Monday, November 04, 2013 - SAC Chairs Avoid Hard Time

SAC Chairs Avoid Hard Time

by Sinclair Noe

DOW + 23 = 15,639
SPX + 6 = 1767
NAS + 14 = 3936
10 YR YLD - .02 = 2.62%
OIL - .12 = 94.49
GOLD – 1.20 = 1315.60
SILV - .21 = 21.76

Stock markets finished October in fine fashion. Remember there was a brief rally in September when the Fed did not taper QE; then there was a rough patch as the government shutdown and tiptoed to the edge of not paying its bills, but that's all behind us now, at least for a month or so. December is now the next foreseeable turning point in the Washington budget battles. That's when a report is due from a joint congressional budget conference. Corporate earnings have been generally positive, even as guidance has been less than exuberant, but that's the game of earnings expectations: under-promise and out-perform. The S&P 500, the Dow industrials, and the small cap Russell 2000 saw new all-time highs last month; absent a big collapse, the Russell is on track for one of its best years of performance ever. The Nasdaq Comp, is still a long way from records but the petal is to the metal.

Since the start of the year through the end of October, the Russell and the Nasdaq are up more than 29%; the S&P 500 is up over 23%, and the Dow has added 18%. Looking forward to this week, a slew of economic data will be released, including: factory orders, the ISM non-manufacturing index, jobless claims, GDP data and personal income and outlays. Earnings season continues. Meanwhile, the soon-to-be former chairman of the Federal Reserve Ben Bernanke will speak on a panel in DC about “Policy Responses” to Crises. The correct answer according to Bernanke is to crank up the digital printing press and shower Wall Street with money.

Today, St. Louis Fed President James Bullard said inflation is too low and he'd like to see tangible evidence that inflation is moving closer to the Fed's target of 2%; that's an argument against tapering in the near term. Bullard thinks the Fed should ignore the “bickering in Washington” largely because it won't go away any time soon. Bullard thinks there will be too many distortions in the Friday jobs report to use the data in a definitive manner. So, all in all, it is a very low probability the Fed will taper in December. We would likely need to see inflation make a very big jump and see the next two jobs reports with net new jobs over 200,000. Doubtful. But we could see taper; it is still in the realm of possibilities. Or maybe we'll see the Fed double down and start buying $170 billion a month in treasuries and MBS. Also doubtful. The only certainty right now is that the Fed is providing fuel to the markets and for now the markets are moving higher.

If history is any indication, the market should see a fourth quarter rally. Shares have climbed in the final two months 82 percent of the time since 1928 when the benchmark gauge advanced at least 10 percent through October. So, the pump is primed. And if the averages hold, the S&P 500 could see a 6% increase in the final two months of the year, which would put the S&P at about 1850 by year's end. But that doesn't guarantee an end of year rally; a weak holiday shopping season could slow down the train, and Fed taper could slam on the brakes and send sparks flying. But for the moment, Wall Street is happy and traders are counting their bonus.

The bear market case is supported by rapidly rising price to earnings ratios, bullish sentiment on Wall Street, margin debt at 5 year highs, and the market has gone almost a year and a half without a real correction, so you have to figure we'll get one at some time. But if you're really counting on a correction, a serious, bring you to your knees correction, then you would look at the Fed hiking rates or tapering from QE combined with higher energy prices. Right now, the price of oil is back under $95 a barrel. No worries.

There will be no bonuses at SAC Capital; might not be a SAC Capital. SAC Capital Advisors has agreed to plead guilty to insider trading violations and pay a record $1.2 billion penalty, becoming the first large Wall Street firm to confess to criminal conduct since the days of Drexel and Michael Milken. The guilty plea and fine paid by SAC, which is owned by the billionaire investor Steven A. Cohen, are part of a broader plea deal. It also will impose a five-year probation on the fund and require SAC to terminate its business of managing money for outside investors, though the firm will probably continue to manage Cohen’s multi-billion dollar fortune. Cohen has not been charged criminally.

SAC’s admission that several of its employees traded stocks based on secret information also sours Cohen’s investment track record. Since 1992, the fund posted average annual returns of nearly 30 percent. The $1.2 billion penalty adds to the $616 million in insider trading fines that SAC agreed to pay to federal regulators earlier this year. Cohen, who owns 100 percent of the firm, will pay those penalties.

The plea deal does not incorporate a separate civil action by the SEC against Cohen. Also, authorities continue to view Cohen and other SAC employees as targets of a continuing criminal insider trading investigation. The plea agreement expressly states that it “provides no immunity from prosecution for any individual.” The firm will not trade about $6 billion in outside investors accounts but Cohen still has a personal fortune around $9 billion, and the firm will likely stay open to accommodate his personal wealth.

This was probably not a difficult deal for Cohen to make. He still keeps a big chunk of money, no matter how much was ill gotten. It’s far easier for SAC Capital as a corporate entity to plead guilty and settle with the government because it doesn’t have to worry about being incarcerated. The government is not going to incarcerate the chairs and desks. For now, SAC appears to be intact; prosecutors did not freeze assets. The corporate entity does not go to jail; just one more reason why corporations are not people.

Even before the deal could be done, it's coming under fire. The lawyer for a class-action suit over SAC’s trading in drug company Elan has asked a federal judge to reject the potential settlement. Federal judges have started to balk at rubber-stamping settlements in which defendants neither admit nor deny wrongdoing; a step in the right direction, but this deal with Steven Cohen seems to confirm that for Cohen at least, crime pays.

Another big settlement today involving big pharma. The Justice Department says Johnson & Johnson will pay more than $2.2 billion in criminal and civil fines for marketing drugs Risperdal, Invega and Natrecor for uses they weren't approved. The settlement also covers charges that the company paid kickbacks to doctors and pharmacies promoting the drugs.

The criminal filings said Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, marketed Risperdal for unapproved uses. The drug, approved to treat only schizophrenia, was marketed to also treat anxiety, agitation, depression and apparently anything that might feel better by taking a pill, preferably a blue pill.

The Johnson & Johnson subsidiary, Janssen, will pay $400 million for the illegal marketing, while Johnson & Johnson will pay $1.7 billion to settle civil cases with the federal government and 45 states.

You've heard of Blackberry's plans to sell itself. The mobile phone manufacturer never quite caught up with other smart phone makers. Today saw the collapse tentative takeover offer from Blackberry's largest shareholder. Blackberry's CEO resigned. The shareholder, Fairfax Financial Holdings, and an unnamed group of institutional investors will invest $1 billion through debentures that can be converted into common shares at a price of $10 a share.

A scientific panel set up by the United Nations has found that climate change will pose a serious threat to the world's food supply in the coming decades. The findings aren't set to be announced until March and are still undergoing editing, but a copy of the report has leaked online, and ended up on the New York Times. The findings come from the Intergovernmental Panel on Climate Change (IPCC), which has been releasing reports on the matter around every six years. The report paints a decidedly grim picture. Climate change will pose sharp risks to the world’s food supply in coming decades, potentially undermining crop production and driving up prices at a time when the demand for food is expected to soar. And they say they are already seeing the harmful effects in some regions.

On the food supply, the new report finds that benefits from global warming may be seen in some areas, like northern lands that are now marginal for food production. But it adds that over all, global warming could reduce agricultural production by as much as 2 percent each decade for the rest of this century. During that period, demand is expected to rise as much as 14 percent each decade, the report found, as the world population is projected to grow to 9.6 billion in 2050, from 7.2 billion today. The report finds agricultural risks “are greatest for tropical countries, given projected impacts that exceed adaptive capacity and higher poverty rates compared with temperate regions.” And yes, hundreds of billions of dollars are already being spent in an effort to reduce emissions in response to previous findings by the IPCC.