Thursday, June 12, 2014 - The Beautiful Game

The Beautiful Game 

by Sinclair Noe

DOW – 109 = 16,734
SPX – 13 = 1930
NAS – 34 = 4297
10 YR YLD - .05 = 2.59%
OIL + 2.51 = 106.91
GOLD + 12.70 = 1274.30
SILV + .34 = 19.63

This is a big day for sports fans. In the US, many fans are thinking about the NBA playoffs or the start of the US Open golf championship, but those games are small potatoes compared to the World Cup. Over the next month, the World Cup will attract about 4 billion television viewers, maybe more when we consider all the digital devices that can replay the games; that’s more than the 3.6 billion viewers who watched the Beijing Olympic games; more than the 3.2 billion that watched the 2010 World Cup. By comparison, the Seahawks-Broncos Super Bowl managed a record 111 million viewers. The cumulative viewership for all the matches over the next month might top 35 billion. It’s a corporate marketing bonanza.

Over the next month, there will be countries across the globe that will quite literally shut down for 90 minutes intervals. Courts will delay hearing cases, hospitals will not schedule surgeries, offices and retail outlets and factories will shut down, the crime rate will drop, the streets will empty with almost zero traffic, planes stop flying, and trains stop running. I’ve seen it happen; and because I am blessed to be married to a lovely Brazilian woman, I have been caught up in the madness.

If you are still unclear, and most Americans are unclear on this subject, I’m talking about the beautiful game, futebol, or what we call soccer and the rest of the world calls futebol. The World Cup is the global championship in soccer and this year it is being played in Brazil, which is the greatest soccer team in the history of the World Cup. The first game was just a little earlier today, Brazil beat Croatia 3-1.

The whole thing was once strange to me as well, but I have a friend, Charles Oelfke, the Honorary Brazilian Consulate in Arizona; he is also an American married to a Brazilian, and when I talked with him about this World Cup thing, he pulled out an article he wrote back in 1994; that was the year the US hosted the World Cup; that was also the year Brazil won its fourth championship.

Here’s what I learned from Charles’ Gringo’s-eye view of the World Cup Extravaganza. Because of my marital affiliation, I will be required to watch all games involving my adopted country every four years. It’s a cultural thing. I will be required to record every game. I will be required to call Brazil immediately after each game to discuss why, for example, a 0-0 tie was such an exciting, logical, tactical display, clearly proving Brazil’s world dominance in the sport. I will be required to replay each game at least 3 times that same night, then twice weekly for the next four years. And apparently it also involves turning the TV room into a green and yellow shrine to Brazilian futebol.

I still don’t really understand the game and the rules, but Charlie explained that there is a certain methodology of the 22 men in plastic shorts and long hair who run around like decapitated chickens for 90 minutes making life miserable for the goleiros (the goalkeepers) who wear oversized sticky gloves while flying horizontally through the air. The goleiros can’t win games, but they’re so often blamed for losing them that volunteers for this position on the team are scarce and they are often hired from other countries.

Next question: just how large is a soccer field? I’ve learned from experts (of which Brazil now has more than 200 million) that it’s… oh…maybe… uh 70 or 80 meters wide by about maybe…, 100 meters… uh.. maybe 110 meters long; something like that. The regulation probably reads “the dimensions of which depend upon space available.” You have to respect the degree of precision in the world’s most popular sport.

My own travels in Brazil reveal that futebol, at least on the amateur level, can be played on almost any stretch of open field, or a street without too much traffic, or the beach, or even on a volleyball court. The only requirement is a ball, or something that looks like a ball.

I asked about the 1994 World Cup, which was in the US but for some reason I have almost no personal recollection of it. It was supposed to be the games that introduced soccer to the US, and the US to World soccer; but mainly it proved that we weren’t quite ready, with the possible exception of our ability to grow and mow grass.

And then I asked about the actual final, the championship game from ’94. Charlie explained that back then he and his wife Josefa had been inviting friends to watch the TV broadcasts at their home, and this usually involved a lot of yelling and screaming and copious overeating (and I’m guessing quite a few cervezas and caipairinhas), but the numbers grew too fast, and they ran out of chairs for everybody, and they had to set up in a restaurant (a steak house, of course) for the final game. About 300 Brazilians showed up, and about 3 very foolhardy Italians; and there was a lot of cheering and dancing and singing. It’s a cultural thing, he explained.

And about that final game in 1994, he said: “It was Brazil’s destiny. Everyone agrees, Brazil was the best team and I believe that, but…” the final of 52 games, of an every four year event, the showcase, the championship of the world’s most popular sport, between two tri-champion teams, the most important athletic competition in the universe with billions of spectators around the world ended in a 0-0 tie. And after 30 minutes of overtime, still a 0-0 tie.

So then it was decided by penalties, a shoot-out, a lottery. Why not just give the goleiros a last cigarette, put a blindfold on them? And … 4 years of preparation and 52 games and it all came down to individual luck. The experts called it a great game, a real cliff hanger, and justified the Brazil win because Brazil had 22 shots on goal compared to Italy’s 8.  That’s like saying Michael Jordan had a great game because he shot 22 air balls. Still, it will go down in history as Brazil Campeao 3-2 over Italy. It was also the first championship to be decided by penalty kicks. Something that still upsets Charlie 20 years later.

Brazil is the undisputed greatest national team in the history of futebol. They have 5 championships; their closest rivals have 3. And this year, Brazil, the most futebol crazy country in the world, is the host country for the World Cup; and most of the experts are picking Brazil as the favorite to win a sixth championship. This would seem to be a perfect, futebol dream come true. Not so fast.

Many Brazilians are angry about how much was spent preparing for the Cup and how the country still struggled to be ready. Anger about broken promises and the ballooning cost of soccer venues contributed to widespread protests that drew over a million Brazilians into the streets last year. Detractors say the World Cup has done more harm than good by taking funds away from social programs and investment projects. The Brazilian government has spent an estimated $11 billion on the World Cup, while protesters say the money should have gone to low income housing, hospitals, better roads, and better schools.

And as the games start today, Brazil is ill-prepared, with many projects over budget and behind schedule. The government spent nearly $300 million for a stadium in Manaus, a city that doesn’t have a major league soccer team, and is deep in the jungle along the Amazon River. It’s expected that after the World Cup, the stadium will sit empty for the most part. Building materials were shipped in by boat because you can’t drive to Manaus.

And to add insult to injury, the ticket prices for most games will price average Brazilians out of the stadiums, and the profits from the games don’t go to Brazil, they go to FIFA. And part of FIFA’s deal is complete tax exemption on all profits. Toss in some charges of bribery and FIFA is being compared to the mafia.

Part of the preparations for the World Cup involved what is known as pacification plans for the favelas, the massive shantytowns that are home to tens of millions of the urban poor. The police move in and after they enforce order, they are supposed to upgrade hospitals and schools. So far, it has been a police invasion without the benefits.

Last year, Brazil hosted the Confederation Cup, a trial run for the World Cup; that led to riots, and protests that drew hundreds of thousands to the streets. The protests continued today, with subway workers on strike in Sao Paolo, and protest camps set up just out of sight from the stadiums.  Two days ago, Joseph Blatter, the President of FIFA, the international football association that arranges the World Cup, kicked things off in Sao Paulo. Brazilian celebrities including President Dilma Rousseff as well as the governor of the state of Sao Paulo and the mayor of the megacity stayed away from the event. They didn’t want a repeat of last year, when Blatter and Rousseff were booed off the stage. Blatter’s solo performance in Sao Paulo speaks volumes about the mood in the country. The World Cup may be a fiasco, but if Brazil loses the World Cup Championship it could be a disaster for the government.

Brazil is the 5^th largest country in the world; it has the 6^th largest economy; Sao Paulo and Rio de Janeiro are major cosmopolitan cities with massive favelas; it is the 17^th worst country when it comes to inequality. When millions live in poverty, and corruption is rampant, and basic public services are denied, a sports extravaganza seems inappropriate, even if it is futebol on Brazilian soil. And so they play. Maybe this is Brazil’s destiny. 

Thursday, May 15, 2014 - A Calm Port in a Stormy World

A Calm Port in a Stormy World

by Sinclair Noe

DOW – 167 = 16,446
SPX – 17 = 1870
NAS – 31 = 4069
10 YR YLD - .04 = 2.50%
OIL - .81 = 101.56
GOLD – 8.90 = 1297.80
SILV - .29 = 19.56

Today, it seems there is a lot going on. Let’s start with international hotspots.

Turks are angry following a deadly mine explosion that has killed at least 300 miners and trapped possibly 100 more; thousands of workers joined a protest strike, demonstrators clashed with security forces, and the discontent threatens the government. An aide to the prime minister was photographed assaulting a protester and there are claims that Prime Minister Erdogan himself struck a teenage girl; that after he was forced to flee an angry crowd and seek safety in a nearby grocery store. Turkish trade unions held a one-day strike over safety standards in the mining industry. Security forces deployed tear gas and water canons against protesters.

Meanwhile, reports of dozens of deaths from an explosion along the border between Syria and Turkey. Also, further allegations of ongoing chemical attacks by the Syrian government. Speaking in London today, Secretary of State John Kerry announced the US, Britain, and European and Arab states are increasing efforts to support rebels fighting to overthrow President Assad. Assad still has the backing of Russia, and that makes already tense relations with Russia even more edgy.

Fears of a civil war in Ukraine are mounting. Nobody wants to jump in with troops, and so there are clandestine forays by unidentified groups or squads of soldiers. And the major powers are only explicit with sanctions. Today, Russia announced it will halt the export of rocket engines crucial to US military defense and space programs. It must be very uncomfortable on the International Space Station these days.

Anti-Chinese sentiment has been running high in Vietnam ever since Beijing deployed an oil rig into disputed waters in the South China Sea on May 1st. There have been encounters including ramming and exchanges of water cannon between Chinese vessels operating near the rig and boats from Vietnam, which wants China out of the area. Today, Cambodia reports hundreds of Chinese nationals had poured across the border from Vietnam to escape riots.

Also, Japan’s Prime Minister, Shinzo Abe, has called for a review of how Japan interprets its pacifist constitution to allow its military to participate in conflicts beyond its borders for the first time since the end of the second world war; this in response to a growing conflict between China and Japan over islands claimed by each country; of course, it’s not just islands but the oil reserves around the islands.

Meanwhile, China issued a bunch of economic data this week, and it mostly points to a real estate slump; home sales fell 18%; housing starts were scaled back by 25%. Moody’s Analytics estimates that the building, sale and outfitting of apartments accounted for 23% of Chinese gross domestic product last year. That is higher than in the US, Spain or Ireland at the peaks of their housing bubbles. The scale of China’s building boom and the country’s reliance on infrastructure investment for growth is unprecedented. In just two years, from 2011 to 2012, China produced more cement than the US did in the entire 20th century, and it all seems to be on shaky ground these days. Each attempt to rein in China’s $25 trillion credit bubble seems to trigger wider tremors.

Brazil has sent army troops to Recife, the capital of the northeastern state of Pernambuco, after strikes lead to riots. State police walked off the job Tuesday. Schools and universities also closed down because of concerns for student safety. Today, further protests in Sao Paolo and Rio de Janeiro drew tens of thousands to the streets. The protests are centered on cities that will host the upcoming World Cup, the quadrennial global soccer championship games. Huge anti-government protests across Brazil last year overshadowed the Confederations Cup, a warm-up tournament for the World Cup. Some of the demonstrations saw clashes between activists and police, and at least six people were killed.

Many Brazilians are angry at the billions spent to host the World Cup. Protesters have said the government should focus spending instead on improving Brazil's woeful health, education, security, housing, and infrastructure systems. The World Cup starts in less than 30 days, and the whole world will be watching.

In one week, Europeans will elect a European Parliament. It’s the second biggest election in the world, after India. Voters look set to choose more assorted extremists, anti-Europeans and oddballs than ever. The Euroland economy is going nowhere, and with the razor thin exception of Germany, most countries are seeing economic contraction; that tends to lead to strange election results.

There are other hotspots around the World. The president of Yemen has declared all-out war on Al Qaeda militants and army troops are now trying to dislodge Al Qaeda from the Arabian Peninsula. Political violence returned to Bangkok Thailand, and the Thai army killed a handful of protesters and threatened more military action if the protests continue. And of course, the Nigerian crazies, Boko Haram, and the kidnapping of hundreds of schoolgirls. And of course, all the old seething conflicts that haven’t been resolved. And don’t forget, the US is still at war in Afghanistan. I know, it’s easy to forget. Apparently, it’s even easier to forget the veterans that have served our country.

Today, Secretary of Veterans Affairs, General Eric Shinseki went before the Senate Veterans Committee to explain the mess that is the VA; this following revelations that as many as 40 veterans died while waiting for medical care at the VA facility in Phoenix.

Since the allegations arose last month that veterans were forced to wait months for appointments at the Phoenix VA medical center and that VA officials were covering up the problem, Shinseki said he has asked the VA's inspector general to investigate. He said he has also launched an intense investigation of scheduling practices at the VA's other 151 medical centers. Shinseki said he was “mad as hell” and the various Senators all acted very indignant. Of course, it wasn’t very believable theatre.

One of the documents brought forth today was an internal VA memo, written in 2008 by a team of VA managers, listing 25 ways that VA scheduling clerks were cooking the books to make it appear that veterans waiting for medical care actually were being seen on time, when in fact they were being made to wait weeks or months.

And then, 2 years ago, the Government Accountability Office reported that VA schedulers were fudging wait times for veterans seeking outpatient care and avoiding using the electronic waitlist as required. The GAO report includes a response from Shinseki's chief of staff at the time, writing that the VA has "proactively taken steps in response to GAO's findings." Clearly that didn’t happen.

Meanwhile, Southern California is on fire. Actually nine fires are burning in the greater San Diego area and they have already destroyed more than 10,000 acres, forcing evacuation of about 125,000 residents. California Governor Jerry Brown has declared a state of emergency to free up resources. It’s hot, it’s dry, and it’s just the start of the fire season.

The 2014 fire season is repeating a pattern of destruction established over the past decade by a combination of high temperatures, parched vegetation and more people living in wooded areas. Fires feeding on plentiful dry grass, brush and hardwood are requiring more personnel and money to bring them under control. More than twice as many acres burned across the US through May 9 this year than during the same period in 2013.

Last week, 96% of California was considered to be under “severe” or worse drought conditions, with about 4% of the southeastern tip of the state still in “moderate” drought conditions. A year ago, only 46% of the state suffered from “severe” or worse conditions. As of today, the National Drought Mitigation Center reports severe drought conditions now engulf 100% of California.

Meanwhile, former Treasury Secretary Tim Geithner is trying to polish his tarnished image; he’s on a book tour peddling the notion that the Wall Street bailout was a huge success. And while it might be argued it prevented a Great Depression, it is delusional to consider it a success. It was at best an experiment that did not result in a worse catastrophe. It did little or nothing for the tens of millions of Americans who lost billions of dollars in home equity and savings, and the millions more who lost their jobs. The toll was greatest on the poor and the middle class. Nor have reforms been enacted that will help the middle class and the poor the next time Wall Street implodes.

Economic data today showed industrial production in the US unexpectedly declined in April, held back by a plunge in utilities as temperatures warmed and a broad-based decrease in manufacturing. That contrasted with a higher-than-forecast reading on the Fed Bank of New York’s gauge of regional manufacturing, which climbed to 19.01 this month, from 1.29 in April.

Initial claims for state unemployment benefits declined 24,000 to a seasonally adjusted 297,000 last week. It was the lowest reading since May 2007.

Consumer prices recorded their largest increase in 10 months in April. The Consumer Price Index increased 0.3% last month as food prices rose for a fourth consecutive month and the cost of gasoline surged. In the 12 months through April, consumer prices rose 2.0%. Stripping out food and energy prices, the so-called core CPI rose 0.2% after advancing by the same margin in March. In the 12 months through April, the core CPI increased 1.8%, the biggest gain since August last year.

Normally you might expect higher inflation numbers to result in lower bond prices, which means bond yields would move higher; not today. The yield on the 10-year Treasury note dipped below 2.5% intraday. Of course, Treasuries are considered a safe haven investment, and it seems a lot of people are looking for a calm port in a stormy world.

Friday, July 26, 2013 - Notes from the Favela

Notes from the Favela

by Sinclair Noe

DOW + 3 = 15,558
SPX + 1 = 1691
NAS + 7 = 3613

10 YR YLD - .01 = 2.56%
OIL - .82 = 104.67
GOLD - .30 = 1334.80
SILV - .26 = 20.09

Earlier in the week, the Dow and S&P hit record highs but the markets slipped; earlier today the Dow was down 150 points. For the week, the Dow rose 0.1 percent, the S&P 500 was flat (even as it hit a record) and the Nasdaq rose 0.7 percent.

It's Friday, and I have a bunch of notes and scraps that have been piling up, so we'll clean the desk, in no particular order.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment climbed to 85.1 from 84.1 in June, topping expectations for 84. It was the highest level since July 2007 and was also an improvement from July's initial reading of 83.9. Of course, if you paid a premium subscription, you could have had that information before the rest of the market.

Yesterday, I mentioned former Fed Chairman Paul Volker's remark that the only real financial innovation in the past 20 years was the ATM, which is actually about 30 years old now. And Volker wasn't quite right; the banks haven't done any real innovation but the hackers have. For nearly a decade, a band of cybercriminals rampaged through the servers of a global business who's who: Among the victims were 7-Eleven, Dow Jones, Nasdaq, JetBlue and JC Penney. Prosecutors say the hackers stole "conservatively" 160 million credit card numbers, and the dollar value of the crimes they helped facilitate is enormous; just four of the victims are out $300 million. The prosecutors say it's the largest data heist case ever and the suffering caused to identity theft victims was "immeasurable".

On Thursday, five of the gang's members were indicted. One is in custody in the US, a second is awaiting extradition in the Netherlands, and three more are still at large. Maybe if the banks paid more attention to providing a safe place to store money and a safe way to facilitate digital transactions, and if they spent less time trying to trade derivatives; maybe there could have been some financial innovation that actually was innovative.

The Federal Housing Finance Agency says the Swiss bank UBS has reached a settlement and will pay $415 million to the government-sponsored housing enterprises Fannie Mae and $470 million to Freddie Mac to resolve claims of misrepresenting the quality of collateral backing securities sold to Fannie and Freddie between 2004 and 2007.

The bank has already paid out $612 million to settle allegations of manipulating interest rates. UBS is now the third bank to settle with the FHFA after Citigroup and General Electric did so for undisclosed sums. UBS is just one of 18 banks the FHFA pursued in 2011 for allegedly lying about the quality of the collateral backing securities; essentially packaging subprime loans and selling them as a better quality.

 Home Affordable Modification Program or HAMP has been something of a disappointment nearly from its inception. After loudly touting the program’s ability to help 4 million borrowers, the administration was forced to concede it had barely helped a fraction of that number, or roughly 1.2 million mortgage modifications; and some advocates and administrators in the program actually came right out and declared the thing a failure. However, in recent months, we’ve been hearing a lot about how HAMP is finally getting going and hundreds of thousands of borrowers are getting the loan modifications that they need. What we haven’t heard until now, though, is just how many of them are re-defaulting on those loan modifications just months or years later; the number is now at 306,000.

I can see why many people think the HAMP program is a dud, but just to maintain perspective the Hope For Homeowners plan initiated by President Bush set aside $300 billion to refinance toxic loans and in 3 years time it managed to modify 71 loans; and the FHA-Secure plan managed to refinance 4,100 mortgages over a 3 year span. As far as the high number of re-defaults, the modification programs never dealt with the underlying problems, and for many, relief was just too little, too late.

One year ago today, Mario Draghi, the president of the European Central Bank spoke at an investment conference and he said:  "the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." The speech seemed to revive markets and stave off what looked like an impending collapse. A few weeks later, Draghi introduced OMT, or Outright Monetary Transactions, a conditional bond buying program. Spanish and Italian bond yields stabilized, even though the ECB hasn't actually used OMT to actually buy bonds. Germany’s constitutional court is due to rule later this year on OMT’s legality under German law. The ECB hasn't exactly managed to forge a solid plan, and so the financial improvement has not been accompanied by a meaningful change in what matters most: namely, the ability to generate economic growth, create jobs and arrest excessive income and wealth inequalities.

Earlier this week we marked the 3 year anniversary of the Dodd-Frank Act. Which is to say it was passed onto law, although less than half of the Act has been enacted. Mainly, it's been a battleground for bank lobbyists trying to tear out the entrails.

A federal grand jury indicted Steven A. Cohen's hedge fund SAC Capital Advisors on fraud charges. The hedge fund was charged with wire fraud as well as four counts of securities fraud, and the government is seeking to force SAC to surrender any fraud-related profits. According to the indictment from roughly 1999 to 2010, SAC obtained and traded on inside information to boost returns and fees and that the scheme involved a number of portfolio managers, research analysts and dozens of publicly traded companies.

The government has also filed civil money-laundering charges against the firm, which call for fines and penalties to be determined at a trial, the date of which hasn’t been set. Those civil charges pose the greatest threat to Cohen’s fortune because prosecutors allege that if the fund reinvested the proceeds of illegal insider trading into its capital pool, then the entire pool is tainted and subject to forfeiture, but it's expected that prosecutors won't try to go after the entire amount.

SAC oversaw $6 billion for outsiders at the start of this year, but have since withdrawn about $5 billion. The big question for those folks is whether they will face clawbacks. SAC is almost like Cohen's personal hedge fund; he has about $7.5 billion in SAC’s funds and employees account for $1.5 billion of assets. And the fund is conducting business as normal, or somewhat normal. Cohen wasn't named in the criminal indictment and faces no threat of prison time. In the corporate criminal world, avoiding indictment is the key battleground.

What does it take to be considered wealthy? A new survey finds the majority of people with a net worth of between one and five million dollars do not consider themselves wealthy; 28 percent of people worth between $1 million and $5 million call themselves wealthy. For people worth more than $5 million, just 60 percent of them say they’re rich. Of those surveyed, 50 percent said they’d consider themselves rich if they had no financial constraints on activities. So, it's not really a number.

Tell that to Eike Batista; he's the Brazilian oil tycoon who started 2012 as the eighth richest person in the world; net worth estimated at $34 billion; now that has dropped to $200 million. You might think that $200 million is a lot; if you had that money, you might think you were wealthy, but I'm not sure if that's how Batista feels. So, it's not really a number.

A few months ago, a Senate committee grilled Apple CEO Tim Cook over the company’s creative accounting strategies, accusing it of cheating the U.S. Treasury by stashing away billions of dollars that live in no tax jurisdiction at all. The company didn’t dispute the truth of the accusations, but blamed the United States for building a tax system that makes bringing overseas earnings back to the United States very expensive, and proposed simplified rules that would make it cheaper to do so.

The Organization for Economic Cooperation and Development has been working on the problem; in February they issued a report. The G20 held a meeting last weekend and they said they want a more globally uniform tax system, and they want the OECD to finish up a a concrete plan to crack down on tax cheats, and they want that plan within the next 2 years.

More problems for Boeing's troubled 787 Dreamliner today; one was grounded, an oven overheated in another and damage was found in wiring on two other planes. It's turning out to be like a flying cruise ship.

Halliburton Co has agreed to plead guilty to destroying evidence related to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, which killed 11 workers and left a horrific mess. The guilty plea is the third by a company over the spill, and requires the world's second-largest oilfield services company to pay a maximum $200,000 statutory fine; that's about how much Halliburton earns every 23 seconds, based on 2012 revenue numbers. Halliburton also made a separate, voluntary $55 million payment to the National Fish and Wildlife Foundation, plus 3 year probation.

Meanwhile, another Gulf of Mexico drilling rig caught fire this week off the coast of Louisiana. The blaze broke out Monday on a natural gas platform. The rig partially collapsed, but then sand and sediment covered up the spill and the fire is out or nearly out; and because it is natural gas it dissipated quickly in the ocean water. No one was injured.

Meanwhile, TEPCO, the Tokyo Electric Power Company finally admitted today, what had been suspected for quite some time; the Fukushima Dai-ichi nuclear power plant, the one damaged in the 2011 eathquake and tsunami, has been leaking contaminated water into the ocean. They don't know how much damage has been done by the leaks; they don't have a plan to clean it up and they don't seem to have a plan to stop it.

The northeast of Brazil is largely poor and rural. Years ago, there was a migration to the South, to the major cities of Rio de Janiero and Sao Paolo. The migrants were looking for jobs, industrial jobs. There were more people looking than getting. The migrants camped out. In Rio, they camped out in the hills surrounding the city. Eventually the encampments turned into shacks, the shacks turned into homes, but the entire process was haphazard. The homes lacked modern conveniences, and so the residents strung up illegal lines, they built illegal plumbing. The shacks turned into homes turned into small cities; slum cities known as favelas. The houses were built close together, the roads often not more than a tight alleyway, difficult for police to patrol. Poverty and unemployment were high. Gangs soon became a stronger authority figure than police; crime was pervasive; hope was not.

The favelas grew over time. In Rio, a city of more than 11 million people, it is estimated that more than 4 million live in favelas, or slums. The largest favela, Rocinha, is home to more than 500,000. Last year, the government sent in police with machine guns and armored vehicles to clean up the favelas in advance of the World Cup Soccer tournament next year, and the Olympic Games in 2016. You would probably not feel safe walking through a favela.

There is a favela in the north part of Rio, known as Varginha; it is very poor and violence is common. Built on swampland, Varginha is one of several favelas that have been "pacified," meaning the drug lords who once ran the place have been ejected or subdued by authorities. The government has allocated money for community centers, libraries and a train station. But residents say they have received more broken promises than actual help, and basic services such as sanitation remain woefully unavailable. They also complain that police are abusive and treat everyone like a criminal.

Pope Francis is visiting Brazil. He is not meeting with Brazil's president; the Pope instead headed to Varginha, telling residents of the notorious slum that their leaders must do a better job of helping them. The Pope said public authorities and "those in possession of greater resources" must "never tire of working for a more just world, marked by greater solidarity!" He told the crowds that "No one can remain insensitive to the inequalities that persist in the world!"

It was the most political message yet in the pope's pilgrimage to Brazil, and for many it echoed the enormous protests that erupted last month among Brazilians angry over government corruption, excessive state spending on upcoming international sports events, and lack of basic services such as education and healthcare.

And then after visiting the favela, he went to another favela, known as the City of God and he visited with recovering drug addicts, saying , “It is necessary to confront the problems underlying the use of these drugs, by promoting greater justice, educating young people in the values that build up life in society, accompanying those in difficulty and giving them hope for the future.”

And along the way, the Pope opened the windows of the Popemobile and even got out to walk with the crowds of people and kiss babies and give hugs and blessings to the crowds of people; he visited a little speck of a Catholic chapel; he just walked up to the modest home of a local family and was welcomed like a long lost brother. The security detail must have freaked out, but even in the most dangerous and violent slums of South America, there was not even the hint of a problem.

He stressed to the people of the favelas that he is on their side, saying: “The church offers its collaboration on all initiatives that lead to the development of all people. The church is with you. The pope is with you.”

Hours later, speaking under a rainy sky at the beach in Copacabana, the pope’s message to the more than one-million faithful was to shake up the church and make a “mess” in their dioceses by going out into the streets to spread the faith. He was less political and more centered on the importance of believing in Jesus. “He is a friend who does not defraud. ”

There has been revolution in the Middle East – the Arab Spring, and the n the Arab Spring-Part2. And throughout much of Europe there have been protests, especially in the periphery. It seems that we have forgotten what is important. How much real-world difference the papal visit might make remains to be seen. John Paul II visited the favelas of Rio in 1980, and obviously the underlying problems hardly disappeared in the intervening 33 years, but the Pope is the spiritual leader of more than one billion souls. And even if he can't change the reality on the ground, maybe he can make us consider how we keep score. He said, "The measure of the greatness of a society is found in the way it treats those most in need, those who have nothing apart from their poverty."

Thursday, June 20, 2013 - Fed Fallout

Fed Fallout

by Sinclair Noe

DOW – 353 = 14,758
SPX – 40 = 1588.19
NAS – 78 = 3364
10 YR YLD + .11 = 2.42%
OIL – 3.61 = 94.70
GOLD – 73.50 = 1278.80
SILV – 1.75 = 19.70

Yesterday the Federal Reserve FOMC issued a formal statement that they were holding steady with their zero interest rate policy and their Quantitative Easing policy which involves buying up $85 billion a month in Treasuries and mortgage backed securities. Then, Chairman Bernanke held a press conference and said the Fed might scale back purchases if the economic data gets better. And while Bernanke was trying to make a very nuanced forecast with no specific call for action, what the market players heard was a threat the Fed would slash the flow of free money; the plug was being pulled on the money printing press.

Faced with the economic crisis of 2008, the Fed started creating money at a prodigious pace and giving it to the banks. Catastrophe was averted. The money flowed into the markets and financial asset prices jumped. The US equity markets have been on a 4 year bull run; housing prices have bounced back, at least a partial bounce. The money did not flow into the broader economy. Cheap money and credit, instead, lead to malinvestment. The result is that while some financial asset prices have jumped dramatically, the rest of the economy has stagnated or atrophied. The idea is that the economy did not go through its normal cycle of boom and bust; and by avoiding the catastrophe we also lost the opportunity to cleanse the malinvestment from the economy; we lost the opportunity to correct the structural deficiencies.

So, yesterday Bernanke hinted that QE might end later this year or maybe at some indefinite point in the future. The money power is so concentrated that the hint was interpreted as a threat and the threat was taken as an attack. Rarely do I say that the stock and bond markets go up or down on any given day because of some specific news story, but the past couple of days the markets dived because the Fed might take away the free money. The key question is how much malinvestment is still clogging up the economy.

The idea behind Quantitative Easing was that the free money would be spent; it would circulate through the economy; the economy would heal. There should be inflation by now; instead the free money either went down a dark hole or it has ended up in concentrated clusters. There should be a surge in employment and growing demand as workers spend their wages; instead the job growth has been anemic and the quality of jobs has been declining; the result is that demand has failed to gain traction.

Yesterday the New York Times had an article that said, “Even pessimists feel optimistic about the American economy.” And the Fed's monthly report concluded that the "downside risks" were reduced. Housing is coming back. The stock market is up. Profits are at record levels. The sequester cuts haven't sabotaged growth. Consumers feel more confidence.

Only one problem with all this. The economy can't recover if the people don't. Official unemployment has drifted down to an abysmal 7.6 percent but largely because people are dropping out of the workforce.

There are still over 20 million people in need of full time work. The employment rate -- the percentage of the population in the workforce -- hasn't budged from recession levels. At current rates, the US won't return to the pre-recession 5% unemployment rate until 2022, and even at that level, American families are losing ground.

Corporate profits are up, wages aren't. Wages are now at the lowest percent of the economy on record. The median wage hasn't budged this century. College and non-college grads are now losing ground. The good jobs that were lost are being replaced by low wage and part-time jobs. Young people are starting out behind, unemployed or underemployed at ruinous high rates. Our Gilded Age inequality is getting worse, with the top 1 percent pocketing all of the rewards of growth.

The Federal Reserve is turning out to be a one trick pony and that one trick is getting old. Maybe the Fed was fairly effective in avoiding a complete meltdown in 2008. Maybe the time has come to consider that the economic models need to be changed or at the very least adjusted. Maybe it is time for the Fed to move away from printing money and giving it to the banks. Of course, the fear is that every time the Fed pulls away the punch bowl, the financial markets shuffle to the edge of the dark hole and threaten to go over the cliff, like so many lemmings. The Fed has already "tightened" prematurely three times in the last five years, coming to regret its haste within three months on each occasion.

If the Fed is going to move forward with tapering or tightening or whatever you want to call it, it's not enough to exit QE and calm the froth in the financial markets. It may be a very good thing to flush out the excesses in the banking system; it would be great to see some reining in of the excessive risks in derivatives markets and some control over shadow banking and off-shoring of capital. But it would seem the only responsible way to flush out the malinvestment is to take some steps to provide stimulus to the broader economy. While lowering interest rates doesn't do much to stimulate demand in the real economy, raising rates will typically slow growth and might do more to choke off a recovery than the Fed has anticipated.

We need dramatic reforms to make this economy work for working people. That requires major long-term investments to rebuild the country and renovate education and training, from pre-K to affordable college, putting people to work. We need a sensible strategy for balancing our trade and reviving manufacturing, capturing the lead in the green industrial revolution that is already sweeping the world. It requires empowering workers to gain a fair share of the profits and productivity they are helping to generate, raising the minimum wage, and bringing millions of undocumented workers out of the shadows. And it requires curbing the executive compensation policies that give CEOs million dollar incentives to plunder their own companies. Tax reform that shuts down tax havens abroad and requires the wealthy to pay their fair share can cover the bill.

And we probably need some new thinking in economics. The alternative is that we stumbled along like this indefinitely. Not quite crashing, not quite recovering. Welcome to the new normal.

And what if the recovery stalls again? What if inflation fears never materialize? Can the Fed back away from QE now, only to flip the switch and turn it back on? Can they do that even if they have repeatedly shown they will cower in fear at the hint of inflation? Can they back away without having hit their targets? And if the recovery stalls, has the Fed done irreparable damage?

Meanwhile, amidst all the brouhaha over the Fed, you might not have noticed that China has taken a stand against expanding its money supply. It looks like the People's Bank of China will try to pop the credit bubble and do it fast, even if it results in short-term pain. The China strategy is to tighten before the Fed winds down QE in order to avoid two negative shocks occurring simultaneously.

The one-two punch has already hit the emerging markets, especially commodity exporters such as Brazil, South Africa and Russia that sell to China, but also tripping up Turkey, Ukraine, Hungary and others that rely on external funding. Everything is being hit indiscriminately.

Just take a look at the chart of the BRICS. The 10 year Treasury yield zipped up past 2.4%; gold has been tied to a whipping post. Asia had a nasty day of trading; the Nikkei dropped about 1.7%, although that's kind of a normal day lately; the Hang Seng dropped 2.9%. Major European markets were down hard. Copper hit a low for the year.

Protesters are expected to flood more than 100 Brazilian cities and surround two international soccer matches. After more than a week of the largest protests in over two decades, demonstrators show no signs of letting up. Though the transport fare hikes that sparked the unrest were rescinded in Brazil's two biggest cities yesterday, demonstrators by the hundreds of thousands promised to take to the streets in locales as diverse as the Amazon capital of Manaus to the prosperous southern city of Florianopolis.

The persistence of the protests reflects what has become a generalized host of complaints about high taxes, inflation, corruption and poor public services, from hospitals and schools to roads and police forces. The complaints about bus fares seems like such a mundane thing, but once you reach a certain point, whether it's bus fares in Sao Paulo or cutting down some trees in a park in Istanbul, it's a spark, and it just takes a little spark to light a fuse, and it can happen very, very fast.

Tuesday, June 18, 2013 - The Fed, and the Brazilian Protests

The Fed, and the Brazilian Protests

by Sinclair Noe

DOW + 138 = 15,318
SPX + 12 = 1651
NAS + 30 = 3482
10 YR YLD + .01 = 2.18%
OIL + .63 = 98.02
GOLD – 16.40 = 1369.30
SILV – .16 = 21.78

The past couple of years, the financial markets have been very dependent on the Federal Reserve, perhaps overly dependent. Much of the fundamental analysis of companies and the economy has taken a backseat to the Fed's unprecedented monetary policy of Quantitative Easing. The outlook for the financial markets for the remainder of the year boils down to potential changes in policy. The Federal Open Market Committee has begun its regularly scheduled policy meeting and tomorrow they will issue a policy statement followed by a press conference by Fed Chairman Bernanke.

So, this time tomorrow we'll know more but given the importance of monetary policy, it's worthwhile to consider possibilities and possible market response. There are four possible scenarios to consider:

The first scenario has the Fed announcing preparations for tapering off QE; they won't actually stop QE tomorrow, they'll just announce their intention to exit QE policy at some identifiable point down the road; and of course, it would be conditional on economic developments between now and the determined exit date; it would most like involve scaling back securities purchases without any specific targets for changing interest rates. This seems to be the most probable scenario right now.

Since the Fed announced QE3 last September, the Bank of Japan has started their own $75 billion per month stimulus policy, known as Abenomics. There are fears that the combination of QE3 and Abenomics might have a destabilizing effect. There is no indication the Japanese are backing away from their stimulus program, and there is indication the Euro-zone might consider some sort of monetary stimulus program. So, if the Fed backs down, that leaves room for other central bankers to maneuver.

The other three scenarios for tomorrow's announcement are far less likely. The Fed could announce an immediate tapering off from securities purchases; this is not likely; former Fed Chairman Greenspan tried this in 1994 and it was messy. The only reason the Fed might try this is to shock the markets, inducing a flight to safe havens such as Treasuries, and applying pressure on the politicians to come up with something that resembles fiscal policy. This is risky, like dancing on a carpet of banana peels.

The other scenario involves the Fed announcing that it is continuing with stimulus but it will consider a different mix. In other words, instead of buying $85 billion a month in Treasuries and mortgage backed securities, they will consider other purchases. They might consider student loan debt or state or municipal debt. Again, this would be a bit of a shock but it makes some sense.

The housing market has benefited from the Fed purchasing mortgage backed securities; meanwhile, student loan debt is starting to resemble the subprime markets of a few years back; defaults are on the rise and a meltdown would be ugly.

Likewise, there are several municipalities that could benefit from an infusion of capital from the Fed. Several cities in California are bankrupt. Detroit is insolvent and facing the prospect of default on $17 billion, including pension payments. They have a tightrope balancing act between the legacy obligations to creditors, employees, and retirees and their obligation to the residents of the city to continue to provide basic services. Right now there are 30 fires per day in Detroit. If they cut back on the Fire Department, the whole city could burn. Yes, some of those fires are deliberate.

There are other areas the Fed could consider that would offer a more direct infusion of capital directly into the economy, and they could do this in small steps; stepping back from Treasury or MBS purchases as the markets fluctuate; stepping into brave new arenas as needed. This is a highly unlikely approach but it would offer the biggest bang for the Federal Reserve Note.

The final scenario is that the Fed doesn't change anything tomorrow. Why should they? When they announced QE3, they said they would continue until they reached a target of either 6.5% unemployment or 2.5% inflation. Inflation remains below the Fed’s 2% target. The core consumer price index is up just 1.7% year-on-year in May. The central bank’s preferred measure, the index for personal consumption expenditures, is up only 0.7%. The economy has been adding jobs but the unemployment rate still stands at 7.6%; that's a long way from the target. While some might consider tapering to be an indication the Fed thinks economic recovery is stronger than it looks, an exit from QE now would be an admission of monetary policy failure. Consider it the central bank equivalent of a “Mission Accomplished” banner.

The Fed may ultimately decide that the economy or the markets are simply not ready and that announcing any intention to taper in the coming months may cause more harm to capital markets than its worth. This leaves the Fed with the option to do more jawboning in the future; it leaves them with the option of shocking the markets; it leaves them with more time to figure out alternative monetary policy; and it leaves them with more time to try to see beneficial returns on QE3 before they burn that bridge. Maybe Bernanke would just as soon leave the exit from QE to the next Fed Chairman.

Whatever the Fed announces tomorrow, it will likely rattle the markets. Both stocks and bonds would likely have a party if the Fed holds steady with no changes. The markets love free money from the Fed and no change might just be enough to provide a summer rally; a little boost for the economy.

Stocks would likely take any tapering news poorly. Any news of intention to taper might be enough to push stocks into a summer swoon; and then we would wait to see if that leads to a full fledged bear. At the very least, it would take a little of the exuberance out of stocks. That might not be such a bad thing; the S&P 500 is up about 22% over the past 12 months; there has been a disconnect between the stock market at 20% and the broader economy, which has been growing at a little less than 2%. Any news of intention to taper would likely be positive for bonds in the short term with a flight to safety, at least that was the history following the end of QE1 and QE2.

Tune in tomorrow.

Yesterday, I mentioned that there had been quite a few protests around the world. I listed about a dozen locations where protesters had taken to the streets in huge numbers. I didn't even mention Turkey. I did mention Brazil, where the normally laid back Brazilians took to the streets. Yesterday, the Brazilian protests really picked up steam. It started on Saturday, when the FIFA Confederation Soccer matches began in Brasilia. President Dilma Rouseff was scheduled to make an announcement before the game. The government had spent about $600 million to build a beautiful new soccer stadium, part of the 2014 World Cup. Rousseff was booed relentlessly; she cut short her speech and quickly exited the stage.

You may hear that the Brazilians are upset about a rate increase in bus and subway fares. That's not what the protests are about, or at least it's just a small part. The Brazilians are upset that the government has spent tens of billions preparing for the World Cup, with allegations of corruption; projects are already vastly over-budget and we are a year away. Meanwhile Brazil continues to invest below the OECD average in education. Public health expenditure is even lower. People are going hungry.

Rio de Janeiro consistently ranks amongst the most expensive cities in the world, while minimum wage remains low, about $300 per month. Sao Paulo, the country's financial center is even worse. It is home to the highest concentration of private jets and helicopters in the world, but the lower and middle classes have no access to decent schools and hospitals; and the poor people rely on public transportation. When residents of the two cities took to the streets last weekend bearing placards and chanting slogans demanding answers, regional police responded by firing rubber bullets and tear gas and violent beatings.

In response, the Brazilians took to the streets yesterday in massive numbers. The official estimates were more than 100,000 protesters in downtown Rio; the unofficial numbers topped a quarter million. The international media has also been peculiarly disinterested on the subject, even if coverage of the protests in Turkey, similar in nature to Brazil's, has been extensive and detailed. Spain's El Pais suggested the Brazilian protests have left the international community baffled as the country is consistently painted as a model for growth and development; Brazil is now the world's sixth largest economy, growing rapidly; Brazilians have nothing to complain about.

Certainly the Brazilian government thought that the populace would be distracted by soccer; and while it is true that Brazilians love soccer, it turns out it wasn't enough of a distraction. While there has been economic growth, there has also been growing inequality, and growing poverty. And the World Cup has just highlighted the inequality. The minimum wage of $300 a month is the average price of one ticket to one World Cup soccer game. Soccer was once a game that brought all Brazilians together; now the World Cup just rubs their noses in the fact that they are further apart than ever.

The big reason inequality is now a regular topic of conversation among economists is that the rapid rise of a super rich class while average workers are left in the dust makes it impossible to ignore. The IMF and the World Bank have just released a report showing that at the same time US companies are taking down a record share of GDP in profits, our country’s ranking in inequality is worse than that of many developing economies. New York City is more unequal than China, and also more unequal than Russia, famed for its oligarchs, and India, which still has hundreds of millions living in abject poverty.

March, Friday 30, 2012

DOW + 66 = 13,212

SPX + 5 = 1408
NAS – 3 = 3091
10 YR YLD +.06 = 2.22%
OIL +.15 = 102.93
GOLD + 7.30 = 1669.70
SILV +.02 = 32.38
PLAT + 11.00 = 1645.00

The S&P 500 gained 11.6 percent in the first quarter, its best start of the year since 1998 and the best overall quarter since the third quarter of 2009. The Nasdaq Composite gained 18.7%. The Dow Industrial average gained nearly 1,000 points, up 8.1% - the best first quarter point gain for the Dow - ever. Apple's share price increased 48%. Bank of America's share price increased 70%, if you had the stomach for it. Elsewhere Germany's Dax gained 17%; the Nikkei was up more than 19%; crude oil futures were up 4.2% and gold gained 6.7%. Pretty good, really.

If there's no real bad news and the Fed is pushing money into the economy, markets tend to go higher. For now, the economic news is pretty good. Consumer sentiment rebounded to its highest level in more than a year in March as optimism about jobs and income overcame higher prices at the gasoline pump. Meanwhile, personal spending jumped 0.8% in February as personal income edged up 0.2%; that might qualify as semi-good economic news. An increase in spending, 4 times greater than income growth, doesn't pencil out on an individual level but it is a positive for the broader economy, consumer spending accounts for about 70% of economic activity; higher spending tends to result in more and better business activity which can result in more jobs and more investment in businesses, leading to more jobs and more spending; a righteous circle of growth. The problem is incomes aren't keeping up. The personal savings rate dropped to 3.7%. If we can't get past that gap in incomes and spending, we'll have problems. An increase in inflation or higher energy prices could derail growth. The price index for personal consumption expenditures climbed 0.3%, marking the biggest increase in six months; and you know what's happening with the price at the pump. This economic growth is fragile and the righteous circle could be broken, but for now – the news is good.

Just a reminder – we have the monthly jobs report next Friday, and another reminder – the old market advice - “Get out in May and stay away. This is the idea that the best six months are November to May and the worst six months are May through October – and it has been an incredibly simple and powerful timing tool for years and years – not perfect but very good. So, I think this is another way of saying, I hope you were invested in the first quarter and I hope you're satisfied. I hope that you listened last October when I said I was cautiously bullish on the market and you concurred and acted. One good quarter is not a guarantee that the next quarter will be impressive. Markets don't typically race higher this fast. I'm not saying markets will collapse from here; they probably will not but there are any number of things that could go very bad very fast. Volatility will likely increase. I don't think the markets will keep this rapid pace. There will be people who will take money off the table because you can't take a loss by taking a profit – and that makes sense to me. And that's where I stand at the end of the quarter.

Euro-zone finance ministers agreed to increase the Euro-zone's bailout lending limit to $930 billion dollars. And while $930 billion may sound like a fair chunk of change, it is not the mother of all firewalls requested earlier in the week, and the banks are already saying it won't be enough to prevent further Euro-turmoil. Yields on Italian and Spanish debt have been rising recently and the effects of huge infusions of cheap money are already starting to wane. Greek technocrat prime minister Papademos says Greece might need another bailout. Europe has lent banks a trillion euros, which should provide a backstop over the next several quarters. That has taken a certain amount of systemic risk off the table, at least for now. There is still a risk. Today, the Spanish government announce a $36 billion dollar deficit reduction plan. There is a nationwide strike and protests. One million people took part in a rally in Madrid. That is huge.

Dilma Rousseff, Brazil's president, says western countries are causing a "monetary tsunami" by adopting aggressive expansionist policies such as low interest rates, which are making emerging economies less competitive globally.

Speaking at an emerging nations summit in New Delhi, Ms Rousseff said the developed countries have monetary policies that are helping the US and European economies at the cost of causing greater global trade imbalances.

"This (economic) crisis started in the developed world," Ms Rousseff said. "It will not be overcome simply through measures of austerity, fiscal consolidations and depreciation of the labour force, let alone through quantitative easing policies that have triggered what can only be described as a monetary tsunami, have led to a currency war and have introduced new and perverse forms of protectionism in the world."

Heads of state from the Brics, Brazil, Russia, India, China and South Africa, issued a post summit joint declaration which said: “Excessive liquidity from the aggressive policy actions taken by central banks to stabilise their domestic economies have been spilling over into emerging market economies, fostering excessive volatility in capital flows and commodity prices."

The group of five countries, which represent about 45 per cent of the world's population and, at $13.5 trillion, a quarter of the global economy, set up a working group to formally consider creating a common development bank for the grouping.

The first version of this story that ran in the Financial Times had the headline: Rouseff attacks west's crisis response. They later updated the headline to read: Brics nations threaten IMF funding.

Forbes has a pretty good analysis of the MF Global scandal. It's a tragedy in three parts. Part one. There was the conscious transferring of customer assets to meet a margin call by JP Morgan in London in what was intended to be an 'over the weekend' transaction with the funds replaced on Monday. Edith O'Brien is at the center of this, although it is almost inconceivable that she acted alone.

Part two. In part the failure of MF Global was caused by the refusal of certain parties to honor requests for wire transfers of legitimate funds. These parties almost certainly had insider knowledge of MF Global's finances, and may have even had a financial interest in MF Global's failure.

Part three. In hiding funds seized at the last hour from MF Global, and using influence to steer the bankruptcy to Chapter 11 versus the much more appropriate Chapter 7, certain parties, which may include some regulators most likely at the SEC and CFTC, and the hiding of the funds from investigators and the customers, it is quite possible that there was a conspiracy to obstruct justice.

And as in all scandals such as this, it is the obstruction of justice that can become the real giant killer. Everybody has the right to plead the Fifth Amendment, and we are all innocent and proven guilty. It's just strange to hear exceptionally well compensated professionals invoking plausible deniability. And this is why corporate America hates Sarbanes-Oxley, because it strikes to the heart of that plausible deniability, and says, 'you should know.' I'm afraid they probably do know and just don't care or think they're above the rules and the law. And this is why the system needs reforms and without the reforms it will be impossible to say we have a true recovery because we still have systemic rot.

There are some people, and I'm not naming names but you've probably run across someone in your lifetime, someone who was financially successful but was just a jerk. And maybe you thought that if your were every blessed with exceptional good fortune you would approach your circumstances and those around you with a certain humility and gratitude. Now I've seen some hard times in my life and you probably have as well, and I've tried to turn lemons into lemonade and in truth I could have done better but I could have done worse; and I've tried to bear my burdens with grace and a modicum of dignity. Now I would like to see if I am worthy of bearing great good fortune with a deserving demeanor. And it was in this light that last night, as I was driving home, I stopped to buy a MegaMillions ticket. Actually I bought 4 tickets. Buying 4 tickets didn't increase the odds by much, just scooched it up to one in 175-million-990-thousand -996. My chances are not 4 times greater. And when I arrived at my humble abode, I discovered my wife had purchased 5 tickets. You are about 176 times more likely to be struck by lightning in your lifetime. You are about 3.7 times more likely to be killed by fireworks this year. You are almost 9 times more likely to die from a TV falling on your head this year. But none of that stuff is nearly as much fun as winning the biggest lottery jackpot ever.

Annuity option: Provides annual payments over a 26-year period. For every $1,000,000 in the jackpot, you will receive approximately $38,500 per year before taxes, or around $15 mil per year. Cash option: A one-time, lump-sum payment that is equal to all the cash in the Mega Millions jackpot prize pool." Based on a $540 million jackpot, with the cash option being $389 million. Assuming a winner pays 35 percent of income tax, that comes to $252,850,000. Putting 3 percent of that jackpot into a super conservative portfolio—without touching the principal—would generate a princely $7,585,500 per year.

OK, those numbers were based on yesterday's estimate of a $540 million dollar jackpot. The jackpot has grown to $640 million. The lump sum option could be as high as $460 million or more.

So, what would you do with a $640 million dollar jackpot?

Good luck,

Sinclair Noe