Thursday, August 08, 2013 - Shining Light on the Bright Economy

Shining Light on the Bright Economy

by Sinclair Noe

DOW + 27 = 15,498
SPX + 6 = 1697

NAS + 15 = 3669

10 YR YLD - .01 = 2.58%
OIL -.59 = 103.78
GOLD + 25.10 = 1313.40
SILV + .66 = 20.35

After three down days and a negative start to today's trading, the major market indices finished in positive territory. Three day losing streaks have been rare for the past nine months. You have to go back to December last year where we had more than a three day losing streak and any kind of decline that caused a scare; that was the fiscal cliff brouhaha, you'll recall.

This certainly is not a market for short sellers, it has been about eight months since the bears have been able to put any real fear on the table. The market may go down for three days, but then it pops back up; the down days are apparently nothing more than a pause that refreshes, and then the buyers rush back in.

Despite taper talk, the Fed has not committed to taper, just a bit of jawboning, and they are still pumping $85 billion a month into mortgage backed securities and treasuries, and then the cherry on top is that $40 billion managed to flow into equity funds in July. Earnings growth is decent even if revenue growth is underwhelming. There is still cash on the sidelines. Maybe too much cash on the sidelines.

Wealthy Americans put away about 37 cents for every dollar they earned, which is more than triple their savings rate in 2007. In addition, a Bank of America study cited in the CNBC report found that more than half of millionaires have a "substantial" amount of cash on hand and of that group, about 60 percent said they didn't plan to invest it in the next two years.

As the recovery struggles to gain solid ground, the findings indicate that even while America's wealthiest households are getting an ever larger share of the income pie, they're doing little to put that money to productive use in the economy. Over the last few decades, the incomes of the top 1 percent of earners grew by about 275 percent, according to a 2011 report from the Congressional Budget Office. During the same period, the bottom fifth of earners saw their incomes grow by just 20 percent. That increased concentration of wealth in the hands of a few, combined with the effects of the Financial Crisis and the slow recovery, has meant less money in the hands of low- and middle-income Americans -- who are more likely to spend it -- decreasing demand for goods and services. The lack of demand in the economy makes wealthier Americans more hesitant to spend, keeping the cash concentrated in a few hands. Call it a vicious cycle instead of the virtuous cycle.

While it has indeed been enjoyable to ride the bull train for the majority of this year, history suggests that it is probably a good idea to keep an eye on the exits these days, and the biggest known threats are the taper tantrum and upcoming budget battles; I'll get to the budget in a bit. We know about the taper tantrum; any hint of taper can send the markets into a hissy fit, so imagine if or when the Fed actually cuts back on QE. Yes, we all know it will happen eventually but Wall Street will still have a tantrum. Already the Fed is setting us up with the idea that the economy has improved enough and is strong enough to handle less monetary stimulus. Don't be surprised to see more news stories and articles on how bright the economy is these days.

A Labor Department report today showed initial jobless claims rose less than expected in the most recent week. The day's report dropped the four-week average of claims to the lowest level since 2007, before the start of the recent recession.

Yes, too many Americans are out of work and have been that way for too long. And yes, household incomes, adjusted for inflation, are still below 2007 levels. Yes, job number one is more jobs and better jobs and better pay. The economy needs growth in order to make that happen, and that's where the news is good. Confounding so many skeptics, the economy is actually shifting into higher gear. Growth for this year's second quarter was reported at 1.7%, beating expectations. Yes, that's the good news; 1.7%

The Federal Reserve Board, not known for going out on a limb or for accurate prognostication, recently raised its 2014 forecast for real growth to the 3%-to-3.5% range. And the country will likely see two to three more years of good growth, which would produce millions of new jobs and begin to raise incomes. This is one reason the stock market recently reached all-time highs. Yea, that's it. Happy days are here again. Happy days, happy days.

The US is the only developed country with a story like this to tell. Europe, unfortunately, is facing a long period of economic stagnation. Its financial crisis came later, and southern Europe is laboring under the burdens of sick banks and weak competitiveness. Meanwhile, Japan, where the population is falling, hasn't seen meaningful growth in years and isn't likely to see it now. In a global economy, it isn't exactly encouraging when your global partners struggle.

There are a number of factors that could slow any growth we're seeing and send the markets into a tailspin, and the taper tantrum is just one. The other is the budget battle. Right now, Congress is on its 5 week money collecting tour of the home districts, also known as summer recess. The good news is that with Congress out of Washington for the remainder of the summer, they can't do much damage to the economy, but in September they'll try to make up for lost time. There is a very real possibility of a government shutdown, and just getting close is enough to damage things. Remember the fiscal cliff scare.

But for now, don't bet against the markets, and don't lose sight of the exits.

Of course a taper tantrum and budget battles aren't the only things that could rattle markets. There were three drone strikes in Yemen today; so we are now engaged in a remote control war in the Middle East. And of course the banksters could always throw a monkey wrench in the works at any given moment.

In the last few days, the Department of Justice, along with the SEC, filed a case against Bank of America over a 2008 prime mortgage securitization that breaks some new ground in fraud allegations and is also saber-rattling in the form of launching a criminal investigation into JP Morgan’s sale of mortgage backed securities.

We've been down this road before, but at a certain point you have to think it could be problematic for the banksters, just because it is coming at them fast and furious. JPMorgan is being poked and prodded by at least eight different federal regulators for alleged misdeeds ranging from mortgage shenanigans to interest-rate manipulation. The latest addition to this long list of troubles did appear to gently rattle JPMorgan's stock price, which was down less than one percent, on a day when the broader stock market was slightly higher. Just a blip; and allegations of wrongdoing are just business as usual.

JPMorgan has suffered $16 billion in legal costs since 2009. But the bank has earned $71 billion in profit during that time. JPMorgan on Wednesday raised its estimate for future legal costs to $6.8 billion, up an extra $800 million, to account for the new probes. But it could pay off that entire bill with just the second quarter's $6.5 billion in profits.

So what’s with the new-found enforcement religion? Is Attorney General Holder trying to rebuild what little he has left in the way of a reputation after essentially admitting back in March that the big bad banks were too big and too bad to be bothered by things like laws.

Testifying before the Senate Judiciary Committee, Holder told lawmakers that he is concerned that some institutions have become so massive and influential that bringing criminal charges against them could imperil the financial system and the broader economy. His remarks came as a growing number of lawmakers have suggested that big banks are, effectively, “too big to jail.”

Holder said: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” he said. “And I think that is a function of the fact that some of these institutions have become too large.”

There was some uproar and signing of petitions, and then we didn't hear much for a while, and now BofA is charged and JPMorgan is under investigation. Don't get too excited. It’s inconceivable that the DoJ would indict JP Morgan at a corporate level. Not only would Holder not risk destabilizing the bank, there’s simply no way the Treasury would let him go there. If any actual criminal charges are contemplated (remember, this is just an investigation), expect a rerun of the UBS Libor strategy, where UBS paid a large fine for Libor rigging and admitted to criminal conduct…in its Japanese unit. I’d be delighted to be proven wrong, but there’s no reason to expect anything other than new and better optics from the Obama Administration at this late date.

And then this tidbit; the trader at the center of JPMorgan Chase's $6.2 billion trading loss last year will not face charges related to the incident. Bruno Iksil, who worked in JPMorgan's chief investment office in London and incurred losses on oversized positions in a derivatives market, is reportedly cooperating with government investigators.

The Federal Bureau of Investigation in New York and the Securities and Exchange Commission, along with regulators in the UK, opened probes last year into the activity surrounding the costly bets, which earned Iksil the nickname "the London Whale" from his fellow Wall Street traders.

The case is still open, but according to a New York Times report on Thursday, JPMorgan is close to a deal with the SEC and British regulators, which is expected to be announced in the fall. The fate of a potential criminal case against JPMorgan or individuals who worked for the bank during the incident remains unclear.