Wednesday, July 10, 2013 - Trying to Make Some Sense of It All

Trying to Make Some Sense of It All

by Sinclair Noe

DOW – 8 = 15,291
SPX + 0.3 = 1652
NAS + 16 = 3520

10 YR YLD +.05 = 2.68
OIL + 2.64 = 106.17
GOLD + 12.20 = 1263.90
SILV + .20 = 19.57

Over the past couple of days, we've talked about the slowdown in the global economies; the IMF revised growth forecasts. We've also talked about the new capital reserve requirements for banks. Today, we got the minutes of the last FOMC meeting in June. Today, I'll try and put it all together and explain it so it makes a little sense. I'll try.

Everywhere around the world, economic growth is slowing; this is especially true in emerging markets. For example: growth in China is forecast to be 7.8 percent in 2013, a downward revision of 0.3 percent; growth in India is forecast to be 5.6 percent, down 0.2 percent, growth in Brazil is forecast to be 2.5 percent, down 0.5 percent;  growth in Russia is forecast to be 2.5 percent, down 0.9 percent.

There is still growth in the emerging markets, but the BRIC countries had been looking at really strong growth, now it's slightly sluggish growth, and the rate of change is the attention grabber. In China, there is considerable downside risk because they are facing a financial crisis brought about through a shadow banking system that financed unproductive investment and succeeded only in building credit risk. Now that risk is coming home to roost.

Japan is looking at an expanding economy, perhaps 2% growth for 2013; that represents a big jump, but it is still not what you'd call fast growth. I'll talk about Japan a bit more in just a moment.

In the Euro-zone, we'll probably see contraction of a negative 0.6%. This reflects serious downturns in Spain and Italy and low growth in the other core countries.

In the US, we're probably looking at 2013 growth in the range of 1.6% to 1.9%. You'll recall that we've seen some downward revisions to GDP.

So, generally speaking there is a slowdown in the advanced countries, and that leads to a slowdown in consumption and investments; and demand remains low, in large part because unemployment levels remain high. This is true in the US, even though private sector employment has picked up a little; it's been offset by declines in public sector employment. The unemployment problem in the Euro-zone is particularly bad, especially in the southern, peripheral countries. Exports can't overcome the weak internal demand.

In the US, we've been on the verge of a virtuous circle; that point where we see sustainable, productive growth, but we can't quite reach escape velocity. One reason is that fiscal policy has been a disaster. We have refused to invest in infrastructure; we refuse to invest in education; we refuse to invest in the future. Meanwhile, monetary policy has been a failure; at least it has been a failure in helping to achieve the Fed's mandate of maximum employment; it's been fairly successful in it's real, unstated purpose of propping up the big banks.

The Fed has had three rounds of Quantitative Easing plus Operation Twist since 2008; they've pumped more than $2.3 trillion into the banks. If they had pumped that money into the economy, we might be seeing different results, but they didn't pump the money into the economy. If they had pumped $2.3 trillion into the economy, we would see a very big spike in inflation. It just hasn't happened.

Even as the Money Supply has grown, the money actually ended up on the books of the banks; specifically the excess reserves of the biggest private banks have now increased to about $1.9 trillion. Back in 2008, the excess reserves were at almost zero. And the Basel III rules call for 3% reserves, but yesterday the Fed, the FDIC, and the OCC called for the big banks to hold at least 6% in reserves.

Following the financial meltdown in 2008, the Fed's mission was to prop up the banks. So far they have propped up the banks with $1.9 trillion in excess reserves and they still feel more reserves are needed, just to be on the safe side. The mission of the Fed is not maximum employment; it is to avert another financial meltdown and more bank bailouts. More bailouts are unacceptable because it might just wake up the average citizen and cause them to scream bloody murder, and put an end to the whole mess. The side benefit of building up banks' capital reserves is that the banks actually have money to lend, at least a little.

There are a couple of ways this shows up in the economy. First, there is basically no inflation. If you pump $2.3 trillion into the economy, you should have inflation. The spending of money -- and in particular the rate at which money changes hands -- is what creates inflation. Economists call this the "velocity of money." The velocity of money is at the lowest levels in more than 60 years. Money is not moving through the economy. It is stuck in the banks. It's kind of like burying you money in a coffee can. This is a way for the Fed to continue QE, without having the immediate concerns about inflation.

And so today, Fed Chairman Ben Bernanke said the economy continues to need highly accommodative monetary policy. Answering questions at a conference sponsored by the National Bureau of Economic Research Bernanke said that when looking at the Fed's dual mandate on employment and inflation more work needed to be done. He said the 7.6 percent unemployment rate probably "overstates the health of the labor market" and that inflation remains below the Fed's 2 percent target. Moreover, fiscal policy remains "quite restrictive."

Before Bernanke spoke, the Fed delivered the minutes from the FOMC meeting of June 18-19. The minutes showed that some Fed officials worried not only about the outlook for employment, but the pace of economic growth as well: "Some (officials) added that they would ... need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases."

Of the Fed policymakers who argued it would be wise to curtail bond purchases soon, two thought it should be done "to prevent the potential negative consequences of the program from exceeding its anticipated benefits."

The negative consequences some Fed policymakers worry about are what might happen if the banks start to use some of the capital reserves for something other than reserves. That's when things could get dicey. The easy thing to do is watch the velocity of money; if money starts circulating through the economy, it could quickly lead to nasty inflation, especially if it goes into the economy through the typical routes used by banks. For example, if they start easing up on underwriting requirements for mortgages, we could see the beginnings of an asset bubble in housing. If the banks start trading the money in the markets, we could see a financial asset bubble develop on Wall Street, or perhaps in the commodity markets, or the energy markets.

So, there is a bit of a trick to see the velocity of money increase, which would be beneficial to the economy, in that it could increase demand, and help guide us to the virtuous circle of a sustainable and productive economic growth – yet still avoid asset bubbles and inflation.

And that brings us back around to one of the few countries in the world that is seeing an increase in the rate of growth – Japan. The Japanese approach is called Abenomics, and it involves three arrows. The first arrow is fiscal stimulus, the second arrow is aggressive monetary easing, and the third is structural reforms. So far, we have seen the aggressive monetary policy – nearly twice as aggressive as the Fed's QE, at least on a percentage basis. Why have the Japanese been so extremely aggressive? Well, they are faced with a nuclear problem of truly epic proportions. The Fukushima nuclear reactor meltdown has threatened everything in Japan, including the economy. The Japanese were forced to take drastic action to rouse the economy out of a two decade slumber, or risk watching the economy slip into a long, dark nuclear winter.

Now, the Japanese still have to complement the monetary policy with a credible fiscal plan, and substantial structural reforms, otherwise they risk investors becoming nervous about debt sustainability and demanding higher interest rates.

We don't face the imminent threats of an economy badly damaged by radiation, however we face similar economic problems as the Japanese. The Fed runs the risk of nervous investors pushing up interest rates and making the Fed's balance sheet – which is rapidly approaching $4 trillion total – making the debt on the Fed's balance sheet unsustainable. And we just can't seem to get the other two arrows out of the quiver.

There is no credible fiscal policy coming out of Washington, and the only structural reforms are being determined by the banks; they are literally writing the legislation. If we don't make essential investments in the US economy now, then things will just get tougher down the road. Looming in the distance is a potential dollar meltdown. The dollar is the strongest currency in the global market; in large part because it is the reserve currency, but also because other currencies have been debased. Since January 2002, for example, when the U.S. Dollar Index stood at 120.22, the dollar has fallen by 31%. And that's after its recent two-year rise.

These are tricky times.

Tuesday, July 09, 2013 - What's It All About?

What's It All About?

by Sinclair Noe

DOW + 75 = 15,300
SPX + 11 = 1652
NAS + 19 = 3504

10 YR YLD -.01 = 2.63%
OIL + 1.38 = 104.52
GOLD + 13.40 = 1251.70
SILV + .18 = 19.36

It's earnings reporting season. The stock market is feeling happy for the moment. Second quarter earnings are expected to be soft, but expectations have been ratcheted down, so there is potential for upside surprises. That's the game that's played on Wall Street to siphon a little bit of trading profit. Anywhere else, they'd call it price fixing.

But this game of diminished expectations may have some basis in reality. The top line numbers more than likely suck. Analysts expect the 30 companies in the Dow Industrial Average to see revenue growth of just 0.7%; that number could be ratcheted down into negative territory; that follows a 0.6% drop in revenue in the first quarter.

What do you call it when there are two consecutive quarters of economic contraction? Recession. That's a bit of a non sequitur, but the logical conclusion is not too far removed from the premise. After all, we're talking about 30 of the biggest, most powerful companies in the world and they are struggling to grow sales. They're still reporting profits, but that comes from cost cutting, which tends to fall on the labor force. There are limits to cost cutting as a business strategy for growing profits.

No worries. The S&P 500 closed above 1650 and looks poised to make a run at those record highs of May; remember the days of milk and cookies, before Bernanke started talking about taper. Well tomorrow the minutes of last month's FOMC meeting will be released, and we'll see if they're still talking taper, and we'll see if the markets can remain exuberant if the Fed is still talking taper.

Of course the Fed looks at more than just the headline unemployment rate, even if they have set a target of 6.5% based upon that rate. They also look at broader views of the labor markets. After all, the Fed will make its decision based on the outlook for labor markets, not what happened a month ago. One such report, know as “Jolts” looks at job openings and labor turnover. In May, businesses posted more job openings and gross hiring also picked up. But the rates remain well below those seen before the most recent recession.

May also saw a small increase in job separations. A sizeable part of the gain in separations came from people quitting their jobs. That’s a positive for the labor market outlook since workers tend to give notice only when they are confident they will quickly land another job.

Before you think that is overly optimistic, the Conference Board employment trend index, a compilation of job indicators designed to foreshadow changes in nonfarm payrolls, edged up a mere 0.05% in June. Its growth rate for the second quarter moderated. The report said that suggests “acceleration in the employment growth is unlikely in the near future.”

Part of the problem is that for every job opening, there are 3 people looking for a job, and since people aren't really leaving their current jobs, because of the tight labor market, that means people aren't moving up; they aren't leaving a job for a better job. The ratio of unemployed workers to job openings is the highest in the 13 years the BLS has been collecting the data. Not coincidentally, most of the industries with the highest numbers of job openings in May, according to the JOLTS data, were lower-paying sectors, including health-care services, retail sales and restaurants.

Another consideration in the jobs market is that one of the most consequential effects of the sequester began just this week: weekly unpaid furlough days for more than 650,000 civilian workers at the Defense Department, who will effectively see their pay cut by 20 percent for the  final 11 weeks of this budget year. A little back-of-napkin math shows 20% of 650,000 jobs is kind of like losing 130,000 jobs.

All the commissaries at domestic military installations will be closed every Monday through the end of September. (Most agencies within the department have decided to salve the economic sting a tiny bit by setting the furloughs on Mondays and Fridays, so that workers might at least enjoy a series of long weekends.)

But the visuals of closed cafeterias, equipment maintenance sheds, supply warehouses, payroll offices and the like will have absolutely no effect on the pace of congressional effort toward untangling the budget morass. Whatever work is taking place on that score is totally out of view. And none of the congressional leadership is suggesting this will change before Congress returns from its August recess a full week after Labor Day, when there will be 23 days left before this fiscal year gives way to the next.

Some agreement on spending will need to get done by then to forestall a partial government shutdown, which is in neither party’s political interest to permit. Odds are that the first month or so, at a minimum, will be covered by a temporary patch in the form of a continuing resolution that keeps agencies spending at their across-the-board budget cut levels.

But any longer-term agreement already seems destined to be delayed until the end of the year, by which time the debt ceiling will also be nearing. And if they can't find agreement, then the budget would require layoffs – probably a mix of civilian, active-duty military, National Guard and Reserves.

As expected, the IMF cut its forecast for world economic growth for the third time this year. The IMF now expects global output to expand by 3.1%, down from 3.3% forecast in April, and down from 3.5% forecast growth back in January. The revision means the global economy will have failed to pick up pace over the past two years, although the IMF expects a slight acceleration in growth in 2014 to 3.8%, subject to revisions, of course.

The IMF said: "While old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies." They pointed to the slowdown in China which is also affecting emerging markets such as Brazil and South Africa; also, the ongoing slowdown in the Euro-zone. One country that is expected to show growth – Japan, which should see growth of 2%, up from earlier forecasts of 1.6%, due to the success of Abenomics.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency are proposing raising the leverage ratios on the largest US banks to 5% from the 3% agreed upon by international regulators as part of Basel III. The insured bank subsidiaries of those firms would be subject to a 6% leverage ratio to be considered well-capitalized. That basically means the banks would have to hold a little more in the way of reserves.

While the proposed changes would not take effect until 2018 if finalized, the rules as proposed represent the latest attempt by regulators to address lingering concerns that certain large, complex banks remain too big to fail. Of course, that still leaves a 5 year window, and considering the extreme leverage, it is doubtful that a 5% cushion could save us from a bank crash, but it's a start I suppose.

FDIC staff said market perceptions that certain banks would be protected by the government poses a threat to the financial system, allowing these firms to obtain cheaper funding and eliminating checks on excessive risk taking by the banks. The banks don't want to be forced to hold more reserves, even if it would mean they are a bit safer. And the reality is that it would not make them much safer. If we really have concerns about too big to fail, we could start by regulating derivatives trading and reinstating Glass-Steagall.

Yesterday, Fortune released its list of the world's 500 largest corporations, ranking them by revenue for the fiscal year ended on or before March 31. In total, the 500 largest global corporations reported $30.3 trillion in 2012 revenue, nearly a 3 percent increase from the year before, with profits of $1.5 trillion. There are 132 US companies on the Global 500 list; China had the second most with 89 companies. Seven of the top ten companies by revenue were in the energy business. Royal Dutch Shell topped the revenue list with $481 billion, followed by Walmart with $469 billion and Exxon Mobil with revenue of $449 billion. Exxon Mobil was the most profitable at $44.9 billion, followed by Apple at $41.7 billion.

Oil closed at $104.52. Fill up the gas tank now.

Thousands of people gathered in Prescott Arizona today to honor the 19 members of the Granite Mountain Hotshot squad who died fighting the Yarnell fire. Vice president Biden lead a list of dignitaries on hand. Biden referred to an old saying: “All men are created equal - then a few became firefighters.”

Over the years I've raised a question from time to time on this program: “What's the economy for?” Why do we get up each day and do the work we do? What is the purpose of our labors? Well, for the Yarnell 19 their mission was to save lives and protect property, and their jobs weren't jobs, but a duty to their fellow citizens. Sometimes I wonder about the purpose of our labors, but I'm quite certain the Yarnell 19 had figured out the right answer. 

Friday, January 11, 2013 - Meet the New Boss

Meet the New Boss

by Sinclair Noe

DOW + 17 = 13,488
SPX -.07 = 1472
NAS + 3 = 3125
10 YR YLD - .02 = 1.88%
OIL -.06 = 93.76
GOLD – 12.10 = 1663.70
SILV - .42 = 30.54

Within a few days, Tim Geithner will be gone from the Treasury. Geithner was at the center of the financial crisis, first in his role as President of the Federal Reserve Bank of New York and in 2009 as Treasury Secretary. In a recent exit interview he said: “It was a very bad crisis. No playbook. No road map. No clear precedent. If we had a different set of constraints, particularly in fiscal policy, then I think that the economic outcome could have been modestly better.”

To be fair, Geithner was handed a mess, and to his credit he did not turn it into a catastrophe, and there were constraints. Still, Geithner's tenure at Treasury has been a little less than satisfying. The Too Big to Fail banks are bigger than ever; they operate with an explicit public guarantee, and despite Geithner's dissatisfaction with constraints placed on him, he did little to challenge the banksters. Geithner quashed proposals to seize bonuses, impose new taxes or otherwise punish bankers. He claimed that it would have destabilized the banks; instead he created a moral hazard and a two-tiered system of justice; Too Big to Fail became Too Big to Jail and the result is the banksters now operate with impunity. At the same time Geithner was making sure the big banks weren't destabilized, it was far too easy to overlook the lack of stability on Main Street, as families lost their homes. Programs to modify the loans of American facing foreclosures were impotent at best. Geithner sought to incentivize banks to provide mortgage relief; what was needed was a swift kick.

Geithner will be replaced by Jack Lew. Both Geithner and Lew should be applauded for their decades of commitment to public service; they are both intelligent men, but it's disheartening that the President has once again tapped Wall Street for a key economic advisor. Back in 2006, Lew was the chief operating officer of Citigroup's Alternative Investment Unit, a proprietary trading group that oversaw a hedge fund that bet on the housing market to collapse. It's hard to imagine Lew is prepared to stand up to the banksters and fight for policies that protect working families. We need a treasury secretary who will work hard to break up too-big-to-fail financial institutions so that Wall Street cannot cause another massive financial crisis.

And so, this week we have federal regulators proudly announcing an $8.5 billion dollar settlement with 10 big banks in a deal that papers over a sham review of foreclosed loans. The original idea was to provide a review process; independent analysts would go over each mortgage loan and make sure the efforts at loan modification hadn't been bungled; make sure the paperwork wasn't deficient; make sure the fees weren't excessive; make sure the wrong family wasn't being kicked to the street; and make sure the banks weren't robo-signing reams of foreclosure documents without checking for accuracy. But the analysts and consultants didn't really work for the people; they worked for the banks. The reviews that were supposed to detect foreclosure shams were nothing more than a sham.

The comptroller’s office said that it had identified 654,000 potentially problematic foreclosures, a combination of 495,000 claims submitted by borrowers and 159,000 files that the consultants flagged for review. The regulator said it was still determining the number of reviews completed, but the consultants said that only a third of the loans were fully reviewed. Now that the review program is being shut down, we'll never really know the full extent of wrongdoing.

And because the regulators don't know how many borrowers were actually harmed, this week's settlement will be spread out among 3.8 million borrowers; some who don't deserve anything, and not enough for those who were truly aggrieved. And for the 10 banks involved, no clawbacks of fees and profits, and no admission or denial of guilt.

And just last month, HSBC was fined $1.9 billion for money laundering. There were no criminal charges against any individuals, even though the bank admits to laundering billions for Mexican drug cartels, violating the Bank Secrecy Act and also the Trading with the Enemy Act. There were no criminal prosecutions against the bank either. The money laundering was brazen. The bank gave special boxes to the drug cartels, so they could fit their cash deposits through the bank tellers' windows. Other bank employees directed terrorist groups on how to circumvent sanctions. Apparently the rationale of the government for not pursuing criminal cases against individuals at the bank was that to do so when the individuals were employees of such an important bank, might threaten the stability of the financial system.

Money laundering is taking the proceeds of crime, “illegitimate” money, and bringing it into the legitimate financial system so that the criminals can use that money without being tied to those terrible crimes – crimes like manufacturing and distributing drugs, selling people into the sex trade, trafficking in illegal weapons, and terrorist attacks against our troops, our embassies, and our country. This is not mere money we are talking about; it is the daily gang violence on the streets of our cities and towns, it is the increased likelihood that your children will be offered drugs in their schools, it is the abduction of children and selling them into the sex trade; it's the killing and maiming of troops in Afghanistan; the violence and political unrest around the world – all made possible by the banks. And not just HSBC.

HSBC Bank USA was already under a written agreement from 2003-2006 with US regulators to correct deficiencies in its anti-money laundering regime.  In a strikingly similar case, Wachovia was found to have allowed as much as $420 billion through its banks without money laundering controls.  $110 million of that was linked directly to Mexican drug cartels, just like the HSBC case.  Wachovia was fined $160 million, $110 million of which was just coughing up the ill-gotten gains and not an actual penalty.  Not one person was prosecuted.  Recently, Standard Chartered Bank was fined $667 million, and ING Bank was fined $619 million, for engaging in the same criminal activity HSBC was engaged in when it doctored wire transfer information in order to clear transactions from countries barred from accessing the U.S. financial system, like Iran. Again, not a single person is being prosecuted in those cases. If it sounds like a lot of money in fines, just consider that this morning, Wells-Fargo posted fourth quarter earnings of more than $5 billion – far more than the fines imposed on the banks I just mentioned.

And we find this acceptable because the regulators and politicians are afraid to force the banks to conduct business honestly and sensibly. Better to allow the banks to lubricate the transactions of drug cartels and terrorists than face a possible bank closure that might challenge the global banking system.

More than 4 years after the financial crisis nearly imploded the global financial system, a committee of central bankers and regulators from more than two dozen countries, including the United States, has disappointingly given in to lobbying by big banks; watering down rules meant to strengthen the global financial system. After the meltdown, it just made sense that the banks should set aside enough reserves to cover possible and potential losses. The committee unanimously rolled back the so-called Basel III rules that were adopted in 2010 to make them “more realistic”.

The banks argued that requiring them to hold most of their liquid reserves as cash and government securities would restrict their ability to lend to small businesses and consumers because they would have less money to lend. Instead of holding cash reserves or Treasury bonds in reserve, the banks want to be able to hold stocks, or mortgage-backed securities.

Large banks are second to none among institutions in arguing against regulations, no matter how reasonable and valuable in protecting both the public and the banks themselves against unwise behavior. The problem is that the new assets defined as liquid are precisely those that banks found difficult to value and trade in 2008. Relying on mortgage-backed securities to provide liquidity during a crisis is a recipe for disaster, and just stunningly stupid.

The reality is that the banks know that in a crisis they would receive emergency loans and capital from central banks and their governments, so why tie up their reserves with assets that provide only modest returns? And because the banks know they are Too Big to be allowed to fail, they dictate policy in ways that put the world at greater risk of another crisis.

Eighty years ago this month, Ferdinand Pecora, the former assistant district attorney for New York City, was appointed chief counsel for the US Senate Committee on Banking and Currency. In subsequent months, the hearings of the Pecora Commission featured many sensational revelations about the practices that led to the 1930’s financial crisis.

The Commission’s investigation led to far-reaching reform – most famously, the Glass-Steagall Act, which separated commercial and investment banking. But Glass-Steagall didn’t stop there. It created federal insurance for bank deposits. With unit banking (in which all operations are carried out in self-standing offices) viewed as unstable, banks were now permitted to branch more widely. Glass-Steagall also strengthened regulators’ ability to clamp down on lending for real-estate and stock-market speculation. Glass-Steagall separated the banks' deposit-taking and securities underwriting activities. If a bank wanted to gamble, they could, but they couldn't gamble with depositors' money; and if the bankers lost their bet, they lost their own money; they had skin in the game.

The hearings also led to passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. Securities issuers and traders were required to release more information, and were subjected to higher transparency standards. The notion that capital markets could self-regulate was decisively rejected. The contrast with today is striking.

We have a watered down Dodd-Frank Act, largely written by the bankers. We have watered down Basel III rules. And we have banks acting illegally, conspiring with drug cartels and terrorists; and doing so with impunity. And there are stacks upon stacks of illegally laundered dollars bearing the signature of Timothy Geithner, and soon they will bear the loopty-loop signature of Jack Lew.

Monday, January 7, 2013 - I Went on Vacation and Not Much Changed

I Went on Vacation and Not Much Changed

by Sinclair Noe

DOW – 50 = 13,384
SPX – 4 = 1461
NAS – 2 = 3098
10 YR YLD -.01 = 1.90%
OIL + .21 = 93.30
GOLD – 9.90 = 1647.90
SILV - .02 = 30.26

Forty years ago, Yale Hirsch at the Stock Traders Almanac, created the January Barometer. The idea was simple: as the S&P 500 goes in January, so goes the year. This market prediction tool has been correct 89% of the time since 1950, suffering only seven major setbacks. Since 1950, stocks have finished lower for the year only three times after posting gains in January. When the Dow is positive in January, then the rest of the year is positive 83% of the time, averaging additional gains of 9.59%. Compare that to the Dow’s performance when January is negative. In those years, the February-December returns are positive just half of the time, with an average gain of 2.04%.

As with the full-year results, a positive January typically leads to a positive February. When the Dow closes higher in January, February goes on to average a return of 0.57%, and is positive 63% of the time. When January is negative, February is negative more than half the time, and averages a loss of more than 1%. However, an outsized return in January has not necessarily translated into a bigger return for February. If January is up more than 3.5%, the average February gain is not as big as if January is simply positive.

Price movement in January is also a pretty good predictor of price movement in February for individual stocks; not a perfect predictor but usually moving in the same direction about 80% of the time.

Many investors look to the first five days of January as a gauge of where the markets are going for the rest of the year. During the last 40 years when those five first days were gainers, the markets were up for the entire year 85 percent of the time. For example, last year the S&P 500 Index gained 1.2 percent in the first five days of January. As a result, the S&P 500 Index was over 13 percent. That was close to the historical average. Over the last 39 years, the markets gained an average of 13.6% when the first five days of January were gainers.

Conversely, when the first five days are negative the markets were down for the year, but only 47.8% of the time. The indicator therefore, does not work as well on down periods. You should be aware that, in general, during post-election years the markets have not done well. Only 6 out of the last 15 post-election years saw gains in the first five days of the year. It looks like 2013 will be an exception. Maybe, maybe not. That's why they play the game.

The fiscal cliff is behind us, sort of; there are still the actual implications of the implementation of the changes. Then, we have the debt ceiling, which will be the next catastrophic, OMG, here comes another massive economic sky-is-falling event, they'll shut down the government if they don't get cookies for lunch, political tantrum. Before we move to the next news cycle, let's review briefly the fiscal cliff calamity that was narrowly averted, specifically $205 billion in corporate tax breaks, subsidies and tax loopholes. One of the most egregious giveaways included in the New Year's Eve fiscal cliff deal is an extension of a loophole that allows corporations to book US profits in overseas, tax-free accounts. US companies have about $2 trillion in these offshore accounts.

Another corporate tax benefit included in the fiscal cliff deal is a provision known as bonus depreciation, which allows companies that invest in costly equipment to account for depreciation expenses much faster than they otherwise could. In other words, companies can deduct more in expenses now, lowering their taxable income.

Congress has extended the provision each year since 2008 in an effort to spur business investment during the economic downturn. Bonus depreciation is expected to cost $35 billion this year, according to the Joint Committee on Taxation, and those costs are predicted to rise significantly if Congress keeps extending the benefit. The Congressional Research Service issued a report saying that accelerated depreciation is a “relatively ineffective tool for stimulating the economy.”

I guess that avoiding the fiscal cliff is a good thing; it shows the politicians can do something; even if it's the same old, same old.

New Year, things change, but not much. Let's see what the banksters have been up to. Once again the banks are body slamming the banking regulators. The banks have beaten down the tough parts of Basel III bank-capital standards. The global liquidity standards were designed to ensure banks had sufficient capital on hand to survive another Lehman-like crisis, as well as require that capital be high-quality and liquid. There was a lot of fanfare from regulators when the regulations were first announced in 2010, and then the banks started to chip away at the regulations which might require a little cushion against a downturn. The regulators succumbed to pressure. We're all shocked, shocked I tell you. The new capital rules have been expanded to change the definition of what constitutes safe bank capital to include stocks and AAA rated mortgage backed securities.

Now, you're probably asking yourself, “Self, weren't stocks and mortgage backed securities really dangerous and excessively risky investments that were a big part of the financial crises of the recent past?” And of course the answer is – yes. “Self, didn't those risky gambles lead to a freeze on the credit markets and the near collapse of the global financial system?” And again, the answer is – yes. And then you ask: “Self, does this mean we'll see Hank Paulson getting down on his knees to beg Nancy Pelosi to save him from his errors?” And the answer is no; that's not going to happen again, but clearly we haven't learned our history lessons.

In a world of Too Big to Fail banks that have only gotten bigger, the regulators decided that if the banks were to face a crisis, like the recent crisis, the banks would only have to prepare for a world in which they lose 3 percent of their retail deposits, down from 5 percent originally proposed. Complete amnesia when it comes to Northern Rock or IndyMac. And then the banks have four years to gradually phase in the new, scaled down 3-percent requirements, down from the 2-year requirement originally proposed. The banks argued that if they were forced to provide a 5-percent cushion and do so within two years, it would be too much of a burden and they wouldn't be able to do any lending, which might actually help the global economy.

Meanwhile, federal bank regulators announced an $8.5 billion settlement with 10 large mortgage companies in a deal that will end a near worthless foreclosure review program in favor of a new program that authorities say will distribute aid to homeowners "significantly more quickly."

Under the deal, announced by the Office of the Comptroller of the Currency and the Federal Reserve, the mortgage companies will make $3.3 billion in direct payments to "eligible borrowers" whose foreclosures were handled improperly, and will make $5.2 billion available in other assistance to struggling borrowers, such as loan modifications.

This new deal is separate from the $25 billion mortgage settlement to which five large banks agreed earlier this year, though many of the allegations of misconduct are the same. Homeowners have complained for more than five years that the mortgage companies made widespread errors in the management of their home loans, and that in some cases those errors pushed them into foreclosure.

This new settlement replaces a deal struck in April 2011 that established the Independent Foreclosure Review; that program was supposed to give homeowners an unbiased third-party review before the banks could foreclose, and might even determine if homeowners qualified for a cash payout because of mortgage related bank abuses. So, that program never really happened, and today's announcement is basically saying the Independent Foreclosure Review was a complete failure.

What went wrong? Part of the problem is that the third-party independent reviewers actually worked at the banks' beck and call. So, ten different banks will pay out $8.5 billion to end the foreclosure reviews.

But wait, there's more!

Bank of America announced today that it will spend $10 billion to settle mortgage claims resulting from the housing meltdown. BofA will pay $3.6 billion to Fannie Mae and buy back $6.75 billion in loans that the bank and its Countrywide banking unit sold to the government agency from Jan. 1, 2000 through Dec. 31, 2008. That includes about 30,000 loans.

Bank of America said that the loans involved in the settlement have an aggregate original principal balance of about $1.4 trillion. The outstanding principal balance is about $300 billion. Fannie Mae and Freddie Mac, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses. So, all in all, BofA gets off really cheap.

Fannie Mae issued a statement saying they had “diligently pursued repurchases on loans that did not meet our standards at the time of origination, and we are pleased to have reached an appropriate agreement to collect on these repurchase requests."

And so, there is $8.5 billion for ten banks, and $10 billion in fines for BofA, and you might think that's real money, and it almost is, but keep it in perspective. The six biggest US banks are expected to pay employee bonuses of $38 billion for the past year.

Bank stocks led all other major stock sectors in 2012. The KBW Bank Index rose more than 30% compared to just over 13% for the S&P 500, and Bank of America shares surged 109%--more than doubling in price. And according to a new report from ProPublica, many banks are still trading below book value, despite the gains in share prices, and much of the gain is due to hedge fund speculation.

And so, you're probably asking yourself: “Self, wasn't hedge fund speculation a big part of the near meltdown of the global financial system? Isn't this just part of the multi-trillion dollar derivatives casino? Isn't this the same sort of risky stuff that the London Whale was betting on and which led to $2 billion in trading losses, or $5 billion, or $6 billion in gambling losses?” And the answer is – yes.

A funny thing is happening in the copper markets. The SEC has paved the way for investors to take a direct stake in commodities, rather than through commodities futures. The agency gave the green light to JP Morgan to launch a fund whose shares would be backed by warehoused copper. In practical terms, the SEC handed traders at JP Morgan control over 20 to 30 percent of the copper available for immediate delivery from the London Metals Exchange — the commercial market where companies that use copper go to procure last-minute supplies.

The investors purchasing shares in J.P. Morgan’s fund won’t be buying copper to use, but to store. The intricacies of the fund are complex, but its underlying rationale is straightforward: the more shares investors buy, the more copper is taken off the market. And the more copper that is taken off the market, theoretically the more valuable the copper and the shares become.

Moreover, it’s a no-brainer that this JP Morgan “innovation” will lead to the creation of copycat fund in other markets, most troublingly those for agricultural products.

The SEC asserts that its own study showed that changes in inventory levels at the LME did not have a price impact. If you've ever heard a little theory known as supply and demand, you might reach a different conclusion than the SEC.

The question regarding the LME would be to define what a normal level of inventory would be (a certain level is necessary to handle routine transactions); amounts in excess of this buffer level would be seen by economists as proof that prices were above the true market clearing price unless you had a good explanation as to why not.

Companies that use copper strongly oppose the new fund, and argue that allowing investors to hoard the metal will lead to supply shortages, create substantial price volatility, and distort the market. A group of copper users wrote to the SEC in August, saying: “The implications of this practice would be grave for our companies, our industry, and, indeed, for the U.S. Economy.”

The SEC is undermining provisions in Dodd Frank calling for the CFTC to rein in undue speculation in critical commodities. You might remember that commodities prices moved up in a coordinated manner in 2008. Remember when oil prices jumped up near $150 a barrel? It looked like a speculative bubble, and was, since prices collapsed in the second half of the year. Well, there was similar behavior in other commodities.

Here, you’re allowing investors to intervene with physical supplies. BlackRock has petitioned the agency to launch its own copper fund, one that would be twice as large as JPM’s and will get an answer by February 22. Given that its proposal is identical to JPM’s, it is well nigh certain to be waved through. If the nay sayers are correct, that hoarding by investors will drive prices up, we should see the impact, although the mere announcement of the JPM approval, particularly in light of the pending BlackRock application, may have led speculators to bid up prices in anticipation of the funds’ launch. That too should be measurable, but if the next few months proves the SEC analysis to be wrong, you can bet the agency won’t admit its error and halt the creation of more funds.

Same old, same old.