Friday, August 09, 2013 - May All Your Wishes Come True

May All Your Wishes Come True

by Sinclair Noe

DOW – 72 = 15,425
SPX – 6 = 1691
NAS – 9 = 3660

10 YR YLD - .01 = 2.57%
OIL + 2.57 = 105.97
GOLD + 2.30 = 1315.70
SILV + .31 = 20.66

As we started the week, I warned that August can be fairly volatile in the stock market; it seems like the lazy days of summer and volume is usually lackluster, as it was today, but sometimes that just intensifies price swings. The markets were down again today, the fourth decline in the week, and the first weekly decline on the heels of six weeks of gains. The Dow was down 1.5% for the week. The S&P pushed back to 1700 a few times but couldn't break through. This week's declines don't seem to tell us much; we could go either way next week. Yes, I know the rally is long in the tooth; going back to March 2009, the rally is 4.4 years old, longer than the average rally, but it really is too early to start catching falling knives.

There wasn't much in the way of economic reports this week; earnings reporting season is winding down, Congress is away on Summer recess. I guess it's been about a week since we saw the guesstimates on second quarter GDP, and you'll recall that the guesstimates included revisions that go back 83 years. The government is recalculating the numbers to try to get a more accurate picture. One of the revisions was to how research and development is counted; now it will be considered an investment, and that adds to GDP, and makes GDP bigger than we thought. Meanwhile, another revision shows they've been overestimating the amount of income not reported by taxpayers; this could include restaurant workers under-reporting tips, or people who work for cash and don't report it. The result is that it looks like wage earners make less than we thought.

Before the figures were revised, it appeared that wages and salary income in 2012 amounted to 44 percent of GDP, the lowest at any time since 1929, which is as far back as the data goes. But the revisions cut that to 42.6 percent, which matched the revised 2010 figure as the lowest ever. The flip side of that is that corporate profits after taxes amounted to a record 9.7 percent of GDP. Each of the last three years has been higher than the earlier record high, of 9.1 percent, which was set in 1929. So, the new data shows what you probably suspected; corporations are getting richer and workers aren't.

Even in the Dog Days, we've had some interesting news. Tesla makes a very good car and their earnings are reflecting that. Priceline, the name-your-price online hotel booking place is up around $1,000 per share and we're feeling deja vu from 1999 all over again. And Jeff Bezos, the Amazon.com guy is buying the Washington Post newspaper; admittedly, that doesn't sound like much. I bought a newspaper the other day along with an iced tea and I sat down and read it and got ink on my hands and it was very satisfying. Bezos is buying the whole company.

The biggest economic news this week came from Federal Reserve officials talking about the need to eventually taper the Fed's bond buying program, or more specifically slowing down the rate at which they acquire new assets. The Fed may actually be able to slow down the volume of purchases and still increase the share that they take out of the market. The Fed would have a difficult time just changing course; they recognize that sudden change is problematic. And so they are taking very, very small steps; actually right now, they only talking about the possibility of taking small steps. And if it starts to hurt; they will stop. And they will huddle back in their corner.

Eventually the huddle in the corner will not include Ben Bernanke, he's planning on hanging up his lasso and riding into the sunset, or at least into a cushy job with some humongous private financial firm. Today, President Obama held a press conference and while most of the talk was on how the government is spying on everybody, including me and you; and by the way, Mr. Obama feels this is justified; there was also a question on his pick to replace Bernanke. He hasn't decided yet, but he says he has a “range of outstanding candidates” including Larry Summers and Janet Yellen; and whomever it is, they should remember the Fed has a dual mandate to maintain price stability and avoid inflation, and also to achieve full employment.

The press conference covered a wide range of issues, including Republican opposition to Obamacare, which Mr. Obama described as an “ideological fixation.” A key part of the law begins on Oct. 1, when insurance exchanges start. Under that provision, the 15 percent of Americans still without health insurance will, for the first time, be able to sign up for coverage at a significantly cheaper rate than what they can buy on the individual market. Those who still can't afford insurance at those reduced rates can get a tax credit under Obamacare.

The Oct. 1 start date for the exchanges coincides with the date that Congress needs to pass a temporary spending bill to keep the government running. Tea party Republicans have vowed not to pass that spending measure, and shut down the government in the process, if the bill includes any funds for Obamacare.

So, what's the biggest crisis facing the country right now? A CBS poll asked Americans which issue they feel Congress should focus on, and the answers included the economy, followed by the budget deficit, health care and education. What's interesting here is what didn't make the top responses. Fill in the blanks for yourself.

Meanwhile, we keep getting hints of a spine in financial regulators. The SEC is now trying to get JPMorgan to admit to wrongdoing in connection with an investigation of the multi-billion dollar trading losses by the London Whale. For decades, the big banks have settled suits and the SEC has allowed them to “neither admit nor deny wrongdoing”. And even now, the SEC is looking at a civil suit, not criminal charges, and there does not appear to be any threat of charges against JPMorgan senior management.

The losses in the case have now grown to more than $6 billion, stemming from derivatives bets made by JPMorgan's Chief Investment Office in London. The top trader at the CIO office was Bruno Iksil, also known as the London Whale. Iksil is said to be cooperating with US and UK regulators. And the bank is expected to be fined by the British regulators. Meanwhile the FBI and federal prosecutors in Manhattan are uncovering emails and phone records to see who knew what and when, regarding the size of the losses. The bank initially told investors that the losses would maybe be $2 billion. Jamie Dimon, the CEO, described the losses as a “tempest in a teapot”. Dimon is not personally suspected of wrongdoing in the investigation. But it appears the traders in London breached the bank's risk limits in making their derivatives trades, and that points to a lack of internal controls.

In one phone call last year, the London Whale, Mr. Iksil, told a colleague that the bank’s estimated losses were “getting idiotic.” Mr. Iksil added that “I can’t keep this going” and that he did not know where his boss in London “wants to stop.” Investigators suspect the traders' concerns were not relayed to upper management of the bank in keeping with industry standards. Of course, the investigation might get even more interesting if those concerns were relayed to management.

Even if JPMorgan moves beyond this investigation, they still have eight other federal agencies investigating their practices, including possible criminal and civil violations, plus at least one state regulator, and two European nations. The SEC calling for an admission of wrongdoing represents a major shift in attitude by the new SEC Commissioner Mary Jo White. Ms. White won't be involved in prosecuting JPMorgan because she has recused herself because she used to represent the bank back when she was in private practice. Still, if the SEC wins, it represents one of the toughest penalties faced by the banksters; they have to say out loud that they did a bad, bad thing, and Ms. White might even force them to write on the blackboard 100 times: “I'm sorry I lied to investors.”

Yep, that'll teach 'em.

The Silver Fire grew overnight to more than 16,000 acres, or about 25 square miles, with winds pushing the fire east towards Palm Springs. Firefighters say they have reached 25% containment but the fire is still growing. We wish them the best in their fight.

And finally, the Perseid Meteor shower can be seen this weekend; best times will be Sunday and Monday nights. Try to stay away from city lights, hope for clear skies, and enjoy nature's free show, and may all your wishes come true.