Tuesday, November 12, 2013 - Supremely Happy

Supremely Happy

by Sinclair Noe

DOW – 32 = 15750
SPX – 4 = 1767
NAS + 0.13 = 3919
10 YR YLD + .02 = 2.77%

OIL – 2.10 = 93.04
GOLD – 15.70 = 1267.20
SILV - .65 = 20.80

We've been hearing from Federal Reserve big wigs about their ideas for taper. Today, Federal Reserve Bank of Atlanta President Dennis Lockhart said he wants to see inflation accelerate toward the Fed’s 2% goal before the central bank reduces $85 billion in monthly bond purchases. Lockhart also wants to see economic growth pick up to around 3%.

In a speech, Lockhart said: “To achieve a faster pace of growth, it’s my opinion that we’ll need to see” greater consumer spending and a decline in “fiscal drag.” Even though those targets for inflation and growth are a long way off, Lockhart says the taper, reducing bond purchases, “ought to be on the table at upcoming meetings” by the FOMC, including the December 17-18 meeting.

There has been a common thread in mainstream economic forecasting lately. It goes like this: "Yes, 2013 has been rough. But growth should pick up in 2014." The latest example is from the OECD, the organization of leading developed nations projecting that improvement just around the corner, as its index of leading indicators rose.

The same story shows up in almost any mainstream forecasters' estimates. For example, in their last official forecasts, top Federal Reserve economists concluded that 2013 US economic growth was on track to be only 2 to 2.3 percent. But they forecast that would rise to the 3 percent ballpark in 2014 and as high as 3.5 percent in 2015.

The consistent pattern for the last four years has been to project improving growth in the year ahead, and then to mark down those projections when the rosier future does not arrive. 

Perhaps the US economy is gathering traction, or perhaps last week's rate cuts by the European Central Bank signal a global competition to cut the value of currencies; the result is that the dollar is bouncing off its lowest levels since February. Weak inflation readings offer the Fed a rationale to continue securities purchases; it also locks the Fed into securities purchases. Right now the PCE reading of inflation is just below one percent and there really isn't any indicator of a big increase in inflation; and if the Fed starts tapering now, they run the risk of increasing deflationary pressures.

When the Department of Justice blocked the American Airlines, US Airways merger, we told you it was probably a negotiating tactic. It was. DOJ has reached an agreement that will have the merged airline give up flight slots and gates at seven different airports, the big changes coming at Washington Reagan and New York La Guardia. So, now that a deal has been reached, the two airlines are expected to complete their merger in December, just in time for the holiday travel season.

In a settlement expected to be announced this week, Bloomberg reports Johnson & Johnson will pay more than $4 billion to resolve thousands of lawsuits over its recalled hip implants in the largest settlement of US legal claims over a medical device. The accord will resolve more than 7,500 suits filed in federal and state courts by patients who’ve already had defective hips removed. The company will likely pay an average of $300,000 for each of those removals. The agreement doesn’t bar patients whose hips fail in the future from seeking compensation from J&J; that means the settlement is uncapped in terms of its total value.

Timothy Massad is expected to be picked to head the Commodity Futures Trading Commission, replacing the retiring Gary Gensler. The CFTC is the regulator of the derivatives markets, estimated at more than $600 trillion on Wall Street; perhaps double that amount worldwide. It might be a misnomer to say the CFTC regulates the derivatives markets, because those markets are largely unregulated. The CFTC, long an unexciting agency overseeing agriculture futures, has only just been put in charge of the swaps markets, and has yet to write some of its planned rules. Massad worked as the head of the Troubled Asset Relief Program until 2011.

Six years after the collapse of a couple of Bear Stearns hedge funds and the fight continues over the cause of Bears' demise. Liquidators seeking to recover money for investors have filed a fraud lawsuit against three major credit rating agencies: Standard & Poors, Fitch, and Moody's. The suit accuses the credit rating agencies of assigning artificially high credit ratings to the mortgage bonds in the funds. When those bonds collapsed, the funds failed, resulting in more than $1 billion in investor losses.

The credit rating agencies made the mistake of allowing employees to communicate by email about the work they were sort of doing. “It could be structured by cows and we would rate it,” an S&P employee said to a co-worker in a text message from 2007. A Moody's employee wrote: “We sold our soul to the devil for revenue.” In an email, another S&P employee called the firm’s ratings practices a “scam.”

The lawsuit is not the first that seeks to hold the ratings agencies accountable for losses incurred during the financial crisis. The Justice Department filed a civil fraud action this year against S&P, the first federal enforcement action against a credit rating firm.  It is also not the first legal action related to the two Bear funds, which collapsed in July 2007. Federal prosecutors brought criminal securities fraud charges against the funds’ managers, Ralph Cioffi and Matthew Tannin. The two fought the charges and a jury found them not guilty after a trial.

A report by the Financial Crisis Inquiry Commission found the  credit ratings firms were “key enablers of the financial meltdown.”

Mortgage bond investors have had mixed results bringing civil lawsuits against the ratings agencies. S&P and the other agencies have argued that their ratings are speech that is protected by the First Amendment. A number of judges have agreed with the ratings agencies and tossed out these lawsuits. Others have said the ratings were not opinions, but misrepresentations that were possibly the result of negligence or fraud.

S&P also said its ratings were not to be relied on, in part because the investors had the same information as it did.

In July, a federal judge denied S&P’s motion to dismiss the government’s case and called its defense “deeply and unavoidably troubling.” The judge, David Carter of Federal District Court in Los Angeles, asked, “If no investor believed in S&P’s objectivity, and every bank had access to the same information and models as S&P, is S&P asserting, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness?”

This week, the operator of Japan's crippled Fukushima nuclear plant will begin removing 400 tons of highly irradiated spent fuel in a hugely delicate and unprecedented operation fraught with risk. Carefully plucking more than 1,500 brittle and potentially damaged fuel assemblies from the plant's unstable Reactor No. 4 is expected to take about a year. If the rods - there are 50-70 in each of the assemblies, which weigh around 660 pounds and are 15 feet long - are exposed to air or if they break, huge amounts of radioactive gases could be released into the atmosphere.

When the time comes, extracting spent fuel from the plant's other reactors, where radiation levels are much higher because of core meltdowns, will be even more challenging. Reactors No. 1 and No. 3 sustained heavier damage than No. 4 as a result of the March 2011 earthquake and tsunami, but Reactor No.4 is perched nearly 60 feet high in a building that has buckled and tilted and could collapse if another quake strikes. Also, if the pool housing the fuel assemblies is punctured and the water drains away, there could be a fire that releases more radiation than during the 2011 disaster

You've heard that some retailers are trying to kill Thanksgiving; they're moving Black Friday to Thursday, Thanksgiving Day; some are even starting sales at 6AM on Thanksgiving Day, so as to totally ruin any sense of the holiday. The big chain stores include: Old Navy, Kmart, WalMart, Target, Staples, Sears, Best Buy, Toys Rus, and others. We've been told that the reason behind the move is because of a calendar anomaly this year that resulted in 6 fewer shopping days between Thanksgiving and Christmas. The real reason is far more insidious and diabolical.

It is in fact, a socialist plot, and it started in Venezuela. About six months ago, Hugo Chavez, the Venezuelan president and dictator died; his replacement is a man named Nicolas Maduro, and Maduro has declared that Christmas should be celebrated earlier; he moved it to the first Saturday in November. So, I'm a little late with the story. And then he ordered government employees to be paid their Christmas bonuses in November, as he turned on the Nativity lights on the Presidential Palace. But why did the Venezuelan president decide to defy the calendar in such a bizarre manner? Well, Maduro announced that he simply wanted to bring “happiness for everyone.” And it's all part of a bigger plot.

Last week, Maduro sought to raise the level of happiness throughout the country by introducing the Deputy Ministry of Supreme Social Happiness. Maduro defended this cabinet-level creation, by remarking, “It’s provocative to make it a ministry, right?”

He then went on to add, “That’s the main message I wanted to give here. Let’s be happy and make others happy too.”