Thursday, August 21, 2014 - Rarified Air

Rarified Air

by Sinclair Noe

DOW + 60 = 17,039
SPX + 5 = 1992
NAS + 5 = 4532
10 YR YLD - .02 = 2.40%
OIL + .45 = 93.90
GOLD – 15.10 = 1277.30
SILV - .04 = 19.52

The S&P 500 broke two records during today's session, climbing past its previous intraday all-time high of 1,991.39 and ending above its previous record close of 1,987.98. Both had been set on July 24.

Family Dollar has rejected a $9 billion dollar buyout offer from Dollar General, opting instead for a smaller $8.5 billion dollar offer from Dollar Tree. The thinking is that a combination of the largest dollar store – Dollar General with the #2 Family Dollar, would be unlikely to win antitrust approval.

Once upon a time, Sears was the largest retailer in the nation. Today, Sears Holdings announce it lost $975 million in the first half of the year; $573 million in the second quarter. This was the 9^th consecutive quarter of losses, and the past quarter also marked the heaviest losses. Quarterly revenue dropped about 10%. The plan now is to close underperforming stores, or, in a classic example of corporate-speak “rationalizing our physical footprint.” The company successfully spun off Lands End earlier this year, to the benefit of shareholders. But its Sears Canada and Sears Automotive stores have been on the block for some time, indicating either a lack of interest on the part of buyers or an unwillingness by Sears to bend on its asking price.

Gap shares moved higher in after-hours trade after earnings topped expectations. With a few exceptions, retail earnings this quarter have been disappointing. Last week, Walmart cut its full-year earnings guidance, and a few days later, Target reported a disappointing quarter. It’s hard to get consumers to loosen their grip on the purse strings.

The National Association of Realtors said sales of existing homes rose 2.4% in July to a seasonally adjusted annual rate of 5.15 million, the fourth consecutive month of gains and the fastest rate of gain in 10 months. More people are buying homes compared to earlier in the year, but the sales pace is still down 4.3% from one year ago. The median existing-home price for all housing types in July was $222,900, which is 4.9% above July 2013. This marks the 29th consecutive month of year-over-year price gains.

In a separate report, the Labor Department said initial claims for state unemployment benefits fell 14,000 to a seasonally adjusted 298,000 for the week ended Aug. 16.

The Conference Board’s Leading Economic Index increased 0.9% last month after an upwardly revised 0.6% rise in June.

The Bureau of Economic Analysis, the BEA, has released its state by state analysis of quarterly gross domestic product. California has the biggest economy among the states, with about $2.1 trillion in GDP, followed by Texas at $1.4 trillion, and New York at $1.2 trillion. Vermont has state GDP of about $28 billion. Arizona comes in at almost $265 billion.

The latest numbers from the Census Bureau show the gap between Americans at the top of the economic ladder and those at the bottom is as wide as ever. Between 2000 and 2011, the gap expanded considerably. The net worth of the poorest 20% of US households fell by $5,124. At the same time, the wealthiest 20% posted a $61,379 increase in net worth. Looked at another way, the net worth of the richest 20% of families totaled $630,754 in 2011. The poorest had a negative net worth of $6,029. Altogether, the top 40% of households increased their net worth from 2000 to 2011. The bottom 60% lost ground.

Sentier Research has analyzed Census data on incomes. In June 2014, the median household income was $53,891, down from $55,589 in inflation-adjusted dollars when the economic expansion began in June 2009; that is a 3.1% drop in median income. Now, let’s clarify this report because you may have seen that the average inflation adjusted per-person disposable personal income is up 4.2% over the past 5 years. There is a difference between median and average; Bill Gates walks into a room with 80 other people and the average net worth of everyone in the room is about one billion dollars; while the median net worth is barely changed. The averages can be distorted by the strong income gains among the wealthiest; the median income numbers give a better sense of the majority of Americans.

And it’s not just the past 5 years; median income remains lower than back in January 2000; the middle income family is worse off than they were 14 years ago. The good news is that there has been some improvement in the past 3 years; since 2011, inflation adjusted household incomes are up 3.8%. We are starting to dig out of a hole, but we’re still digging.

The point is that the economic recovery has been pretty miserable for most Americans. Meanwhile, the Federal Reserve is holding its annual confab for the world’s most powerful financial players at Jackson Hole, Wyoming. The invitation only soiree includes central bankers, investment bankers, economists, and a various assortment of other bigwigs. Tomorrow morning, Fed Chair Janet Yellen will deliver the customary opening speech. ECB President Mario Draghi will speak at lunch. This year’s theme is “Re-Evaluating Labor Market Dynamics”.

In the mountains of Wyoming, the air is thin, and around Jackson Hole, it is rarified: One banker was quoted as saying: "It seems that conditions reflect the best of all worlds - US economic growth that is neither too slow, which would put pressure on earnings - nor too fast, implying inflationary pressures which could lead to (price-to-earnings ratio) contraction and possibly accelerate the Fed's move towards higher interest rates."

Kansas City Federal Reserve Bank President Esther George says the time has come for the Fed to raise rates, citing improvement in the labor markets. George said: "I don't want us to be behind the curve in beginning to normalize interest rates… When you see the economy getting as close as we are to full employment, to stable inflation, it would suggest to me that the time has come to do that… I think a very natural response when you get to this point is worrying that you might derail the recovery, but then again we've seen data come in stronger than we expected."

Fed officials are convinced that the economy is gaining strength after the years of false starts, but a majority of policy makers, led by Janet Yellen, favors a slow retreat from the Fed’s efforts to encourage job creation. They note that millions of people still cannot find jobs, while inflation remains relatively weak.

The theme is the labor market, and the Fed tracks wage trends closely because they're an important inflation indicator, and they're also a reflection of how close the economy is to full capacity. Also, in a well-functioning economy, wages should be rising particularly when productivity is going up. The Fed can't really do anything to get wages up; what it can do is wait to raise interest rates until the job market is healthier and that's what they're debating now - should they wait a while longer?

The latest government data show average hourly earnings adjusted for inflation have not increased at all in the last year, even though we're told the economy is getting better and other wage measures show similar trends. The problem with Jackson Hole is somebody like Bill Gates walks into a restaurant, and all the economist believe they are billionaires.

It is shaping up to be another good year in the equity markets, not as good as last year, but not a letdown; investors have ignored the calls for a correction, and this is still a risk-on market. Typically, when risk is not given much weight, this would be a good time to hedge one’s portfolio. And the reason for “risk-on” is a Federal Reserve that keeps interest rates at historic low levels; add in the demographics of most investors who have no choice but to stick what they have into higher risk assets such as stocks; plus the corporate world that is sitting on cash and the closest idea to innovation is to buy back their own stock, thus pushing prices even higher.

In this environment, weakness in the economy and even geopolitical events are being disregarded, with both being seen as buying opportunities. Investors might not have much choice but to hang onto the bandwagon, but you also should be keenly aware of when you need to get off because the markets could switch to risk-off in the blink of an eye.

The Bank of America settlement deal was announced today. BofA agreed to pay $16.65 billion to end federal and state investigations into the sale of toxic mortgage securities during the subprime housing boom; actually, it works out to $9.65 billion that will actually be paid, plus $7 billion in soft-consumer relief; minus about $600 million in tax deductions. About $5 billion of the cash portion of the settlement is paid as a penalty to the US Treasury. Other portions will go toward compensating investors, including state pension funds. Just under $1 billion will be split among six states.

Under the out-of-court settlement, Bank of America acknowledged that Merrill Lynch told investors in subprime mortgage bonds in 2006 and 2007 that the loans generally complied with underwriting guidelines, though reviews suggested as many as 50% did not. Bank of America also acknowledged that Countrywide did not generally tell investors the extent to which it made exceptions to its own internal guidelines. The settlement also covered some post-crisis conduct, including Bank of America's admission that from 2009 to 2012 it submitted loans for government insurance under the Federal Housing Administration that did not qualify.

The statement of facts failed to identify the amount of profit the bank gained, or show how the penalty will restore losses to investor victims. No individuals were charged. Maybe we can blame robots.

Bank of America shares jumped 4.1% to $16.16; the thinking is that the worst is behind them. The bank had already set aside reserves to handle the legal problems and the thinking is that this settlement is the settlement to end all settlements. Ultimately it works out to about a half year’s profit, give or take; you know, the cost of doing business.

Wednesday, August 20, 2014 - Sunlight is the Best of Disinfectants

Sunlight is the Best of Disinfectants

by Sinclair Noe

DOW + 59 = 16979
SPX + 4 = 1986
NAS – 1 = 4526
10 YR YLD + .02 = 2.42%
OIL + .63 = 93.49
GOLD – 3.80 = 1292.40
SILV + .04 = 19.55

No economic reports today, but the Federal Reserve released the minutes of the July 29-30 FOMC meeting. You will recall that the Fed left interest rates unchanged and continued the taper by reducing large scale asset purchases by $10 billion a month, with the plan to end purchases by October. The Fed had said in its policy statement following the July meeting that there was "significant" labor market slack, but the minutes showed many members of its policy-setting panel thought this characterization "might have to change before long."

Most Fed officials wanted further evidence the labor market and the economy were showing significant improvement before changing their view on raising rates, but they said, "Labor market conditions had moved noticeably closer to those viewed as normal in the longer run," and policymakers "generally agreed" the job market was healing faster than they had expected.

Most Fed policymakers felt any change in their view on when to start raising rates "would depend on further information on the trajectories of economic activity, the labor market and inflation." Well, we got more data yesterday showing that inflation is not a problem yet; so that leaves economic activity and the labor market. The economic trajectory has remained sluggish since the beginning of the recovery; GDP turned negative in the first quarter of this year and then showed a very strong bounce in the second quarter. Is the second quarter bounce sustainable? It seems most Fed officials think it could be. And the Fed minutes almost seem to gloss over this long-term sluggishness, or what the Center for Economic Policy Research callssecular stagnation. What is secular stagnation?

A persistent gap between actual and potential output. Because of an imbalance between saving and investment, the nominal interest rate required to maintain full employment falls to less than zero -- not just briefly, but persistently. Since the rate can't be cut to less than zero, monetary policy (as currently conceived) can't keep the economy running at full potential.

A slowdown in growth of potential output. This may happen because of demographic changes, or because innovation isn't what it used to be, or for other reasons.

An irreversible drop in the level of potential output. Even if the full-employment rate of interest is still positive and the growth in potential output hasn't slowed, the recession may have permanently cut its level -- for instance, by causing workers to leave the labor force and not come back. Even if the economy now grows as fast as it did before, it's on a lower track and won't ever converge with the path it was on pre-crash.

This all means that the Fed’s long awaited economic liftoff might not happen, at least for another 20 years or so. But the Fed doesn’t seem to be concerned with this problem, which means that if the US economy experiences secular stagnation, the condition will be self-inflicted.

That leaves the Fed with the question of the recovery in the labor market. So, it really boils down to jobs. More jobs, and specifically, the quality of the jobs. So far, the average wage is stuck at $24.25 an hour; too many jobs are part-time or temporary. If we start to see some movement on wages, and more full-time positions, that might be a sign for rate increases. One area of remaining slack is the low participation rate, the percentage of working age population that is still in the labor pool; many people got out of the pool. Last month the economy added 209,000 net new jobs. The unemployment rate moved up to 6.2% from 6.1%. The jobless rate can rise for both good reasons (more people looking for work) and bad reasons (fewer people having a job).  Even though the economy added jobs, more people joined the labor force, and that is why the unemployment rate moved higher.

There are many things that could derail the recovery in the labor market, but for now the Fed thinks things are on track, and that means a probable rate increase in the first half of 2015. Any rate increase is likely to be incremental. Right now the fed funds target rate is between zero and 0.25%. It would likely be increased by 25 basis points, with the lower range representing the rate on overnight reverse repurchase operations. In reverse repos, the Fed borrows funds overnight from banks to mop up excess cash in the financial system.

Market reaction to a slightly more hawkish Fed stance: well, the dollar index continued higher, Treasuries dropped but then settled down, precious metals were a little lower, oil was higher, stocks initially threw a little tantrum and then recovered. After all, there were no real surprises.

Elsewhere, we’ve been waiting for the Department of Justice announcement on a settlement with Bank of America. Bank of America has reportedly reached a record $17 billion settlement to resolve an investigation into its role in the sale of mortgage-backed securities before the 2008 financial crisis. The official announcement will come tomorrow. The deal works out to $10 billion in cash, and $7 billion in soft dollar consumer relief - which is really a gift to the bank involving credits for various forms of consumer aid that the bank would or should be doing anyway. So, if you have a BofA mortgage and you’ve been having trouble with a loan mod or a refinance – try again. And by the way, the bank will make money on consumer aid.

The deal requires Bank of America to acknowledge making serious misrepresentations about the quality of its residential mortgage-backed securities issued by itself and by Countrywide Financial and Merrill Lynch. In exchange, BofA will probably not have to actually admit wrongdoing, and they get a free “get out of jail” card.  

Usually these settlements include a statement of facts which is most notable for its absence of facts and details. That silence means the Department of Justice is essentially protecting the banks from private lawsuits by deliberately withholding evidence which could result in even further disclosure of really bad behavior and even bigger damages and other unexpected outcomes. The biggest unexpected outcome would be that the public finally says to hell with the bankster criminals and we all see through the flimsy apologists in the media and the cronies in politics.

Most people know the banksters got away with murder; and I use the word literally, not figuratively. Most people want to see bankster executives prosecuted. Most people understand that the fines in these settlements are just a slap on the wrist, cost of business paid by shareholders, and taxpayers. Yep, the fines are typically considered tax deductible.

Tomorrow, the DOJ will announce the biggest settlement ever against a bank: $17 billion. But we know, it’s really a little under $10 billion in cash, with all kinds of little gifts to the banksters to soften the blow. And we know this will do nothing to deter future wrongdoing. You can place a huge derivative bet that they’re still committing those same crimes and new ones (such as subprime auto), so the prosecution clock resets daily.

And the crazy part is that the Department of Justice and BofA think we’re all too stupid to understand the cronyism. They will portray the settlement as a get tough stance on the bankers. Hogwash, I know it, you know it.

About 100 years ago, Supreme Court Justice Louis Brandeis wrote his famous statement that "sunlight is said to be the best of disinfectants" in a 1913 Harper's Weekly article. He went on to say that transparency is “justly commended as a remedy for social and industrial diseases.” Brandeis actually wrote privately about the idea of transparency 20 years earlier, writing, “about the wickedness of people shielding wrongdoers and passing them off (or at least allowing them to pass themselves off) as honest men."

About 100 years ago, the country was struggling with what was known as the Money Trust, the rough equivalent of today’s systemically important financial institutions, or too big to fail banks. Brandeis asked how the great wealth of his day had been accumulated, and he concluded: “power breeds wealth as wealth breeds power. But a main cause of these large fortunes is the huge tolls taken by those who control the avenues to capital and to investors. There has been exacted as toll literally ‘all that the traffic will bear.’”

Just a reminder, some of the mortgage problems of Bank of America date back to their acquisition of Countrywide; BofA had their own illegal mortgage problems. The guy who started Countrywide and nearly ran it into the ground is Angelo Mozillo. Until now, the harshest penalty imposed on Mozilo has been a $67 million settlement with the SEC from 2010 to resolve allegations that he misled Countrywide investors. Actually, Mozilo was forced to disgorge about $45 million from the sale of stocks, some of which may have been based on insider information; and then Bank of America paid for most of the other penalties; which is to say shareholders and consumers paid for Mozilo’s penalties.

The US attorney’s office in Los Angeles is now preparing a civil lawsuit against Mozilo and as many as 10 other former Countrywide employees. Government attorneys plan to sue Mozilo, Countrywide’s former chairman and chief executive officer, and other individuals using the Financial Institutions Reform, Recovery and Enforcement Act. The law, approved by Congress in 1989 in response to savings-and-loan scandals, gives prosecutors 10 years to bring cases and has less stringent liability requirements than criminal charges.

Prosecutors dropped a criminal probe of Mozilo in early 2011. The Citizens for Responsibility and Ethics in Washington, a watchdog group, sued the Justice Department in June to try to obtain its records detailing investigations of Mozilo and Countrywide. The group faulted the government for failing to prosecute either Mozilo or the company “despite substantial evidence of wrongdoing.”

Tuesday, August 19, 2014 - It’s Just a Matter of Time

It’s Just a Matter of Time
by Sinclair Noe

DOW + 80 = 16,919
SPX + 9 = 1981
NAS + 19 = 4527
10 YR YLD+ .02 = 2.40%
OIL (sept) = 94.48
GOLD – 2.00 = 1296.20
SILV - .18 = 19.50

The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.4%, but energy costs declined 0.3%; the first drop in energy prices since March. Consumer prices have risen an unadjusted 2% over the past 12 months, down slightly from June. Prices surged in the early spring but have since tapered off. Excluding volatile food and energy prices, the core rate has risen 1.9% in the same span, unchanged from the prior month. Almost all of the increase in consumer prices can be traced back to housing costs, or shelter prices; over the past year, shelter prices are up 2.9%.

Hourly wages have risen about 10% overall since June 2009, to $24.45 an hour. But over the same span they’ve slipped 0.3% in “real” or inflation-adjusted terms. Since the Great Recession ended five years ago, the amount of money Americans earn each hour after adjusting for  inflation has actually fallen. And that largely explains why the economy is growing so slowly.

The Federal Reserve should be in no hurry to raise interest rates because there is no serious threat from inflation, at least not now.

According to the US Travel Association and GfK, a market research firm, you might not take a vacation this year. About 40% don't plan on using all of our paid time off. The share of American workers taking vacation is at historic lows. In the 1970s, about 80 percent of workers took a weeklong vacation every year. Now, that share has dropped to a little bit more than half. The declining popularity of vacation has wide-ranging effects not just on workers, but also on their employers and indeed the overall economy. Studies have found that taking fewer vacations is correlated with increased risk of heart disease; other research has shown that workers who take vacations, or even a small break during the workday, are more productive when they return. This vacation aversion is a North American phenomenon; the US is the only “advanced” economy that doesn’t require companies to give paid vacation days.

Housing starts rose to an eight-month high in July. Groundbreaking for new housing jumped 15.7% last month to a seasonally adjusted 1.09-million unit annual pace; this follows 2 straight months of declines. Groundbreaking for single-family homes, the largest part of the market, increased 8.3% in July to a seven-month high. Starts for the multi-family homes segment, such as apartments, jumped 33%.

Home Depot reported quarterly profit today. Profit rose 14% to $2.05 billion. Sales rose 5.7% to $23.8 billion. The number of transactions rose 4.2%. Home Depot said it expects same store sales to grow faster in the second half of the year, as more people take on remodeling projects. However, Home Depot maintained its full-year sales growth forecast of about 4.8%. Lowe's, the world's second-largest home improvement company, is scheduled to report results tomorrow.

Back in 2006 bust, when the housing market went bust, Phoenix was one of the first cities to get hammered with lower prices; in 2011, Phoenix was one of the first cities to snap back; prices, off by nearly 60% from peak, then rebounded sharply; home prices are up nearly 46% from the 2011 low. The number of homes in some stage of foreclosure has fallen to about 4,300 homes today from more than 50,000 four years ago.

Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. Investors accounted for nearly 15% of homes bought in June, down from about one-quarter last year and one-third of sales in June 2012. The market is moving away from from bargain-hunting investors, who typically pay cash for distressed properties, to traditional buyers with mortgages. The Phoenix market is slowly moving back to normal, but there is still a long way to go.

Employment in Phoenix, after expanding at an average annual pace of 2.6% and 2.8% in each of the last two years, is up just 1.5% so far this year. When people don’t have a job or are not secure in their jobs, they don’t buy houses. The sluggish local economy is compounded by consumers still too battered from the bust to think about getting a loan. Some don't have sufficient equity to turn a house sale into an adequate down payment on their next purchase. Others suffered credit blemishes or income hits that make banks reluctant to lend.

Reuters reports Phoenix based PetSmart is exploring a potential sale of the company. Jana Partners, which has reported a 9.8% stake in PetSmart, has been calling on the company to pursue a sale after what it calls years of financial underperformance. There is no guarantee the review will lead to a deal and PetSmart could still determine that it would be better off on its own.

Today marks the ten year anniversary of Google. The company went public August 19, 2004 at a price of $85 a share; and it’s gone up 1,304% since then. A few stocks have done better over that time, but only a few, and of those, only Apple was in the S&P 500 10 years ago when Google went public. Today, Google’s revenue tops $65 billion, more than all but 40 US companies. Net profit margins exceed 20%, higher than all but three. Ten years ago, Google had a forward PE of 52; today, the forward PE is 20. So as share prices have constantly moved higher, valuation has constantly moved lower; which is a neat trick.

Over the past 10 years, or you could say over the past 25 years, a great deal of wealth has flowed to the tech giants of Silicon Valley; which means that the wealth has flowed away from Wall Street. And the techies have finally figured out they don’t need Wall Street bankers to make a deal. According to data from Dealogic, approximately 70% of the tech deals completed in early August have been sealed without a Wall Street bank consultant helping the buyer identify the transaction. And over the past two years, the trend has been growing, with more than half the tech deals in 2012 occurring without a banker working on behalf of the buyer. This M&A consulting shift highlights a subtle but growing divide between fee-eager bankers and the tech giants of today.

Maybe the problem is that the banks just have a hard time remembering who their clients are. Case in point: you may remember the story of Standard Chartered, the British bank, which back in 2012 paid about $667 million to settle charges that it had engaged in money laundering by making transfers for clients in Iran and other countries that were covered by American sanctions. They had to add compliance monitors. A few months later the bank’s chairman denied any wrongdoing, which was a direct violation of the settlement; and he was forced to quickly recant. Today, it seems that all of those new legal staffers and crime-fighting committees also didn’t get the memo about what they are meant to be doing. New York’s financial regulator slapped another $300 million fine on Standard Chartered for “failures to remediate anti-money laundering compliance problems as required” in its previous settlement.

Part of the bank’s 2012 agreement included hosting an independent monitor permanently installed by regulators on-site to vet anti-money laundering procedures. This monitor was back-testing the bank’s processes and found them lacking, particularly when it came to flagging suspicious dollar transfers from its Hong Kong and United Arab Emirates affiliates.

In a statement, Standard Chartered said that it “has already begun extensive remediation efforts and is committed to completing these with utmost urgency.” And this time they really, really mean it; not like last time. So, this raises the question of how many times a bank can break the law, and get away with a slap on the wrist. What does a bank have to do before they forfeit their charter?

The New York State regulator, Benjamin Lawsky, said: “If a bank fails to live up to its commitments, there should be consequences. That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”

So, the penalty is nearly $1 billion in fines over the past couple of years, but actually works out to about 12% of bank profits over the same time.

You might also remember last month when Attorney General Eric Holder announced the $7 billion settlement with Citigroup for its role in packaging troubled mortgages into securities and selling them as investments in the years before the crisis, even though a bunch of Citigroup bankers knew better and did it anyway. And last November, there was a settlement with JPMorgan. And there is a chance that later this week we will see a settlement announced with Bank of America.

It all falls in line with the “too big to fail” idea known as the Holder Doctrine, which stems from a 1999 memo, when then Deputy AG Holder included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern. Holder was thinking of the collapse of Arthur Anderson after the collapse of Enron. So, now Holder holds to the idea of settlement over prosecutions.  Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong.

The problem is, of course, that these settlements allow for the Wall Street bankers to get away with their bad behavior without being held the slightest bit accountable. And with no real deterrent, as Standard Chartered has just confirmed, it’s just a matter of time until they do it all over again. 

Monday, August 11, 2014 - Dog Days

Dog Days
by Sinclair Noe

DOW + 16 = 16,569
SPX + 5 = 1936
NAS + 30 = 4401
10 YR YLD + .01 = 2.42%
OIL + .20 = 97.85
GOLD – 1.20 = 1308.90
SILV + .10 = 20.11

It was actually a quiet day on Wall Street; not much economic data today; we’re winding down earnings reporting season. It is a Monday, so there was some M&A action, but for the most part a slow day; we used to call them the dog days of summer. On a day like this, you can claim whatever you want for whatever market movement there is.

NATO sees a "high probability" of a Russian invasion of eastern Ukraine as some 20,000 Russian troops massed on the nearby border. Kiev had the number at 45,000 Russian troops. The Kremlin announced it had sent a convoy of humanitarian aid to Ukraine under the auspices of the International Red Cross. Western governments are generally opposing, in advance, any Russian aid missions, which they fear could serve as a pretext for a military incursion to support pro-Russian separatists fighting the Ukrainian Army in the country’s southeast. The European Commission issued a statement warning “against any unilateral military actions in Ukraine, under any pretext, including humanitarian.”

Ukraine, the United States and European nations have repeatedly warned Russia against mounting a stealth invasion under the disguise of humanitarian aid, and have looked on with growing alarm as Russian officials have spoken in ever-stronger terms about the humanitarian plight of eastern Ukrainians.

Meanwhile, the US continues its bombing-slash-humanitarian mission in Iraq. The United States launched a fourth round of airstrikes Sunday against militant vehicles and mortars firing on Irbil as part of efforts to blunt the militants' advance and protect American personnel near the Kurdish capital. Reinvigorated by American airstrikes, Kurdish forces retook two towns from Sunni militants. U.S. warplanes and drones have also attacked militants firing on minority Yazidis around Sinjar, which is in the far west of the country near the Syrian border. The US has begun providing weapons to Kurdish forces; the move to directly aid the Kurds underscores the level of  concern about the ISIS militants' gains in the north.

Iraq's president named a new prime minister to end Nuri al-Maliki's eight year rule, but Maliki refused to go after deploying militias and special forces on the streets of Baghdad. But Maliki's Dawa Party declared his replacement illegal, and Maliki's son-in-law said he would overturn it in court. Washington delivered a stern warning to Maliki not to "stir the waters" by using force to cling to power. Maliki himself said nothing about the decision to replace him.

Maliki's opponents accuse him of  keeping key security posts in his own hands instead of sharing them with other groups, alienating Sunnis in particular by ordering the arrest of their political leaders. Islamic State fighters were able to exploit that resentment to win support from other Sunni armed groups. Maliki's Shi'ite State of Law bloc emerged as the biggest group in parliament in the April election, but does not have enough seats to rule without support from Sunnis, Kurds and other Shi'ite blocs, nearly all of which demand he go. Maliki also appears to have alienated his supporters in Iran. Obama says a more inclusive government in Baghdad is a pre-condition for more aggressive US military support against ISIS.

Israeli and Palestinian negotiators resumed indirect talks mediated by Egypt today, as a 72 hour ceasefire appears to be holding, at least for the first few hours.

So, we still have geopolitical hotspots, but for today, they are smoldering rather than exploding; although that could change in a heartbeat.

Stanley Fischer, who took over as vice chairman of the Fed in June, deliver a speech in Stockholm today.  Fisher says economists and policy makers had been repeatedly disappointed as the expected level of growth failed to materialize: “Year after year, we have had to explain from midyear on why the global growth rate has been lower than predicted as little as two quarters back.”

Fischer said it was difficult to determine how much of the slackness was because of cyclical factors and how much represented a more fundamental, structural change in advanced economies. He warned of 3 headwinds to growth: a weak housing market, cuts in federal government spending and weaker global growth that reduced demand for American exports. Fischer also questioned whether the recent weak growth is a temporary problem or a more long-term structural problem. 

A new report from the US Conference of Mayors looks at the weakness of earnings in the recovery. Jobs growth in the US since the 2008 recession has been undermined by lower wages, with workers earning an average 23% less than earnings from jobs which were lost. The average annual salary in sectors where jobs were lost - particularly manufacturing and construction - during the 2008-9 financial crisis was $61,637; Job gains through the second quarter of 2014 in comparative sectors showed average wages of $47,171, implying $93 billion in lower wage income. The report also showed that 73% of metro areas had households earning average salaries of less than $35,000 a year. American workers, on average, earned $24.45 an hour in July, up only a penny from June. Over the last year, wages have grown just 2%, in keeping with where they have been stuck since late 2009. The study also found a continuing accumulation of wealth among the top 20% of the nation's earners. From 2005 to 2012, the highest income bracket was responsible more than 60% of all income gains in the country.

The pipeline group Kinder Morgan, the biggest of the master limited partnerships, announced yesterday that it would acquire its three associated companies and reorganize as one corporation based in Houston. The new Kinder Morgan will have an estimated enterprise value of about $140 billion, $100 billion of market value and $40 billion of debt, making it the third-biggest energy company in the United States, after Exxon Mobil and Chevron. Kinder Morgan, which encompasses a huge network of oil and gas pipelines across North America, will acquire its two related M.L.P.s ‒ Kinder Morgan Energy Partners and El Paso Pipeline Partners ‒ and a third related company, Kinder Morgan Management, for $71 billion. Kinder Morgan will pay a premium for each company and use mostly stock to finance the purchases, allowing shareholders of the three targets to essentially continue their ownership.

Under the existing structure, Kinder Morgan’s related companies were obliged to pay out a majority of their profits to investors, including significant payments to Kinder Morgan itself. The distributions had grown so large in recent years that Kinder Morgan was lending money back to the related companies so they could fund growth. It was a profitable arrangement, but became overly complex and ultimately constricted the combined companies’ growth. The move is expected to free up cash for the company to invest in new capital expenditures needed to accommodate new reserves of natural gas being tapped across North America. It’s also expected the move will allow Kinder Morgan to become more acquisitive.

Last week, Bank of America reportedly agreed to a settlement deal with the Department of Justice for $16 billion, with $9 billion in cash fines, and $7 billion in soft dollar relief to borrowers. We still haven’t heard confirmation; but that would break the record for the largest bank settlement in history, set less than a year ago by a $13 billion agreement between Justice and JPMorgan Chase.

The numbers that accompany these deal announcements always seem impressive. But how large are they, really? That depends on your point of view. Bankers fraudulently inflated a housing bubble. They became extremely wealthy as a result, but the housing market lost $6.3 trillion in value when the bubble burst. It had only recovered 44% of that lost value by of the end of 2013. That's more than $3 trillion still missing from American households. As of the first quarter of this year,  9.1 million residences - 17% of mortgaged homes - were still "seriously underwater," which means that homeowners owed at least 25% more on the home than it was worth.

And homeowners weren't the only ones hurt by banker misdeeds. When the bubble burst, it took the economy with it. Unemployment and underemployment remain at record levels, even as the stock market surges and corporations enjoy record profits. Payments on those 9.1 million underwater mortgages are a form of wealth transfer from Main Street to Wall Street, as homeowners continue to overpay the bankers who inflated those mortgages in the first place - or risk losing their homes to them. If this added burden harms their credit score, they'll pay banks more for other forms of borrowing as well.

And yet, these settlements do not require banks to provide principal relief for these underwater homeowners. They don't ask banks to return homes that they wrongfully took from their owners. They don't ask banks to forfeit every penny of earnings received through forgery or perjury. They don't even ask them to restore the credit ratings of defrauded customers. What's more, there's very little reason to believe that these large sums will be paid in full. Much of the "consumer relief" in past deals has turned out to be nothing more than gamesmanship with numbers. Banks modify loans in ways that are advantageous to them, offer deals they almost certainly would've offered anyway, and then count them against their "settlement" obligations. What's more, it hasn't been announced whether this deal will be tax-deductible. If so, Americans will get shortchanged at the federal level, too.

Bank of America is a repeat offender with six violations since November 2011, but there have been no criminal prosecutions of big-bank executives, an omission that Federal Judge Jed S. Rakoff lamented in a recent speech. Rakoff called the lack of prosecutions from the Justice Department and the Securities and Exchange Commission "technically and morally suspect" and characterized the excuses they've given for failing to prosecute as "hollow" and "lame."

Thursday, August 07, 2014 - Surveillance Will Continue Until the Paranoia Stops

Surveillance Will Continue Until the Paranoia Stops
by Sinclair Noe

DOW – 75 = 16,368
SPX – 10 = 1909
NAS – 20 = 4334
10 YR YLD - .05 = 2.42%
OIL + .71 = 97.63
GOLD + 7.10 = 1314.00
SILV - .06 = 20.05

Normally, at least for the past 5 years, any dip has been seen as a buying opportunity. Lately, investors see a dip as reason to sell and ask questions later.

The Bank of England holds UK interest rates at a record low of 0.5% for another month. And the European Central Bank holds interest rates at 0.15% and announced they would keep rates low for an extended period of time. ECB President Mario Draghi warned there would be a "continued moderate and uneven recovery" in the eurozone. The annual inflation rate in the 18 countries of the eurozone was 0.4 percent in July, down from 0.5 percent in June; not quite deflation, but not headed in the right direction. Italy just announced its second consecutive quarter of negative GDP; which is the basic definition of a recession. Meanwhile, the website of the ECB has been hacked, and the hacker reportedly contacted the ECB and demanded a ransom for the stolen data.

The New York Times reported yesterday that a Russian crime ring had hacked more than a billion internet passwords, maybe more than 4 billion. It’s being called the biggest hack in history; which may or may not be accurate. Russian hackers are just a small part of the hacking world, about 2%. The major global hackers are Indonesia, China, the US, Taiwan, Turkey, and India. And while Russia may not constitute the same volume as other hackers, they make up for it in audacity; for example, the breach of the Target retail stores. And the recent tensions and sanctions between Russia and the US probably mean there will be no coordinated effort to crack down on international hacking. Of course, it might be argued that for true audacity, nobody can touch the NSA.

How dangerous is this hack? Hard to say. We still don’t know which websites were breached. We still don’t know how the hacked data will be misused. And we are being advised that the best thing to do is to change your password on various sites you use; which isn’t that difficult. There are, of course, companies that you can pay to provide cyber protection; coincidentally, these same companies are the ones that alert us to cyber problems; and I have a nagging suspicion some of them might actually create the problems in the first place. What this really does is to raise awareness that data hackers can collect almost anything, and digital security has been a weak spot in technological progress.

Perhaps braced by Moore’s Law, technology marches on; the journal Science reports that IBM researchers have developed a new computer chip they call TrueNorth.  The new chip was “designed to approximate the structure and function of the brain in silicon”, plus it is power efficient. The chip contains 5.4 billion transistors, yet draws just 70 milliwatts of power. By contrast, modern Intel processors in today’s personal computers and data centers may have 1.4 billion transistors and consume far more power, about 35 to 140 watts. The new chip weaves together all those transistors into an on-chip network of 4,096 neurosynaptic cores, producing the equivalent of 256 synapses. IBM has also tethered 16 of  these chips together in four four-by-four arrays, which collectively offer the equivalent of 16 million neurons and 4 billion synapses, showing that the design can be easily scaled up for larger implementations.

Think of the synapses as memory, and the neurons are the processor; working together they provide fairly complex pattern recognition, and what might be described as sensing capabilities. Right now, the chip is not real fast, but it can be strung together, and on a per watt basis, it really starts to fly. The low power consumption opens up a world of possible uses. This might be the chip that powers the internet of things, embedded in all sorts of devices and possibly revolutionizing mobile devices.

The big question is whether the chips can learn? Not yet, however IBM has already tested the chip’s ability to drive common artificial intelligence tasks, including recognizing images; TrueNorth was able to recognize things like people, cyclists, cars, buses, and trucks with about 80% accuracy. Keep in mind that this is a new chip, still in its early stages of development.  IBM is still investigating how to commercialize this processor and has made no commitments to either manufacture the chip itself or license the design out to others.

The problem with the idea of having even more devices than your smartphone and tablet gathering information for your convenience, of course, is the many ways all that data can be used against you. Traditionally, we think of the government as the invader of privacy, but as capabilities change, we see private corporations getting into the act. Last year the Wall Street Journal reported on new facial recognition technology; police could use an iPhone to take a photo, and then cross check the face in a criminal database; sounds good in the battle against terrorism, but the company that makes the technology wasn’t just considering sales to law enforcement, but also to the health care and financial industries. Yea, I don’t know exactly what those applications might be but I don’t think I like it.

Are health care companies going to start sensing every drop of sweat, every minute we work out, every time we puff a cigarette or sip a cocktail? Maybe we won’t even have to bother going to the doctor anymore. And what about the health insurance companies? Financial engineers believe they can pretty much put a price on anything. So what is your freedom worth? You need air, water, food, and relationships to survive. You want to go shopping, to the movies, to see friends. You have kids, romantic attachments, familial obligations. You like being able to travel, to explore, to watch TV. You need medical care. What are each of these worth? It’s a question that analysts are thinking about.

Or how about the school districts in Houston that require students to wear electronic tagging badges to improve security and increase attendance rates; the same electronic tagging badges formerly used to keep track of cattle.

The “Internet of Things” is probably the next Big Thing. How big? ABI Research estimates that over 30 billion devices will be connected to the Internet of Things by 2020; Gartner puts the number at 26 billion – not including 7.3 billion PCs, tablets, and smartphones. That’s a lot of internet-connected things, considering that there are “only” a little over 7 billion people on this planet, and many of those people are not connected to the internet, much less to electricity. And as technology increases and prices drop, in accordance with Moore’s Law, it opens up the possibility of connecting almost everything from the simple to the complex, and not only connecting, but sensing, monitoring, and controlling almost every facet of your work, home, and private life.

And then that brings us back to the hackers. How secure would all those embedded devices be in a world full of such things. You don’t need to break a code, it would be easier than ever to hack into everything you do, or think about doing. Don’t worry, I’m sure it will all work out fine, but the surveillance will continue until you stop being paranoid.

Some things never change. Bank of America is the latest big bank to work a deal with the Department of Justice. We’re still waiting for an official announcement but it looks like BofA has agreed to a $16 billion settlement for its role in the sale of toxic mortgage securities. The deal is reportedly for about $9 billion in cash and more than $7 billion in soft-dollar relief to consumers; things like loan mods or refi’s which they are supposed to be doing anyway; and this could still be a sticking point in the deal. The two sides continue to hammer out details and are still negotiating a statement of facts. For example, will BofA be forced to admit wrongdoing, and if so, will they actually describe what they did and who did it when they broke the law. Will they be able to deduct the fine from their taxes, thus sloughing off the burden onto taxpayers?

If or when the record deal goes through, Bank of America will have paid more than $50 billion in penalties and consumer relief in deals with government agencies, not including private investors, after acquiring subprime giant Countrywide and investment firm Merrill Lynch at the height of the crisis. And that raises the biggest question of all: how is it possible to cheat so many people out of so many billions without anybody actually breaking a law?

There is an interesting side case that is important to understand the BofA settlement. The bank had been low-balling the DOJ, offering to settle for maybe $3 billion, until last week, when Judge Jed Rakoff a federal judge in Manhattan ordered the bank to pay nearly $1.3 billion for selling 17,600 loans, many of which were defective. Bank of America had previously lost that case, which involved its Countrywide Financial unit, at a jury trial. Turns out, that going to trial was a very, very bad idea for BofA, and when Rakoff issued his ruling, the bank had no negotiating leverage in this case. The Department of Justice started preparing a suit to take to trial, and Bank of America returned to the negotiating table. The case before Judge Rakoff dealt with a Countrywide loan program known as the Hustle, which represented only a small fraction of the firm’s mortgage portfolio, meaning that penalties in cases dealing with larger programs could skyrocket.

Wednesday, July 30, 2014 - GDP, Fed, Vultures, and Banksters

GDP, Fed, Vultures, and Banksters

by Sinclair Noe

DOW – 31 = 16,880
SPX + 0.12 = 1970
NAS + 20 = 4462
10 YR YLD + .09 = 2.55%
OIL - .72 = 100.25
GOLD – 4.30 = 1295.50
SILV + .06 = 20.72

Last week we told you that this week would be very busy. Well, here we are; today we had a big report on second quarter GDP and the Fed wrapped up a policy session, and that’s just the beginning. 

This morning, the Commerce Department reported the gross domestic product grew at a 4% pace in the second quarter. Boom. And first quarter GDP was revised from negative 2.9% to negative 2.1%; but any way you look at it, this was a massive turnaround.

The government also published revisions to prior GDP data going back to 1999, which showed the economy performing much stronger in the second half of 2013, growing at a 4% pace, the strongest 6 months since late 2003. This was the first estimate of second quarter GDP, and the first revision will be released August 28.

Inventories added 1.66 percentage points to this GDP report. Stockpiles were rebuilt at a $93.4 billion annualized pace after a $35.2 billion gain in the first three months of the year. That could mean companies will keep tighter control on the number of goods on hand this quarter, which could cut into economic growth. Or it might mean companies are optimistic about sales.

Consumer spending rose at a 2.5% pace last quarter, which also topped expectations, and more than double the 1.2% advance in the first quarter of 2014, in part due to less spending on healthcare. Purchases of durable goods, including autos, furniture and appliances and recreational vehicles, jumped at a 14% annualized rate, the fastest since the third quarter of 2009. Despite the pick-up in consumer spending, Americans saved more in the second quarter. The saving rate increased to 5.3% from 4.9% in the first quarter as incomes rose, which bodes well for future spending.

Corporate spending on structures, equipment and intellectual property such as software increased at a 5.5% annualized rate after rising at a 1.6% pace in the prior three months. In addition to consumer spending and business investment, growth got a boost from the biggest gain in state and local government expenditures in five years. Congress is still debating spending for infrastructure improvements such as roads and bridges, and if they can’t work out differences that could prove a stumbling block later in the year. A widening trade gap subtracted 0.6% from growth. Excluding inventories and trade, so-called final sales to domestic purchasers climbed at a 2.8% rate, the biggest increase since the third quarter of 2011.

Still, the big swing from negative 2.1% contraction to positive 4% growth seems like a very big swing, almost freakish. We know that the first quarter was hit by bad weather and the polar vortex …, still. So, we can smooth out the numbers by looking at the full year growth rate; over the past 12 months the economy expanded at a 2.4% rate, pretty much in line with the past 3 years; in fact, 2.4% growth would be decent in normal times, but the economy is still in recovery mode, and 2.4% is not enough to achieve “liftoff”. The economy is headed in the right direction, it is gathering momentum, but it is still operating below potential. By the Congressional Budget Office’s estimates, the level of output reported for the second quarter is still $770 billion below the nation’s current economic potential, or 4.2% below. That implies that the nation still has plenty of room to grow if a faster expansion ever kicks in.

The economy is far from perfect, we have a long way to go, but today’s report indicates progress, real, honest to goodness progress.

A price index in the GDP report rose at a 2.3% rate in the second quarter, the quickest in three years, after advancing at a 1.4% pace in the prior period. A core price measure that strips out food and energy costs increased at a 2.0% pace, the fastest since the first quarter of 2012. The inflation picture should lend support to the Fed hawks who want to hike interest rates sooner rather than later, but for now the Fed is standing pat.

The Federal Reserve Federal Open Market Committee reaffirmed it was in  no rush to raise interest rates, even as it upgraded its assessment of the economy and expressed a level of comfort that inflation was moving up closer to its target, and the taper is  still on track. The Fed has kept overnight rates near zero since December 2008 and has more than quadrupled its balance sheet to $4.4 trillion through a series of bond purchase programs. The Fed announced, as expected, that it would reduce its monthly bond purchases to $25 billion per month, but it gave no indication that recent signs of stronger economic growth had changed its previously announced plan to hold short-term interest rates near zero well into 2015.

The Fed acknowledged both faster economic growth and a decline in the unemployment rate, but expressed concern about remaining slack in the labor market. The Fed’s statement said: "Labor market conditions improved, with the unemployment rate declining further… However, a range of labor market indicators suggests that there remains significant underutilization of labor resources."

Some Fed officials see evidence that the economy is settling into a pattern of slower growth, and that monetary policy has substantially exhausted its power to improve the situation. They want the Fed to retreat more quickly from its stimulus campaign, fearing higher inflation, or that it will encourage bubbles in financial assets. Fed chairwoman, Janet Yellen, and her allies have taken a more cautious view, arguing that the decline in the unemployment rate appears to overstate the improvement in the labor market, because it counts only people who are looking for work. Yellen expects some people who had been discouraged about their job prospects will return to the labor force as the economy continues to improve, and she has pointed to weak wage growth as evidence that it remains easy to find workers.

More optimism for the economy came in a report from ADP, the payroll processing company; private employers added 218,000 jobs last month, which was down from 281,000 in June. It was the fourth straight month of job gains above 200,000. While ADP’s numbers offered reason to be hopeful, the company’s figures cover only private businesses and often do not track with the government’s jobs report, which will be released Friday.

The ratings agency Standard & Poor’s says Argentina has defaulted after it failed to make a $539 million interest payment due on its discount bonds. The downgrade came late this afternoon as representatives for Argentina and New York hedge funds sought to reach a last-minute agreement on Argentina’s debt. Yet after more than five hours of mediated talks, neither side appeared closer to a deal. Standard & Poor’s lowered its rating on the country’s debt to “selective default”, noting that Argentina had a 30-day grace period following the June 30 scheduled interest payment date to make payment.

This story goes back to 2001, when Argentina defaulted on tens of billions of dollars of sovereign bonds. It later exchanged those bonds for discounted ones with most of its bondholders, but a small group of traders, mainly hedge funds, led by Paul Singer’s Elliott Management refused to take the new bonds, even though they had purchased the discounted bonds after the default, at pennies on the dollar, they demanded full payment, and they have not backed down, and they took it to court in the US.

In 2012 a US federal judge ruled that Argentina could not make payments to bondholders who had agreed to discounted bonds, without paying the holdouts. Argentina appealed and took its case to the United States Supreme Court which rejected the appeal last month. Argentina had until the end of the day to pay the holdouts or risk defaulting for a second time in 13 years.

A federal judge has ordered Bank of America’s Countrywide unit to pay $1.27 billion in penalties for defective mortgage loans sold to Fannie Mae and Freddie Mac in 2008. US District Judge Jed Rakoff in Manhattan issued the civil penalty against BofA in the first mortgage-fraud case brought by the federal government to go to trial. A jury in Manhattan found Countrywide liable. The judge determined that Fannie and Freddie had paid Countrywide nearly $3 billion for HSSL loans, but determined that 57% of the loans were of acceptable quality. HSSL refers to a Countrywide loan program called the High Speed Swim Lane, which basically fast-tracked almost any loan; it was also known as a “Hustle” loan.

In today’s decision, Judge Rakoff wrote: “While the HSSL process lasted only nine months, it was from start to finish the vehicle for a brazen fraud by the defendants, driven by hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.”

Separately, Bank of America is reportedly nearing a settlement with the Justice Department to resolve an investigation into its sale of mortgage backed bonds centered on faulty loans the company inherited from Countrywide and Merrill Lynch, which it purchased in 2008. The discussions include how much money will be paid in cash and how much in consumer relief. Potential terms have ranged from $13 billion to $17 billion. The DOJ has been trying to work out a settlement for some time, and was reportedly dissatisfied with a $13 billion deal that included $5 billion in consumer relief. The consumer relief portion of these settlements has typically been an easy out for the banks. The amount of any settlement would come on top of the $9.5 billion the bank agreed to pay in March to resolve Federal Housing Finance Agency claims.

Wednesday, July 16, 2014 - The Color of the Day is Beige

The Color of the Day is Beige

by Sinclair Noe

DOW + 77 = 17,138
SPX + 8 = 1981
NAS + 9 = 4425
10 YR YLD - .01 = 2.53%
OIL + 1.38 = 101.34
GOLD + 6.20 = 1300.80
SILV + .07 = 20.89

A record high close for the Dow; the 15^th record high close of the year for the Dow. The S&P 500 did not take out the old high from July 3^rd. We have a few economic reports to cover, plus Fed Chair Yellen continued testimony on Capitol Hill, and lots more.

Industrial production increased 0.2% in June to 103.9. This is 24.1% above the recession low, and 3.1% above the pre-recession peak. For the second quarter, industrial production advanced at an annual rate of 5.5%; so the quarter was good but the month of June was less than expected.

The Commerce Department reports producer prices increased by a seasonally adjusted 0.4% last month, above forecasts for a 0.2% gain, after falling 0.2% in May. Year-over-year, the producer price index rose at an annualized rate of 1.9% in June. The core rate, stripping out food and energy prices, was up 0.2%.

This afternoon, the Federal Reserve released its Beige Book, a collection of reports from the 12 Fed districts. The general consensus is that economic growth was moderate to modest. Most Districts were optimistic about the outlook for growth. Consumer spending increased in every district. Retail sales grew modestly in most districts. Auto sales, which have been on the upswing for more than a year, continued to stand out as particularly brisk support for the economy, but broader retail sales were more subdued. Labor market conditions continue to improve with all districts reporting slight to moderate employment growth. Several districts reported "some difficulty" finding staff for skilled positions, however there doesn’t seem to be any pressure on wages. Here’s a hint, if you can’t find skilled workers, try offering higher wages. The report gave a mixed appraisal of the US housing market. Conditions "varied" across the country, with some regions suffering from weak demand.

Fed Chair Janet Yellen returned to Capitol Hill to deliver her second day of Humphrey Hawkins testimony. The prepared remarks were the same as yesterday, then they open up for a Q&A. Some of the key points from today’s hearing:

Yellen said she is optimistic about the economy, “We had a very surprising negative growth in the first quarter, which is a number that in a way doesn't seem consistent with the underlining momentum in the economy and many indicators of spending and production. And I do think the economy is recovering and that growth is picking up and that we have sufficient growth to support continued improvement in the labor market."

Yellen said threats to financial stability are moderate “and not a very high level.” She again weighed in on valuations, saying: "Some things may be on the high side and there may be some pockets where we see valuations becoming very stretched but not generally. The use of leverage is not broad-based, it hasn't increased, and credit growth is not at alarming levels by any means."

Yellen did not single out specific sectors today. Yesterday she said biotech and social media looked a bit over-valued. That had some talking heads complaining; the funniest rant came from Jim Cramer, who said: “Next time, Fed Chief Yellen, it might pay to point out that there are plenty of cheap stocks out there, too. At least that way you can help us make money, not just lose it.” Maybe someone can tell Cramer the Fed is not in business to help him make stock picks, no matter how much help he needs. The Fed has been incredibly accommodative to Wall Street, and Cramer still complains. The Fed doesn’t issue a price target on Twitter. But if you read between the lines, Yellen was likely saying that there are no plans to raise the margin requirements on brokers.

There were some questions about a bill in the House that would require the Fed to follow a mathematical rule for when to raise or lower interest rates. Yellen didn’t like that idea; she said there is no magic formula for raising rates. Yellen again expressed confidence the Fed can exit when the time comes. The Fed has a variety of tools it can use to raise interest rates. In the distant future, the Fed’s balance sheet will shrink in size.

The best line from the Fed did not come from Yellen; Dallas Fed President Richard Fisher was speaking today at the University of Southern California. Fisher said ending asset purchases this fall isn’t enough; the Fed should start to taper the reinvestment of maturing securities in October. Fisher said: "Monetary policy is a bit like duck hunting. If you want to bag a mallard, you don't aim where the bird is at present, you aim ahead of its flight pattern. To me, the flight pattern of the economy is clearly toward increasing employment and inflation that will sooner than expected pierce through the tolerance level of 2%."

Meanwhile, it’s earnings reporting season. Bank of America said profit declined 43% as it spent $4 billion to cover litigation costs, including a mortgage settlement with AIG. There seems to be a trend developing in banks’ earnings reports; they are making money on investment banking and some other areas, but results are weak for mortgage originations, and they are setting aside big chunks of earnings to pay for legal settlements.

Bank of America and the Department of Justice are reportedly negotiating a mortgage securities settlement, which could cost the bank around $13 billion.

Intel was up more than 9% after a very strong earnings report after the close yesterday. Yahoo fell today following weaker than expected earnings. EBay posted lower than expected 2Q results and even though sales were up this month, EBay cut its outlook for the third quarter.

Merger and acquisition activity has been wild lately. Today’s M&A stories revolved around Rupert Murdoch’s plan to buy Time Warner for $85 a share, or about $75 billion. Time Warner says it isn’t interested in exploring a sale, but if they sell, there are other potential suitors. General Electric is in talks to sell its household appliances business; that’s a part of the company that’s been around since 1905, when they invented the electric toaster. Yesterday, the number 2 tobacco company, Reynolds American agreed to buy the number 3 tobacco company, Lorillard for $25 billion.

One of the motivating factors behind mergers lately has been something called inversion, basically merging with an overseas company to avoid corporate taxes in the US. Members of the House and Senate have made proposals to curb the inversion trend in recent months, and the president included a provision in the budget he presented to Congress this year that would have effectively banned the move. But none of these efforts have yet gained traction. Today, Treasury Secretary Jack Lew called on Congress to enact legislation to halt inversion, effective immediately and retroactive to May.  Making any new legislation retroactive through May could disrupt several megadeals that have already been struck, such as the Medtronics deal.

Global M&A volume in the first half was the highest since 2007. One of the side effects of the M&A frenzy back in 2007-2008 was the frenzy of pink slips that followed. Deals are sold to investors on the basis of “creating value” with terms like “efficiencies” and “synergies”; code words for cost cutting and mass-layoffs. Acquisitions, layoffs, and cost-cutting are the simplest things to do for a CEO, as opposed to inventing things and boosting sales organically, which is hard. Analysts love M&A, investors too, and of course the investment bankers promote it as the best thing since sliced bread, or maybe electric toasters.

Last year, Microsoft acquired Nokia’s mobile phone business and promised $600 million in cost saving and efficiencies and synergies. Now, Microsoft employees are bracing for up to 12,000 layoffs, the biggest ever for Microsoft. The layoff news will come before the company holds its post-earnings conference call after the market closes July 22.

Leaders of the five BRICS nations agreed on the structure of a $50 billion development bank by granting China its headquarters and India its first rotating presidency. The leaders also formalized the creation of a $100 billion currency exchange reserve, which member states can tap in case of balance of payment crises. Both initiatives, which require legislative approval, are designed to provide an alternative to financing from the International Monetary Fund and the World Bank, where BRICS countries have been seeking more say.

Friday, June 13th, 2014 - Infallible Source Predicts Economic Collapse!

Infallible Source Predicts Economic Collapse!
by Sinclair Noe

DOW + 41 = 16,775
SPX + 6 = 1936
NAS + 13 = 4310
10 YRYLD + .02 = 2.60%
OIL + .38 = 106.91
GOLD + 2.80 = 1276.90
SILV + .15 = 19.77

For the week, the Dow was down 0.9%, the S&P fell 0.7 percent and the Nasdaq was down 0.25%. The week's decline was the first after three weeks of consecutive gains on the S&P 500. For the year, the broad market index is up about 4.8%. So, it was a rough week, but a good Friday the 13^th.

The Producer Price Index measures prices at the wholesale level; the PPI was down 0.2% in May. The decline was driven lower by cheaper food and gas, and follows two months of strong gains. In the past 12 months, producer prices have risen 2%, matching the Federal Reserve's inflation target. That's down from an annual gain of 2.1% in April. Excluding the volatile food, energy and profit margin categories, (for all you people who don’t eat food or drive in cars) core producer prices were unchanged in May. Inflation, as measured by the consumer price index, has been mostly below 2% for the past two years.

Of course, that might change, at least for people who eat and drive cars. The price of oil has jumped the past few days, now standing at $106.91 a barrel, mainly on fears of a civil war in Iraq. The International Energy Agency played down fears over the possible loss of oil exports from Iraq in its monthly Oil Market Report, writing: "Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk." Oil futures in New York rose 4.1% this week.

A very nasty group of rebels known as ISIS is closing in on Baghdad. ISIS stands for the Islamic State of Iraq and Syria, or the Islamic State of Iraq and Levant, and they are made of Sunnis. The government of Iraq is controlled by Shi’ites. ISIS has taken over the second largest city of Mosul; they have surrounded the largest oil refinery in the country, and they are moving to the capitol of Baghdad. So far, the Iraqi soldiers have been running away, but today a message from the Grand Ayatollah Ali al-Sistani, who is the highest religious authority for Shi'ites in Iraq, said people should unite to fight back.

In an interesting twist, before ISIS started ramping up the fight in Iraq, they were fighting in Syria, against the government of Bashar al Assad.

President Obama told reporters at the White House he would not send US troops back into combat in Iraq but had asked his national security team to prepare "a range of other options" to help Iraqi security forces. He specifically did not rule out the use of military action, which might include the possibility of air attacks to slow the rebel advance.

Pope Francis says the global economic system is near collapse. In an interview with la Vanguardia, the Pope said he was especially concerned about youth unemployment, and he denounced the influence of war and the military on the global economy, saying: “We discard a whole generation to maintain an economic system that no longer endures, a system that to survive has to make war, as the big empires have always done. Since we cannot wage the Third World War, we make regional wars. And what does that mean? That we make and sell arms. And with that the balance sheets of the idolatrous economies -- the big world economies that sacrifice man at the feet of the idol of money -- are obviously cleaned up."

The pope said there was enough food to feed all the world's hungry, and people’s needs should be at the heart of the economic system.

Following the elections in the European Union, France issued a report on debt, which contained several key findings, including the idea that the rise in the state’s debt in the past decades cannot be explained by an increase in public spending. The report also says that no one actually knows who holds the French debt. And the big conclusion of the report is that some 60% of the French public debt is illegitimate. An illegitimate debt is one that grew in the service of private interests, and not the wellbeing of the people. Therefore the French people have a right to demand a moratorium on the payment of the debt, and the cancellation of at least part of it.

Goldman Sachs and Bain Capital have agreed to pay a combined $121 million to settle a lawsuit that accused them and other firms of colluding to drive down the prices of takeovers before the financial crisis, according to a court filing on Wednesday. The deal, if approved by the court, would bring closure for Goldman and Bain of a seven-year-old lawsuit filed by former shareholders of the acquired companies, who claimed that private equity firms teaming up to do deals were partners in an illegal conspiracy to reduce competition.

The settlement deal also raises the stakes for the remaining defendants, which include some of private equity’s biggest firms. The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital, Silver Lake and the Carlyle Group are scheduled to head to trial in November. Now the $121 million dollar settlement is fairly small, but now that Goldman and Bains have broken ranks with the other defendants, the lawyers for the plaintiffs may gain additional bargaining power. The plaintiffs are seeking billions of dollars in damages, but because of the mechanics of antitrust law, the defendants could be liable for a multiple of that amount if they lose at trial.

The Justice Department has asked Citigroup for more than $10 billion to settle a probe into the bank’s sale of mortgage-backed bonds before the 2008 financial crisis. Prosecutors broke off talks with Citigroup earlier this week and are preparing to sue the bank after it offered less than $4 billion ($1 billion cash and the rest in consumer relief) to resolve the matter. The Justice Department could file a lawsuit as early as next week.

The department is taking a similar approach with Bank of America. Prosecutors also halted talks with the bank June 9 after it offered to pay more than $12 billion, short of the department’s $17 billion request. And then there is the outstanding case against BNP Paribas, where prosecutors are believed to be calling for more than $10 billion in fines for money laundering and sanctions violations. And this all follows on the heels of the Credit Suisse $2.6 billion fine and criminal guilty plea in a tax evasion case. No word whether prosecutors are looking at criminal charges against BofA or Citigroup. What we are seeing is that the fines are getting larger, but somehow with billions of dollars of penalties and multiple billions of dollars of wrongdoing, nobody ever goes to jail.

If you wonder why the prisons aren't filled with banksters, just follow the money from Wall Street to Capitol Hill. Earlier this week we saw one of Wall Street's favorite politicians of the decade, Eric Cantor, destroyed by a random teabagger who railed against him endlessly for pushing through Bush's TARP bailout of the big banks. Just this cycle, the financial sector had contributed $1,396,450 to Cantor's campaign coffers. And Cantor was just one of the politicians getting their wallets fluffed by Wall Street, a quick list of Wall Street favorites includes John Boehner, Spencer Bachus, Jeb Hensarling, and Democrats including Charlie Rangel, and Heny Stoyer. We have finally found one thing in Washington that is bipartisan – bribery, or should I say campaign finance…no, it’s bribery.

Elon Musk has announced that Tesla will let other companies use its inventions under an open-source-inspired agenda at the company. Here’s how Musk put it in a blog post:”Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”

Tesla has hundreds of approved patents, and many pending applications, for all manner of inventions tied to electric-vehicle technology. Tesla pioneered innovations that lowered the cost and increased the safety of battery packs. Its cars recharge much faster than others on the market, thanks to connector, software, and power-management advances. Now this public company will offer these smarts up to its rivals and ask nothing but goodwill in return.

And while it sounds like a radical idea, it might be a very smart business move. One thing that is required for electric cars is charging stations, as ubiquitous as gas stations. And even though Tesla has patents on battery technology, and they have some of the best batteries around with longer range and faster recharging, they still need to improve the technology. And Musk apparently isn’t concerned with the competition, saying: “You want to be innovating so fast that you invalidate your prior patents, in terms of what really matters. It’s the velocity of innovation that matters.”

Here’s an amazing statistic, compliments of a Tweet from Bill Gates. From 1901 to 2000, the United States built millions of miles of roads and interstate highways, plus Hoover Dam, plus many other damns, plus an incredible number of building; and during that 100 year period, we used 4.5 gigatons of concrete. In the past 3 ½ years, China has been on a building boom that has consumed 6.6 gigatons of concrete.