Thursday, February 06, 2014 - Waiting on the Friday Jobs Report

Waiting on the Friday Jobs Report

by Sinclair Noe

DOW + 188 = 15,628
SPX + 21 = 1773
NAS + 45 = 4057
10 YR YLD + .04 = 2.70%
OIL + .57 = 97.95
GOLD + .20 = 1258.80
SILV + .05 = 20.05

The number of Americans filing new claims for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits declined 20,000 last week to a seasonally adjusted 331,000. There have been some interesting reports this past week on jobs, including the controversial research from the CBO and the other from the New York Fed.

Competition for jobs is still fierce. Although it varies with the company and the job, on average 250 resumes are received for each corporate job opening. In addition, out of every 1000 people who view an online job posting, 100 people will apply, 4 – 6 will be selected for an interview, 1 – 3 will be invited for a final interview, 1 will be offered the job, and 80% of those who get a job offer accept it.

The Wall Street Journal shows how the very backbone of the labor market, men in their prime (for measurement purposes, 25 to 54), are out of work to an unprecedented degree. More than one in six men ages 25 to 54, prime working years, don’t have jobs—a total of 10.4 million. Some are looking for jobs; many aren’t. Some had jobs that went overseas or were lost to technology. Some refuse to uproot for work because they are tied down by family needs or tethered to homes worth less than the mortgage. Some rely on government benefits. Others depend on working spouses.

The trend has been building for decades, according to government data. In the early 1970s, just 6% of American men ages 25 to 54 were without jobs. By late 2007, it was 13%. In 2009, during the worst of the downturn, nearly 20% didn’t have jobs. Although the economy is improving and the unemployment rate is falling, 17% of working-age men weren’t working in December. More than two-thirds said they weren’t looking for work, so the government doesn’t label them unemployed

The monthly jobs report comes out tomorrow morning. We’ll wait and see.

The largest decline in exports since October 2012 helped widen the trade deficit by 12% in December to $38 billion. When adjusted for inflation, the trade gap rose to $49 billion. In its first estimate of fourth-quarter GDP last week, the government said trade accounted for 1.33 percentage points of the economy's 3.2% annual growth pace during the period. However, the deficit in December was bigger than the government had assumed, and that means fourth-quarter GDP growth will likely be lowered when a revision is published later this month.

A separate report showed US productivity rose at a strong 3.2% rate in the fourth quarter, that follwos a 3.6% increase in the third quarter productivity as businesses managed to step up output sharply while keeping a lid on hiring and hours worked.  For all of 2013, productivity rose just 0.6%, the smallest gain since 2011.

The rise in fourth-quarter productivity helped keep down unit labor costs, which is a measure of the labor-related cost for any given unit of output. They fell at a 1.6% rate, showing no wage inflation pressures in the economy. For the year as a whole, unit labor costs were up just 1.0 percent, the weakest reading since 2010.

A Manhattan jury convicted former SAC Capital Advisors portfolio manager Mathew Martoma of what prosecutors described as the most lucrative insider-trading scheme ever. After more than two days of deliberation, the jury found Martoma guilty of getting secret tips from a neurologist about the results of a clinical trial involving an Alzheimer’s drug, enabling SAC to make about $275 million in profits or avoided losses.

In recent years, US Attorney Preet Bharara has exacted guilty pleas or convictions from seven former portfolio managers or research analysts accused of illegal trading while at SAC. Six of the hedge fund’s former employees have pled guilty to insider trading charges for activities that took place from 1999 through at least 2010. Michael Steinberg, another SAC executive fought similar charges in court and he was also convicted last November. And so this raises the question of why Steven Cohen, the founder of SAC, hasn’t been criminally charged; there is an unbroken string of convictions or guilty pleas against everyone except the big target. There was some question going into the trial about whether Martoma would turn on Cohen, but Martoma did not point a finger at his old boss.

Cohen has not been accused of criminal wrongdoing, but the Securities and Exchange Commission brought a civil case against him in July, alleging that he failed to supervise Steinberg and Martoma. That case is pending. In November, SAC agreed to pay $1.2 billion to settle charges of insider trading, but Bharara indicated he might still pursue Cohen and the agreement does not provide criminal protection or immunity for any individuals.

Last week a judge in New York approved most of an $8.5 billion settlement between Bank of America and a group of mortgage securities investors. At issue in this case are 530 mortgage-backed securities involving troubled loans issued by Countrywide Financial. A group of the largest investors in the bonds agreed to settle their claims with Bank of America, which bought Countrywide in 2008.

But another big investor in the bonds, including and led by AIG (the insurance company), refused to sign the pact, arguing that the settlement was a fraction of the overall losses. AIG also argued that the trustee for the bonds, Bank of New York Mellon, shirked its responsibility to push for more money in the settlement. One of the Countrywide bond investors, Triaxx, has argued that the claims could potentially affect $31 billion of loans. Now, a new judge in the case, has put the settlement on hold and will hold another hearing on the case in a couple of weeks.

New York state's top financial regulator has demanded documents from more than a dozen banks including Barclays, Deutsche, Goldman Sachs and RBS as part of a probe of trading practices in the $5.5 trillion a day forex, or global foreign currency exchange markets. Regulators are stepping up their investigation following the banks' decision to fire or suspend at least 20 traders following reports that employees at some firms had shared information about their currency positions with counterparts at other companies.

Standard & Poor’s lowered Puerto Rico’s credit rating to junk status on Tuesday; maybe you didn’t notice. Puerto Rico’s bonds traded lower, but there was nothing close to the kind of mass sell-off that might indicate a panic. The Governor of Puerto Rico says they will try to renegotiate almost $1 billion in debt deals; they might even issue a couple of billion in new bonds. Bankruptcy is not an option because Puerto Rico is not considered a state or a municipality; it is a territory and as such it falls in a kind of legal limbo. Hedge funds are smelling blood in the water but waiting for more carnage before stepping in; bond prices have dropped to 65 cents on the dollar; the hedge fund sharks are waiting for prices to drop under 50 cents.

The Senate failed to move forward on a three-month extension of assistance for the long-term unemployed that would allow people who have exhausted their unemployment insurance to continue receiving benefits as long as the government offset the $6 billion cost. The vote was 55-to-42, falling short of the 60-vote threshold to break a Republican filibuster effort. Ultimately, how to pay for the program proved too big a hurdle for senators to overcome.

It appears that immigration reform is dead. House Speaker John Boehner cited executive actions by the Obama administration that have changed or delayed implementation of the president’s health care law, saying: “The American people, including many of my members, don’t trust that the reform that we’re talking about will be implemented as it was intended to be. There’s widespread doubt about whether this administration can be trusted to enforce our laws, and it’s going to be difficult to move any immigration legislation until that changes.” So, if we’re waiting on the GOP to trust Obama before they’ll pass immigration reform.., well it’s just dead as a doornail.

Apparently trust was not an issue in passing a farm bill this week. The Senate signed off on the Federal Agriculture Reform and Risk Management Act of 2013 and has sent it to the President for his signature. The “reform and risk” part of the legislation refers to a change in direct cash payments to farmers under a subsidy system, which is being replaced by crop insurance. Time will tell whether that is risky or prudent.

For the past 2 years, European Central Bank President Mario Draghi has been saying he’ll do “whatever it takes” to get the Eurozone back on a growth path; just not today. The European Central Bank today left its benchmark interest rate unchanged, choosing to wait for additional data before deciding whether to address evidence that the euro zone is sliding into deflation. For the past 4 months, consumer prices in the EU have been below 1% and in January prices slipped to 0.7%. Draghi insisted there is no deflation. 

Friday, January 31, 2014 - January Out

January Out

by Sinclair Noe

DOW – 149 = 15,698
SPX – 11 = 1782
NAS- 19 = 4103
10 YR YLD  - .03 = 2.67%
OIL - .76 = 97.47
GOLD + 2.80 = 1246.90
SILV + .03 = 19.27

The Dow started the year and the month at 16,572 (-926). The S&P 500 started the month at 1845 (-63). The Nasdaq Comp, for the month, went from 4160 (– 57).

For the week, the Dow fell 1.1 percent, the S&P 500 slipped 0.4 percent and the Nasdaq dropped 0.6 percent. In January, the Dow slumped 5.3 percent, the S&P 500 lost 3.6 percent and the Nasdaq fell 1.7 percent. January marked the worst month for the Dow and the S&P 500 since May 2012, and the worst for the Nasdaq since October of that year.

Yield on the 10 year Treasury note dropped from 2.99% to (- 32bp). And this is a little telling, the Vix, the volatility index went from 14.32 to 18.22    (-3.9)

The Vix might be indicating that the market is not sufficiently scared of the emerging market contagion; certainly the Vix is higher than the start of the month, but remember that December saw record highs for the major indices, and a really scary Vix reading would be around $49, for those of you who remember the beginning of 2009. In other words, there are a whole bunch of people who haven’t figured out that we’re in a downturn in the markets. So far the US markets are just experiencing a small move, but the rest of the world is taking a bigger hit. About $17 billion has poured out of emerging market funds this month.

Right now, there is growing angst regarding the emerging markets. The Dow was down more than 200 points to start the session today. And really, none of this should be a surprise. We know that emerging markets have been struggling with the Fed’s taper and other stimulus plans of developed economies. Things tend to unravel slowly and then all at once. It’s hard to figure out where we are in the unravelling. When will this little downturn end? I don’t know but I’m guessing the Vix will be higher than today.

A new State Department report on the proposed Keystone XL oil pipeline finds that the project would have a minimal impact on the environment, an assessment likely to increase pressure on the White House to approve it. But the report sets no deadline for doing so. The proposed pipeline would carry crude derived from oil sands in Canada to refineries in the United States. The evaluation fell to the State Department because the proposed $7 billion project by TransCanada Corp would cross the US-Canada border.

A New York State judge has approved an $8.5 billion agreement by Bank of America to settle most of the claims by nearly two dozen mortgage securities investors.  In a 53-page decision, Justice Barbara R. Kapnick of State Supreme Court in Manhattan ruled that the 2011 settlement was reached in good faith.

The settlement had been challenged by the American International Group, an investor in the mortgage securities, which contended that the trustee overseeing the bonds did not push aggressively enough for more money from Bank of America. AIG argued that the settlement shortchanged investors and accused the trustee, Bank of New York Mellon, of conflict of interest and of shirking its duties. The judge determined that the trustee did not abuse its discretion in entering into a settlement.

There’s something rotten in Denmark, and it’s Goldman Sachs. Denmark gave the global financial giant Goldman Sachs the go-ahead on Thursday to buy a stake in its state utility. Some members of the Socialist People’s Party were so upset, they withdrew their ministers from the country’s governing coalition. Some party members said the deal ceded too much power to Goldman. Thousands of people have taken to the streets in recent weeks to protest the deal; a prominent banner featured the vampire squid that has become a symbol for Goldman Sachs. Nearly 200,000 Danes signed an online petition against the deal, a record.

Under the terms of the deal, Goldman would invest about $1.45 billion for an 18% stake in Dong Energy, the state utility. Dong Energy has a number of businesses, including offshore wind farms, drilling for oil and gas in the North Sea. The utility has about one million gas and electric customers and operates coal and biomass power plants. The deal does not buy Goldman a controlling share, but the minority stake would come with special privileges. Goldman would get a seat on the utility’s board. And the bank, along with two Danish pension funds, would have veto power over changes in the utility’s strategy or its executive suite; specifically the utility’s chief executive or chief financial officer. The Danish pension funds are investing about $550 million.

Among the questions about the deal is whether it is being structured to avoid taxes. Goldman’s investment will be made through a company based in Luxembourg. And that Luxembourg company is then owned in part by companies in Delaware and the Cayman Islands. So, the deal boils down to either a big tax evasion scheme by Goldman or a significant investment in renewable, green energy. Time will tell but I’m guessing it’s a bit of both.

Officials in California said that for the first time in the state’s history, they won’t be able to provide any water to contractors that supply two-thirds of the population and a million acres of farmland. The California Department of Water Resources, which had predicted it would be able to supply about 5 percent of the amount requested, said it now projects that it won’t be able to provide any of the 4 million acre-feet of water sought by local agencies.

The reduction means that agencies will have to rely on existing water supplies such as ground water or what is in storage behind dams. The Los Angeles-based Metropolitan Water District, serving 19 million people in Southern California, and the San Francisco Public Utilities Commission, which supplies much of the Bay Area, have built up water reserves and won’t be as hard hit as places such as Sacramento and the Central Valley farming region. About two-thirds of Californians get at least part of their water from northern mountain rains and snow through a network of reservoirs and aqueducts known as the State Water Project. State Department of Water Resources Director Mark Cowin said: "Simply put, there's not enough water in the system right now for customers to expect any water this season from the project."

Farmers and ranchers throughout the state already have felt the drought's impact, tearing out orchards, fallowing fields and trucking in alfalfa to feed cattle on withered range land.  Agricultural production accounts for most of the state's water use and is expected to be hit the hardest by the reduction. At the same time, many cities have ordered severe cutbacks in water use.

If you watched the State of the Union address this week, you might rightly assume that Congress can’t do anything, which would only be partially correct. The House this week passed a Farm Bill. Big whoop. The Farm Bill is normally the most uncontroversial bit of legislation Congress deals with. Not anymore. The bill is 959 pages long and would cost $956 billion.

That cut is twice what the Senate originally proposed, but a fraction of the nearly $40 billion the GOP House voted to cut last year. Those cuts didn't go into effect, but a cut of $5 billion in the current fiscal year was implemented via Congressional inaction last November. The bill budgets $16 billion less than what would have been spent under current law, with the Food Stamp program absorbing almost half those cuts, or right at $8 billion. In a great big federal budget, that might not sound like much but it worls out to 21 fewer meals per month for a family of 4.

The bill also makes some policy changes for famers. It’s a neat little bait and switch. What the bill takes from the ag lobby with one hand, it largely gives back with the other. Of $41 billion in projected savings (over 10 years) from eliminating direct payments to farmers, the bill restores $27 billion via enhanced crop insurance subsidies and a new program that “insures” against adverse price movements. Supposedly necessary to secure the nation’s food supply at a time of record farm, this federal largess flows almost regardless of how much money its recipients already have. People making up to $900,000 per year in adjusted gross income can qualify for payments. The total commodity-program take for any individual “actively engaged” in farming is capped at $125,000, or 2½ times the national median household income. But your definition of actively engaged is probably different than the definition in the farm bill.

Farm prices and farm revenues and net profits had been at record highs, so old-style farm prices that put the floor under prices were no longer effective. So they racheted up the guarantees, converted into a kind of revenue insurance, allowing the money to continue to flow. The insurance scheme also preserves the current incentive structure of large-scale US agriculture, which is to grow as much corn and soybeans as possible. That's great for the corporations that supply inputs to industrial-scale farmers—seed and pesticide companies like Monsanto, DuPont, and Dow. And in the event of floods or drought, the results could get shaky. Depending on the payouts, any savings from cuts in the Farm Bill could be wiped out.

Wednesday, September 25, 2013 - Imagine

Imagine

by Sinclair Noe

DOW – 61 = 15,273
SPX – 4 = 1692
NAS – 7 = 3761
10 YR YLD - .04 = 2.61%
OIL - .83 = 102.30
GOLD + 10.10 = 1334.10
SILV + .07 = 21,90

The stock markets have gone through a bad patch; five consecutive declines have knocked 400 points off the Dow Industrials; no surprise. According to the Stock Traders Almanac, the week after September options expiration (this week) has consistently been one of the worst of the year. Since 1988, weekly declines average from –0.93% for NASDAQ to –1.49% for Russell 2000 and S&P 500 has only posted gains five times in 25 years. Meanwhile, bonds have enjoyed a nice little rally since the Fed announced “no taper”. We can understand how quantitative easing benefits Treasuries, but the threat of a government shutdown or default benefiting Treasuries? Go figure. I read today that a chief investment strategist at a trading house that will go unnamed is predicting that the S&P 500 may go to 1,900 now that the Federal Reserve has decided to not taper its asset purchasing program. He is correct. It might go to 1,900. Then again, it might not.  It might go to 600. Then again, it might not.

Why should market players be nervous? No worries! We finally got bipartisan cooperation in Congress; after weeks of wrangling and posturing, Senate Democrats and Republicans came together in a near-unanimous vote to shutdown Senator Ted Cruz. The vote shuts down all non-essential function of Senator Cruz; so it is, for all practical purposes, a complete shutdown.

The government shutdown is still in limbo, so we can almost turn our attention to the next bit of dysfunctional fiscal policy which involves running out of money, also known as the debt ceiling. Treasury Secreatary Jack Lew sent a letter to Congress explaining that the government would exhaust its borrowing capacity no later than October 17. The government has been scraping up against the debt ceiling since May, but it has avoided defaulting on any of its obligations by employing emergency measures to manage its cash, such as suspending investments in pension funds for federal workers. In his letter, Lew said the updated estimate reflected fresh information on quarterly tax receipts and the activities of certain large government trust funds.

A new poll questioned Americans about the looming debt ceiling and government shutdown, and the results reveal there is wide division, mainly between different age groups; 67% of Americans over age 44 said they were thinking of buying a new iPhone, however fewer than 25% said they had settled on a specific color; meanwhile, 78% of Americans under age 28 said they had purchased or would purchase the new Grand Theft Auto.

So, for the most part, it's business as usual.

JPMorgan is reportedly in talks with federal and state officials to settle mortgage securities probes for as much as $11 billion, which is not a hard and set figure. The sum being discussed would include $7 billion of cash and $4 billion of consumer relief. The discussions include the Department of Justice, SEC, the Department of Housing and the New York State attorney general. It was not immediately clear exactly how many sources of potential liability for JPMorgan would be covered by the settlement being discussed.

Meanwhile, Citigroup said it agreed to pay $395 million to Freddie Mac to resolve claims of potential flaws in roughly 3.7 million mortgages it sold to the housing finance company from 2000 to 2012. Citigroup said the settlement also covers potential future claims arising from the loans bought by Freddie Mac, the government sponsored purchaser and guarantor of home loans. The deal follows an agreement by Citigroup in July to pay $968 million to settle similar claims by Fannie Mae.

Meanwhile, Bank of America couldn't come to a settlement and so, for the first time, a major bank is going to trial over defective mortgage practices leading up to the 2008 financial crisis. Before today, no major bank has had to face a jury; just write a check and move on. Today the US Attorney's Office in Manhattan, in a civil trial, claimed Bank of America's Countrywide unit placed profits over quality in a massive fraud, selling shoddy mortgages to Fannie Mae and Freddie Mac, and claiming that the “documents and witnesses will show... the promise of quality was largely a joke."

The lawsuit is brought under the Financial Institutions Reform, Recovery, and Enforcement Act. The law, passed in the wake of the 1980s savings-and-loan scandals, covers fraud affecting federally insured financial institutions. The Justice Department estimates Fannie and Freddie has a gross loss of $848 million on the Countrywide HSSL loans, though their net loss on loans it says were materially defective was $131 million.

The Justice Department says the loans were pushed out through a Countrywide program called the "High Speed Swim Lane" - also called "HSSL" or "Hustle" - that began in 2007 and effectively eliminated loan quality checkpoints by removing underwriters from the review process and paid employees based on the volume and speed of the loans they pumped out.

And as BofA goes to court, new allegations from the National Fair housing Alliance claiming Bank of America continues to neglect foreclosed homes it owns in predominately minority neighborhoods even though it is under investigation for discriminatory practices. The complaint asserts that Bank of America has failed to adjust practices that are the subject of an ongoing HUD review. The nonprofit homeowner advocacy group examined 116 bank-owned properties in Memphis, Denver, Atlanta and a handful of other cities over the past year. Bank-owned homes in black and Hispanic neighborhoods were roughly twice as likely as those in white neighborhoods to show visible evidence of neglect and decay, such as broken windows and overgrown lawns

And remember back when all those bad mortgages were pooled together and then blew up and nearly resulted in a global financial meltdown, only averted by hundreds of billions of dollars of taxpayer funded bailouts? And remember there was an insurance company involved? AIG. Maybe you got angry about AIG paying huge bonuses just months after it nearly brought down the financial system and took a $182 billion bailout. Did that make you angry? Well, if it did, then you're exactly the same as a racist lynch mob in the Deep South in the Civil Rights era, according to AIG CEO Robert Benmosche.

Benmosche told the Murdoch Street Journal that the outcry over AIG's bonuses “was intended to stir public anger, to get everybody out there with their pitch forks and their hangman nooses, and all that -- sort of like what we did in the Deep South [decades ago]. And I think it was just as bad and just as wrong."

"It is a shame we put them through that,” he added, referring to those poor employees who got huge bonuses. Sure, I think it's obvious how receiving big bonus checks is almost exactly like hundreds of years of slavery and lynchings..., well almost.

Benmosche did not talk about the potential outrage of paying huge bonuses to to employees who did such a great job that the losses nearly destroyed a huge insurance company, creating a cascading collapse of ultra-risky derivatives that nearly destroyed the entire financial system, and civilization as we know it. Sure, you can see how that kind of quality work requires a bonus. So, to sum up: Not allowing financial alchemists who had "probably lived beyond their means" to carry on in the style to which they had become accustomed is exactly the same as lynching African-Americans in the Deep South.

Do you ever take a moment to contemplate what the economy might be like if we didn't have the banksters skimming their cut off everything? Imagine the abundance and prosperity.

The average American family pays $6,000 a year in subsidies to big business. That's over and above our payments to the big companies for energy and food and housing and health care and all our tech devices. It's $6,000 that no family would have to pay if we truly lived in a competitive but well-regulated free-market economy.The $6,000 figure is an average, which means that low-income families are paying less. But it also means that families (households) making over $72,000 are paying more than $6,000 to the corporations. The U.S. federal government spends $100 billion a year on corporate welfare. That's an average of $870 for each one of America's 115 million families. This includes "cash payments to farmers and research funds to high-tech companies, as well as indirect subsidies, such as funding for overseas promotion of specific U.S. products and industries...It does not include tax preferences or trade restrictions."

New research the "U.S. Government Essentially Gives The Banks 3 Cents Of Every Tax Dollar." It's calculated a nearly 1 percent benefit to banks when they borrow, through bonds and customer deposits and other liabilities. This amounts to a taxpayer subsidy of $83 billion, or about $722 from every American family.

The wealthiest five banks (JPMorgan, Bank of America, Citigroup, Wells Fargo and Goldman Sachs) account for three-quarters of the total subsidy, and without the taxpayer subsidy, those banks would not make a profit. In other words, "the profits they report are essentially transfers from taxpayers to their shareholders."

http://www.nakedcapitalism.com/2013/09/45223.html

Tuesday, June 04, 2013 - Systemically Dangerous

Systemically Dangerous

by Sinclair Noe

DOW – 76 = 15,177
SPX – 9 = 1631
NAS – 20 = 3445
10 YR YLD un = 2.13%
OIL + .38 = 93.83
GOLD – 11.20 = 1401.00
SILV - .20 = 22.65

Tuesday?? What happened? For 20 consecutive weeks, Tuesday was an up day on Wall Street; going back to January, every Tuesday was a winner. I don't know why. Maybe there was something going on in the shadows and dark corners of Wall Street, maybe it was just a fluke of nature; maybe it was a trend that started and continued as the algorithmic traders took notice.

The first rule of trends is that a trend in place is more likely to continue than it is to reverse, until it reverses. That sounds simple, but it isn't. Behind that concept is the idea that you follow the market rather than trying to impose your will, or your pre-conceived notions, or your bias on the market. Today, the trend reversed.

Federal regulators have proposed a group of firms that aren't banks to be deemed potential threats to the financial system that need stricter government oversight. The Financial Stability Oversight Council, which includes Treasury Secretary Jacob Lew and Federal Reserve Chairman Ben Bernanke, was created to help prevent another meltdown.

Nonbank financial firms include insurers, hedge funds, mutual fund companies and private equity firms. Those deemed "systemically important" would have to increase their cushion against losses, limit their use of borrowed money and submit to inspections by Fed examiners. These firms would have 30 days to notify the council that they're contesting the designation. The council would have to vote again to finalize each designation. The regulators didn't name the firms or say how many it wants to designate as so big and interconnected that their potential troubles could imperil the financial system.

Some of the usual suspects include the insurance firms, AIG and Prudential, they might include names like Pimco; we'll get to them in a moment. I'm not sure how much credence we lend to the regulators, especially considering they haven't been able to regulate the systemically dangerous banks. If they want to be taken seriously, the first step is to reinstate Glass-Steagall.

We don't know the firms on the list of nonbank, potentially dangerous financial firms, but it would seem that Pimco is pretty big – about $2 trillion, and before they could be labeled dangerous, bond guru Bill Gross has taken aim at the Federal Reserve and Ben Bernanke, charging that the Fed's super-easy monetary policies are dangerous to an economic recovery.

Gross is the founder and co-chief investment officer of Pimco and he writes a regular letter to investors which he posts on the firm's website. The latest letter is entitled “Wounded Heart” and he warns investors to reduce risk assets as a result of the weak rewards to be gained. Gross characterized the Fed's zero interest rate policy and quantitative easing as distorting markets by keeping interest rates artificially low and creating an insatiable demand for riskier, higher yielding assets.

Gross wrote: "Our global financial system at the zero-bound is beginning to resemble a leukemia patient with New Age chemotherapy, desperately attempting to cure an economy that requires structural as opposed to monetary solutions.”

Gross also wrote: “Central banks — including today’s superquant, Kuroda, leading the Bank of Japan — seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn’t seem to be working very well.”

The quick version of Gross' thesis is that financial markets require “carry” to pump oxygen to the real economy; “Carry” is compressed – yields, spreads and volatility are near or at historical lows; the Fed's QE plan assumes higher asset prices will reinvigorate growth; it doesn't seem to be working; therefore reduce risk/carry related assets.

Gross may have a point, but then he missed his mark claiming that low rates create less incentive to take risk; and while that may be true, it is the wrong answer. Gross seems stuck in his supply-side world. The answer is not creating more credit, but creating more demand. Short-term the Fed has been able to re-inflate the stock market, and Bernanke makes no bones about that, but it is a dangerous game to inflate asset bubbles, and it doesn't really do much to create jobs. If the Fed really wants to lower the unemployment rate, they will have to change their tactics, and that seems to be what the Fed is priming the markets for right now.

Today,  Esther George, president and CEO of the Federal Reserve Bank of Kansas City and a member of the Federal Open Market Committee, which determines central bank monetary policy gave a speech and she said she is in support of "slowing the pace of asset purchases as an appropriate next step for monetary policy." While she acknowledged her views are not shared by the "majority" of the voting members of the FOMC, it created fresh uncertainty about when the Fed will start dialing down its stimulus. This is the dangerous gamble part of the Fed's asset bubble policy

George went on to say: "History suggests that waiting too long to acknowledge the economy's progress and prepare markets for more normal policy settings carries no less risk than tightening too soon," and "A slowing in the pace of purchases could be viewed as applying less pressure to the gas pedal, rather than stepping on the brake. Adjustments today can take a measured pace as the economy's progress unfolds." It's not so much a matter of applying the brakes, as it is that the Fed is in the wrong vehicle.

Back to those systemically dangerous, too big to fail institutions. Back in 1999, then deputy US attorney general Eric Holder wrote a memo entitled  “Bringing Criminal Charges Against Corporations,”  in which he argued that government officials could take into account “collateral consequences" when prosecuting corporate crimes.

That memo has resurfaced at a time when Holder, now U.S. attorney general, faces increasing criticism for the Department of Justice's reluctance to bring charges against white-collar criminals. Although it brought only a modest change in the way prosecutors evaluate whether to bring criminal charges against corporations, Holder's memo laid the groundwork for subsequent policies that allowed for more leeway when going after large firms.

In 1999, Holder highlighted the possibility of deferred prosecution -- an arrangement now common in the wake of the financial crisis -- whereby prosecutors essentially give defendants amnesty in exchange for paying a fine, enacting reforms and cooperating with investigators. Later, officials published further memos, turning the option into more of a recommendation. The policy was strengthened in response to the Arthur Andersen scandal of the early 2000s. After the government brought criminal charges against the consulting firm, the company failed, causing 28,000 workers -- many of whom likely had no role in any wrongdoing -- to lose their jobs. A court later overturned the charges.

Holder told the Wall Street Journal in 2006 that he drafted the memo in response to complaints that there seemed to be no uniform rules for deciding whether to bring charges in corporate cases: "[I] didn’t expect these issues would become as big as they were," Holder told the WSJ at the time. Indeed, they've only grown larger in the seven years since that interview.

The government has yet to prosecute any big banks or major executives for their role in the meltdown, and critics have derided Holder and his Justice Department for using the collateral damage argument as an excuse for not doing enough to hold those institutions accountable. The DOJ came under fire last year after declining to prosecute HSBC for years of money laundering violations, saying that to do so would bring too much damage to the global economy.

The government just backed down. Maybe there were reasons in 2008 to say maybe we shouldn’t indict any bank we can because it will just add to the systemic risk. But we were in 2012 to 2013 with HSBC -- that risk wasn’t there and we weren’t dealing with something that was relating to the activities that produced the 2008 crisis.

And finally today, we have a follow-up to the London Whale. Bloomberg Markets will report in its July Issue that Bruno Iksil, a Frenchman who would soon become known as the London Whale because of the size of his trades, knew that the trades were going very badly. On March 23, 2012 he wrote a message to an assoicate saying, “We are dead I tell you.”

Iksil had lost $44 million on corporate-credit bets three days earlier and was down more than $500 million for the year. He and junior trader Julien Grout, under pressure from their manager, had tried to hide the extent of losses that would swell to more than $6.2 billion, the bank’s biggest trading blunder ever.

“They are going to destroy us,” Iksil wrote to Grout that Friday in one of hundreds of e-mails, instant messages, transcripts of recorded conversations and other documents released in March by the U.S. Senate’s Permanent Subcommittee on Investigations after a nine-month probe.

In a 301-page report and at a hearing, the panel accused the largest and most profitable U.S. bank of hiding losses, deceiving regulators and misinforming investors.

The report, the bank’s own 129-page account and interviews with traders and current and former executives offer evidence of a widening spiral of panic as the losses became known beyond a small circle of traders and the extent of the damage reached top management, including Chief Executive OfficerJamie Dimon.

What the documents show is that Dimon presided over a company whose traders amassed growing positions in complex derivatives and whose executives offered rosy forecasts, withheld information from regulators and ignored risk limits that were breached 330 times in the first four months of 2012.

The records reveal how little has changed to prevent even the best-managed banks from speculating their way into trouble five years after the collapse of Lehman Brothers and three years after passage of the Dodd-Frank Act.

Wednesday, January 09, 2013 - Miscellaneous Financial News

Miscellaneous Financial News
by Sinclair Noe

DOW + 61 = 13,390
SPX + 3 = 1461
NAS + 61 = 13,390
10 YR YLD -.02 = 1.85%
OIL +.01 = 93.16
GOLD – 2.80 = 1659.00
SILV - .05 = 30.46

AIG, the insurance company won't join ex-CEO Maurice "Hank" Greenberg's lawsuit against the US government over the insurance giant's financial crisis bailout. Greenberg has filed a $25 billion lawsuit accusing the government of violating shareholders' rights by bailing out AIG, because the terms of the bailout weren't as cushy as Greenberg wanted. Thank you, AIG.

Earlier this week I told you about an $8.5 billion settlement announced between the Federal Reserve and the Office of the Comptroller of the Currency with 10 big mortgage services, including Citigroup, JPMorgan and Wells Fargo over botched foreclosure claims. Now, Goldman Sachs and Morgan Stanley and other banks are expected to agree to a $1.5 billion settlement with the regulators sometime this week. The other banks haven't been officially identified but best guess is that the group includes HSBC, Ally, EverBank, and OneWest Bank.

Goldman got into the mortgage servicing business by purchased Litton Loan Servicing and Morgan Stanley bought Saxon Capital. The Fed has ordered both firms to conduct case by case reviews of foreclosures after widespread mistakes were discovered in how the firms processed home seizures.

Meanwhile, Morgan Stanley plans to cut about 1,600 jobs, nearly 3 percent of its workforce. The cuts will focus on senior ranks at the bank. About half of the cuts will be in the U.S. Morgan Stanley's investment banking unit has been asked to cut about 6 percent of its staff.

Remember when the government offered an amnesty program for people who were evading taxes by holding funds in Swiss bank accounts; admit it, pay the tax plus penalties and all will be forgiven. Well, there was a hitch; taxpayers whose identities become known to the IRS before the clients come forward voluntarily are generally not eligible for the reduced fines and penalties.

UBS, the Swiss banking giant came under criminal investigation for its work selling tax-evasion services to wealthy Americans. Three years ago, UBS entered into a deferred prosecution agreement, agreed to pay a $780 million fine and later turned over more than 4,000 client names. More than four dozen American clients of Swiss and Swiss-style banks have been charged or indicted in recent years; today a 79 year old Florida woman pleaded guilty to criminal charges of tax evasion through accounts at UBS. She faces six years in prison, but probably won't face that much. She actually tried to enter a voluntary disclosure program with the Internal Revenue Service that would have allowed her to pay reduced fines and penalties, but the IRS already had her name.

The government will stop sending out Social Security checks as on March 1^st. No more paper checks. Instead, the Treasury Department will distribute funds electronically, either via direct deposit or on a prepaid "Direct Express" card. Most Social Security benefit recipients already receive their payments electronically, but 5 million checks are mailed each month. Over the next ten years, the move away from paper checks is expected to save about $1 billion.

As you have likely heard, President Obama plans to put Tim Geithner out of his misery tomorrow by nominating Jack Lew for Treasury Secretary. Lew is known for being Obama’s White House Chief of Staff and also for a truly bizarre signature. And, should he be confirmed and subsequently have his name printed on a bunch of dollar bills, Lew will likely be forced to come up with something that actually looks like it spells a name and not a Jackson Pollack painting.

US oil production topped seven million barrels per day for the first time since March, 1993 and is nearly 20 percent above the amount produced at this time last year. The latest weekly data from the Energy Information Administration shows that imports fell as domestic production continues to increase. The government now predicts the US industry could pump 14 percent more oil this year alone. The use of non conventional drilling techniques in places like North Dakota and Texas has created an explosion in US production to the point where the US is expected to pass Saudi Arabia in crude production by 2020.

At the same time, the industry is developing more pipeline capacity to carry crude from storage in Cushing, Okla. to the Gulf Coast refining areas. That should continue to drive the trend, create more refined product for the US and export markets, and the EIA says that should bring down oil prices over the next several years.

That's the good news. The bad news is that we're still burning fossil fuels, and the climate is getting hotter, not just warmer – hotter. The average temperature in the continental US last year was 55.3 degrees; that's a full degree higher than the previous record. Last year’s weather in the United States began with an unusually warm winter, with relatively little snow across much of the country, followed by a March that was so hot that trees burst into bloom. The soil dried out in the March heat, helping to set the stage for a drought that peaked during the warmest July on record. The drought covered more than 60% of the nation; comparable to a severe drought in the 50's and almost as bad as the Dust Bowl days of the 1930's. The drought killed corn and soybean crops, and forced ranchers to thin their herds. The Mississippi River's levels dropped so much that barge traffic backed up and even came to a standstill; stretches of it are deserted like a 'ghost town,' and some of it could be closed altogether as it heads below 3 feet in depth.

Don't forget the tornadoes, the Hurricanes (Isaac and Sandy), derechos, and of course, wildfires. Plain and simple, we need a cold winter with lots of snow, and then we'll need lots of rain to counter the drought. If we don't get it, then 2012 might seem mild. The drought of 2012 likely sliced one percent off the GDP. The nation was hit by 11 environmental catastrophes that cost at least $1 billion in losses. Climate is extremely complex. We may yet see some cold years. There is some thinking that the melting of ice at the poles could temporarily cool the oceans and reduce temperatures for a while. But the longer term trend is not only toward hotter, it is toward a kind of hotter that human beings may find it difficult to survive.

The Baseball Writers' Association of America's ballot for this year's Hall of Fame class listed 37 players, including 24 new candidates, including Barry Bonds – the all time leader in home runs, and Roger Clements – a seven-time Cy Young Award winning pitcher. To be inducted, a player must receive a vote on at least 75 percent of the ballots returned. The Baseball Hall of Fame's Class of 2013 will not have any new inductees from the ranks of the recently retired. It's a dark day in Cooperstown and steroids are the reason.

The Consumer Electronics Show is wrapping up in Las Vegas. If you were waiting for a 110 inch, high definition flat screen TV, it made its debut this week. On the other end of the spectrum was a smart watch; it syncs up with your smartphone so you can get emails, and text and other messages on a 1-and-a-quarter-inch screen. There were cameras everywhere; on top of bicycle helmets, built into racing goggles. There were pouches to let you use your smartphone underwater. There were 3D printers. They've developed mind over matter devices, or at least you can use your mind to transmit signals to electronics that will then move themselves. All you Jedi warriors need to start your training. And then there was one booth selling antennas; yep, big old fashioned television antennas.

The Partnership for Civil Justice Fund obtained a Freedom of Information Act request that revealed the FBI coordinated at length with local law enforcement, private financial institutions, the Federal Reserve and other government agencies to monitor the Occupy Wall Street movement’s activities. One of the things I learned was that the Federal Reserve System has its own commissioned law enforcement arm, the Federal Reserve Police, which is allowed to operate in uniform or plainclothes. Apparently, the FBI treated the Occupy movement as a potential criminal and terrorist threat even though the agency acknowledges in documents that organizers explicitly called for peaceful protest and did "not condone the use of violence" at occupy protests. The idea was apparently to crackdown on the Occupy movement, and it seems to have worked. Meanwhile, how many of the banksters ended up in jail? And a funny thing happened while all those private and federal law enforcement types merged together to crush some protesters in the park...,

Someone here at the radio station today told me her Bank of America credit card was being replaced. She talked to the bank and they said there was a problem with hackers. I don't know if there is a direct connection but at least nine financial institutions have been hit by hackers since September; more attacks are expected. And part of what makes them suspicious is that they seem calculated not to steal account data or money, but instead to disrupt the banking system. Government officials say Iran is behind the attacks. The distributed denial of service attacks, which seek to overload an online system's ability to respond to requests, targeted Bank of America, Citigroup, Wells Fargo, U.S. Bancorp, PNC, Capital One, BB&T, HSBC, and Fifth Third Bank. You might want to make sure your credit cards are still working.

Tuesday, January 08, 2013 - Thank You, America

Thank You, America

DOW – 55 = 13,328
SPX – 4 = 1457
NAS – 7 = 3091
10 YR YLD -.03 = 1.87%
OIL +.06 = 93.25
GOLD + 13.20 = 1661.10
SILV + .24 = 30.50

Some people have debated what we should do if the banks get into trouble again; should they be bailed out? The Too Big to Fail Banks of 2008 are even bigger today, and if one collapses, then there would likely be a cascading effect through the global financial system. So, if a big financial institution gets into trouble, should there be a bailout, or do we just say “tough luck”? You probably have an opinion, and reasonable people can debate the issue, or at least there could be room for reasonable debate, until now. As of today, there is no more debate.

If you go to Webster's Dictionary and look up the word “ingrate”, you will find a picture of Maurice “Hank” Greenberg; the guy who founded American International Group, AIG, the huge insurance company that in 2008 accepted a $182 billion dollar bailout from the Treasury. Hank Greenberg, the former CEO of AIG is contending in a lawsuit that the government treated the company’s shareholders too harshly when carrying out its 2008 rescue of the insurance giant. AIG is weighing whether to join the lawsuit, filed by Mr. Greenberg’s investment firm, Starr International Company, which owns about 12% of AIG. In addition to founding AIG, Greenberg gained notoriety for a high profile fraud case in 2005 that pushed him out of his CEO role at AIG. Greenberg was accused of using sham transactions to mask the company's financial position.

So far, AIG has not joined in the suit with Greenberg. The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr. Greenberg could challenge its decision to abstain. Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. In other words, the board of directors may have a fiduciary duty to sue the government.

One of Starr International’s major arguments is that AIG’s bailout terms were far tougher than those granted to other large financial firms. Greenberg has accused the New York Fed of using the rescue to bail out Wall Street banks at the expense of shareholders, and of being a "loan shark" by charging exorbitant interest of 14.5 percent on the initial loan. 

The Treasury did force AIG to do things which were against their very nature. AIG was forced to pay full settlement on credit default swaps; one-hundred cents on the dollar, to the tune of more than $12 billion to Goldman Sachs alone. Now remember these credit default swaps were a form of insurance but they weren't insurance, and they were and remain largely unregulated. CDS is not like insurance in that it does not require reserves be held to pay off claims. The whole idea behind CDS was to collect premiums without ever paying claims. To force AIG to make full payment on a CDS claim was unprecedented and now Greenberg claims it was cruel and unusual punishment.

AIG’s cash needs and internal failings were in many ways far more serious than those of other institutions. In fact, the company was in such dire straits after the rescue that the government eased up on the terms. The concessions were considerable.

In early 2009, the Federal Reserve cut the interest rate on a big loan to AIG, saving the company about $1 billion a year in interest. Then the Treasury exchanged $40 billion of preferred shares for new ones that effectively paid no cash dividends to taxpayers. If it had paid the originally agreed 10 percent dividend on all these and other preferred shares, the insurer would have paid roughly $20 billion from the beginning of 2009 to the end 2012. Instead, the preferred shares were converted into common stock, which the government later sold, purportedly turning a profit of about $22 billion.

The bailout eventually worked out for AIG. After losing half its value in 2011, the stock rose more than 52 percent in 2012, tripling the gains of the broader S&P insurance index. Things worked out so well for AIG that they are now running a television ad campaign called “Thank You, America” in which it offers its gratitude for the bailout.

Mark Twain was right; truth is stranger than fiction because fiction is obliged to stick to possibilities.

Seriously, thank you, America.

There has been a lot of talk about breaking up the big banks, cutting them down into smaller banks that don't threaten the global financial system. The Dallas Federal Reserve has called for breaking up the biggest banks. Texas Republican Jeb Hensarling, the new Chairman of the House Financial Services Committee has expressed concern about the Too Big to Fail banks. Elizabeth Warren was elected in Massachusetts and she will sit on the Senate Banking Committee. Even Sandy Weill and John Reid, co-founders of Citigroup, which originally pushed through legislation which destroyed Glass-Steagall; they are now proposing that Glass-Steagall be reinstated and the biggest banks be broken up. The timing would seem to be right. Don't hold your breath.

The bank lobby will fight any attempts to break up the banks. Eventually, we will come back around to a big bank or insurance company on the verge of collapse and begging for a bailout; it's inevitable; the banksters continue to gamble in the derivatives markets, and eventually all gamblers lose, and when they lose.., please, please remember the story of Hank Greenberg and AIG.

Alcoa has kicked off the fourth quarter earnings reporting season by posting a profit of $242 million, or 21 cents per share, compared with a net loss of $191 million, or 18 cents per share, in the year-ago period. Excluding one-time items, net income was $64 million, or 6 cents per share, in line with average analysts' expectations of 6 cents.

Alcoa is supposed to provide clues about earnings, but I've never found a good correlation. Instead the earnings season has become little more than an exercise in obfuscation. Take the phrase “excluding one-time items”; that means the cost of doing business. Lucy Kellaway at Financial Times has come up with what she calls the Golden Flannel Awards, a mock celebration of corporate malarkey. Here's an example from one annual report: “In the wholesale channel, Burberry exited doors not aligned with brand status and invested in presentation through enhanced assortments and dedicated customised real estate in key doors.” I don't know what that means, but it might surprise you to learn that Burberry sells raincoats and they don't manufacture doors. Another company, called Record, does manufacture doors, which they call “entrance solutions”.

Sometimes companies create new words, such as: solutioneering, sustainagility, or innovalue. Sometimes, companies say things that are just designed to hide reality; for example, Citigroup issued a press release that talked about “optimizing the customer footprint across geographies,” which means they fired 1,100 workers. Citigroup also got the top prize by declaring that from now on they would offer “client-centric advice”. Sounds good until you think about what they've been offering up to now.

I still think it will be hard to top AIG's “Thank you, America.”

Anyway, welcome to earnings reporting season.

So, I was away on vacation over the holidays, but I'm catching up on the fiscal cliff deal. It has some interesting provisions; lots of little and not so little special deals, especially in the form of tax breaks. For a bunch of lawmakers who were supposedly so busy and so involved in "negotiations," they were remarkably productive when it came to special interests.

There's $9.7 billion over the next 10 years on additional subsidies for student loans or $5.6 billion for adoptions, although both those figures seem like a lot considering that employer-provided childcare is getting only $209 million. More money is at stake in subsidies for various businesses, $46 billion, and $18 billion for alternative energy. 

There's a special 50% tax credit for maintaining railroad tracks is projected to cost $331 million over the next two years.

Tax benefits for certain motorsport racing track facilities, such as Nascar, will cost more than $100 million over the next seven years.

Business property on Indian reservations will receive $660 million in tax breaks over the next three years. Indian employment tax credits will total $119 million over the next four years. Tax breaks for Alaskan Natives receiving trust income will add up to $46 million over 10 years.

More favorable deductions for contributions of food to charities will cost $314 million over two years. For contributions of property, the benefit will be $225 million over a decade.

Film and television production got the last-minute extension of tax write-offs worth $430 million over the next two years.

Businesses in Puerto Rico will receive $358 million over the next two years. In addition, a temporary increase in the excise tax rebate on rum production will give Puerto Rico and the U.S. Virgin Islands $222 million, much of which will go to benefit local rum distillers.

Regulated Investment Companies, such as mutual funds and real estate investment trusts, are to receive $211 million in tax benefits over the next two years. Some of that pertains to dividends paid to foreign investors.

Over the next two years, additional economic development credits for American Samoa will cost $62 million.

Over the next three years, $7 million will go to expand credits for plug-in electric vehicles to include motorcycles. That's a 10% rebate, up to $2,500 for buying an electric scooter.

$59 million in credits for fuel made from algae and expanding benefits for certain other biofuels.

Tax credits for renewable diesel fuel and small agricultural producers of biodiesel will total $2.2 billion over the next five years.

Asparagus growers will get $15 million.

There’s a provision that allows workers to convert conventional 401(k)s into Roth 401(k)s at a cost of $12.2 billion over the coming decade.

There were big breaks for private equity firms and hedge funds, including the

the continuation of the “carried interest” which in effect allows sophisticated investment managers to postpone their earnings from a deal and then often pay taxes at capital gains rates that are lower than the rates for fee income.

And a $9 billion tax break for big banks and manufacturers related to "active financing." Active financing is a special transaction tax break that specifically allows multinational companies to avoid paying US taxes on foreign earnings if those profits resulted from "actively" financing a deal or activity on foreign soil. Not surprisingly, big businesses claim it helps them be more competitive abroad.

Thank you, America.