclosed recently that future legal losses could be as much as $6.8 billion above its existing reserves, more than any other U.S. bank.

And the answer is: how can you tell your ship is sinking?

Friday, August 23, 2013 - QE Giveth and QE Taketh

QE Giveth and QE Taketh

by Sinclair Noe

DOW + 46 = 15,010
SPX + 6 = 1663
NAS + 19 = 3657
10 YR YLD - .08 = 2.82%
OIL + 1.39 = 106.42
GOLD + 21.70 = 1398.80
SILV + .90 = 24.18


Yesterday, the Nasdaq crashed for about 3 hours; trading was halted; we still don't know why. It now has a snappy name, the Flash Freeze. It happened after shares of Apple got stuck at $498, then everything froze. In time we'll hear a good story about why it happened. My best guess for now is that it has to do with high frequency traders; the algo traders have a tendency to clog the trading pipes with all their bids, offers, and canceled orders as they try to scalp and front run trades. The market exchanges claim the high frequency traders provide liquidity, but I didn't see any liquidity for about 3 hours yesterday; zip, nada.

The markets had a pleasant and quiet day today, following a couple of weeks of fretting about Fed taper. America has created a whopping entitlement for the biggest Wall Street banks and their top executives, who, unlike most of the rest of us, are no longer allowed to fail. They can borrow from the Fed at almost no cost, then lend out the money at 3 percent to 6 percent or 30 percent; or they can take the money and gamble in markets they have rigged: derivatives, interest rates, energy, aluminum. It's all rigged; the big wheel spins round and round and the little ball always falls in the same spot. All told, Wall Street's entitlement is the biggest offered by the federal government, even though it doesn't show up in the budget. And it's not even a public good. It's just private gain.

And this whole idea of a taper, according to the primary dealers in the Federal Reserve banking system the taper is likely to start in September and wind down by the middle of 2014; well, it's not a done deal, and even if it is done there might be unintended consequences. Today, Christine Lagarde, the head of the International Monetary Fund, speaking at the Fed's Jackson Hole soiree, she noted that central bank policies “in one corner of the world can reach all corners.”

There’s little question that the Fed’s unprecedented flood of cash into the financial system since the financial crisis has rippled across the globe. Earlier that sometimes prompted complaints from developing nations that there was too much capital flowing into their markets, bringing inflationary pressures and hurting exports as their currencies rose in value. Now the concern for Lagarde and many others is on the other side and the increased risks of a sharp economic slowdown in emerging markets.

Bearish sentiment has gripped emerging markets in recent weeks. Cash is flowing out, pushing down the values of stocks, bonds, and currencies in India, Indonesia, and elsewhere; the Indian rupee has thrown itself off a cliff. Brazil's problems have been well documented and are boiling over. China's long guaranteed growth is unsure but likely quite a bit slower. Europe is starting to show signs of life but don't look for a V-shaped recovery; there are too many imbalances between the various economies of the Euro-zone. There's still too much debt, and too much bad debt, and the demographics are worse than in the US. Lagarde is correct on one point, the US economy doesn't operate in a vacuum.

And then there is the whole question of whether the Fed's QE has actually worked. There is little question that it has had an effect, but has it worked?

A secondary goal of QE is to accelerate the housing recovery. There are some signs that has happened. Home prices bottomed out in 2012 and have been rising by double-digits, year over year. Existing home sales are up 17% from last summer. But new home sales figures out this morning fell to a 9-month low. That might be a fluke, but it might also be the first tangible sign that rising mortgage rates are slowing the housing recovery before it gathers much momentum. It's hardly a ringing endorsement for tighter money.

The primary goal of QE is to prop up the banks, and to this end the Fed has done quite well. Refi's soared earlier in the year, and that is a big moneymaker for the banks. They write the refi's, extract the fees and dump the mortgages onto the lap of the government owned Fannie Mae and Freddie Mac. Refi's accounted for 70% of all mortgage lending in the first half of this year, but now they're drying up. Mortgage rates have jumped a full percentage point since early May. Wells Fargo Bank is the biggie in mortgage lending, and the refi business is down 50%, so they're firing 2,300 workers. QE giveth, and QE taketh away.

Elsewhere, retail sales aren't shining; even Wal-Mart is struggling. Car sales are up, but so are gas prices, and newer cars are more fuel efficient, so you buy a new car and cut your gas bill – it's a wash.For the Fed, the trick is to put the brakes on QE in the early stages of an economic rebound, because waiting too long could flood the economy with too much money, causing inflation, asset bubbles or worse. Yet it’s remarkably tricky to know in real time where the economy is headed, which is why the Fed and many other forecasters have misjudged the recovery during the past few years.

And then don't forget the Fed's dual mandates of price stability and maximum employment. We do not have maximum employment; not even close. Maybe it's too much to expect the Fed to deliver jobs; certainly it is too much to expect the Fed to deliver jobs with the tools of QE. Maybe it would be easier if the Fed just waits until they hit their target of 6.5% unemployment; clear, clean, and unambiguous

 It’s understandable that everybody wants more clarity, especially as we approach the end of the Bernanke era. But the Fed itself probably doesn’t know what it’s going to do, given the conflicting picture painted by all the data it looks at. And when the Fed finally does change policy, it will probably be incremental, and I'm not confident it has been priced in, not yet; that cake hasn't been baked yet.

Speaking of half-baked; financial reform has been on a back burner for years. Earlier this week President Obama called the regulators to the White House for a progress report, something, anything that might provide assurances that there won't be a repeat of 2008. Administration officials and some lawmakers have expressed frustration that the Dodd-Frank act, remain unenforced as an alphabet soup of federal agencies wrangle over how to adopt it, and the bank lobbyists constantly try to rewrite it.

Last month, Treasury Secretary Jack Lew complained in a speech that the regulators were moving too slowly to confront the dangers of banks that are so large that governments cannot allow them to fail for fear of bringing down the economy. The administration has said it wants to end the era of Too Big To Fail; they have stated flatly that there will be no more bank bailouts, but they still don't have the actual reforms in place. For too long, financial watchdogs were asleep on the job, allowing Wall Street megabanks to become too complex to manage and regulate and ‘too big to fail. As the banks have returned to profitability there has been growing impatience with the pace of bank regulation.

The banks have been feeding at the trough of QE, and now the Fed is talking about removing QE. This means the banks had damn well better be strong enough, they had better set aside enough reserves to weather problems. It wouldn't look good to pull away QE, have a big bank fail, and then have to go through this whole bailout process all over again. And make no mistake, QE1, QE2, and QE3 have all been an ongoing, drawn out bailout for the banks.

If we could ever get past the fear of another global financial meltdown scenario, maybe we could take all the trillions of dollars that have been funneled to the banskters, and instead funnel that money onto Main Street. Theoretically of course.

Speaking of half-baked; Congress is in recess, so they haven't been messing things up. Actually, this Congress hasn't done anything even when they are in session. This has been the most gridlocked Congress in decades. When they get back from recess they might actually do something; and that is not necessarily a good thing. There is a decent chance Congress might close down government. Yesterday,  about a third of the Republican caucus sent a letter to House Speaker John Boehner and Majority Leader Eric Cantor urging them to oppose any annual spending bills that include funding for Obamacare.

Today Boehner responded by saying that when Congress reconvenes on September 9 after the summer break, “Our intent is to move quickly on a short-term continuing resolution that keeps the government running and maintains current sequester spending levels."

This weekend you'll likely hear quite a bit about the 50^th Anniversary of the March on Washington; it was August 28, 1963, and it was actually called the “March on Washington for Jobs and Freedom”. The march was intended to raise awareness of civil rights and economic issues, because social and economic justice are just branches of the same tree.