Tuesday, November 05, 2013 - Hey Guy, Remember the Fifth of November

Hey Guy, Remember the Fifth of November

by Sinclair Noe

DOW – 20 = 15618
SPX – 4 = 1762
NAS + 3 = 3939
10 YR YLD + .06 = 2.66%
OIL – 1.00 = 93.62
GOLD – 2.70 = 1312.90
SILV + .05 = 21.81

Today is election day in much of the country. In 1872, Susan B. Anthony was arrested for trying to vote. If you don't vote today, at least remember the people who tried to make sure you have the right to vote. Today is also Guy Fawkes Day. In 1605 Fawkes led the Gunpowder Plot, a plot to blow up the English Parliament. That didn't work and he was hanged. The plot is recognized with bonfires to this day, and those strange white masks with the smiling, mustachioed guy that have become popular with protesters from New York to Cairo. Also, the word “guy”, comes from Mr. Fawkes; nobody used the word before he came along. Hey guy, where you going with that mask on your face?

Stocks moved lower today but the Dow Industrials wiped out most of a 117 early morning decline; this followed two days of gains for the Dow and the S&P 500, while the Nasdaq stretched its winning streak to three sessions in a row.

Treasury prices pulled back for the fourth day of losses in the past 5 sessions. According to data released by CoreLogic Tuesday, home prices rose 0.2% in September as the annual pace hit 12%; that's the fastest annual pace since 2006. The Institute for Supply Management said its non-manufacturing survey rose to to a 55.4% reading last month from 54.4% in September, beating economist expectations of a 54% reading. A result over 50% indicates expansion. The strength of the ISM survey seems to indicate that the government shutdown might not have been a major hit to the economy, which in turn might mean that the Federal Reserve could be closer to tapering its bond buying program sooner rather than later.

There will be a couple of different research papers formally presented to the International Monetary Fund later this week and both papers are expected to suggest a dovish stance for the Fed; arguing for the Fed to lower the target for the jobless rate before consider changes to interest rate policy. Right now the Fed has a target of 6.5% unemployment and 2.5% inflation rate. The research from a half-dozen Fed economists maintains the the unemployment objective actually should be lowered to 6.0 percent or even 5.5 percent before it makes any moves. Models used in the reports show that the economy simply will perform better if the Fed holds off. But there also is a mix of market expectations and some unusual trends in the current labor situation that call for a less aggressive rate-hike schedule. Markets have grown accustomed to having the Fed firmly in place, so news of a delay in rate increases should be pleasant, but there is no guarantee the Fed will continue to provide easy money to the markets.

Remember the talk about how low energy prices would drive a renaissance in the US economy, manufacturing would return to America in a process called “re-shoring”. Well, we're still waiting for the shale revolution, and Goldman Sachs is writing about the not yet arrived revolution, saying: “There is little evidence of significant “induced” employment growth in downstream manufacturing industries. Similarly, cap-ex in energy intensive sectors that might be expected to benefit most from the shale boom has not outperformed cap-ex in other sectors during the recovery, although it did decline by less during the recession.”

This is not to say we haven't seen some activity. Oil and gas extraction has seen a pretty strong increase in employment but that's just a small part of the total labor force. The impact on GDP growth is estimated by Goldman Sachs to be 0.10 ppts in 2013.

It might be expected that the resulting decrease in natural gas prices will result in lower production prices, either through lower energy prices (GS sees little impact thus far) or lower feedstock prices. Certainly gas costs in the US are lower than overseas, although there is still a connection.

As Goldman Sachs notes:

“A core narrative in the US manufacturing renaissance theme is that low energy prices will directly support growth in downstream manufacturing industries. In past research we found scant evidence of a structural renaissance in US manufacturing in the incoming data―whether due to energy cost advantages, rising productivity, subdued labor costs, or other factors ... we now look at employment outcomes in downstream industries in particular.

“We define these downstream manufacturing industries relatively broadly, including the chemical, plastic and rubber products, and primary metal manufacturing industries.”

In addition, the share of manufacturing employment in total nonfarm payroll employment has stabilized, suggesting an arrest to the offshoring, but not a boom in re-shoring. Bottom line, the macroeconomic benefits of the shale revolution are positive but probably modest, at least for now. However, the reverse is not the case; in other words, if we took away the shale revolution and if gas prices jumped, that would likely be a catalyst for an economic downturn.

On Thursday, the European Central Bank is expected to keep rates on hold, but there are some expectations for a hint they will cut rates in the not-so-distant future. The European Commission has cut the economic growth forecast for 2014 and raised its joblessness predictions and they're blaming the US, and emerging markets. Ollie Rehn, the EU economic chief says:

“While growth in the U.S. is expected to accelerate over the forecast horizon, with the elevated level of public debt at 105% of GDP, navigating around the next fiscal cliff in February 2014 will require very decisive action by U.S. policymakers to avoid another train wreck that could damage growth both in the U.S. and global economy,” he said.

“Moreover, the eventual phasing-out of monetary stimulus, likely to start in the U.S. in line with the Fed’s revised forward guidance, will call for careful calibration and communication to avoid ramifications to growth,” he added.

Then he pointed the finger at emerging-market economies:

“Not only growth in emerging-market economies has slowed down, but also the growth models of some countries may have reached their limits,” the commissioner said.

“More broadly, the lack of will or ability to deliver reforms that are necessary to strengthen economic fundamentals is a major risk in some emerging-market economies.”

“Renewed capital-flow volatility, particularly related to the phasing-out of monetary stimulus, could aggravate uncertainly and weigh on growth in the world economy, and thus also on Europe.”

Meanwhile, checking in on Cyprus, the chairman of the Independent Commission on the Future of the Cyprus Banking Sector says Cyprus needs to start preparing to attract foreign lenders to the island, and t he government should start putting in place a new attractive regulatory framework so it’s ready for the moment when it can go out and get new banks. Translation: the Troika blew up the old banks so now the Cypriots have to rely on the kindness of strangers.

nearly 40 percent of Americans between the ages of 25 and 60 will experience at least one year below the official poverty line during that period ($23,492 for a family of four), and 54 percent will spend a year in poverty or near poverty (below 150 percent of the poverty line).

Even more astounding, if we add in related conditions like welfare use, near-poverty and unemployment, four out of five Americans will encounter one or more of these events. In addition, half of all American children will at some point during their childhood reside in a household that uses food stamps for a period of time.

Put simply, poverty is a mainstream event experienced by a majority of Americans. For most of us, the question is not whether we will experience poverty, but when.

But while poverty strikes a majority of the population, the average time most people spend in poverty is relatively short. The standard image of the poor has been that of an entrenched underclass, impoverished for years at a time. While this captures a small and important slice of poverty, it is also a highly misleading picture of its more widespread and dynamic nature.

The typical pattern is for an individual to experience poverty for a year or two, get above the poverty line for an extended period of time, and then perhaps encounter another spell at some later point. Events like losing a job, having work hours cut back, experiencing a family split or developing a serious medical problem all have the potential to throw households into poverty.

Just as poverty is widely dispersed with respect to time, it is also widely dispersed with respect to place. Only approximately 10 percent of those in poverty live in extremely poor urban neighborhoods. Households in poverty can be found throughout a variety of urban and suburban landscapes, as well as in small towns and communities across rural America. This dispersion of poverty has been increasing over the past 20 years, particularly within suburban areas.

Along with the image of inner-city poverty, there is also a widespread perception that most individuals in poverty are nonwhite. This is another myth: According to the latest Census Bureau numbers, two-thirds of those below the poverty line identified themselves as white — a number that has held rather steady over the past several decades.

What about the generous assistance we provide to the poor? Turns out the safety net is extremely weak and filled with gaping holes.

We currently expend among the fewest resources within the industrialized countries in terms of pulling families out of poverty and protecting them from falling into it. And the United States is one of the few developed nations that does not provide universal health care, affordable child care, or reasonably priced low-income housing. As a result, our poverty rate is approximately twice the European average.

Whether we examine childhood poverty, poverty among working-age adults, poverty within single-parent families or overall rates of poverty, the story is much the same — the United States has exceedingly high levels of impoverishment. The many who find themselves in poverty are often shocked at how little assistance the government actually provides to help them through tough times.

The solutions to poverty are to be found in what is important for the health of any family — having a job that pays a decent wage, having the support of good health and child care and having access to a first-rate education. Yet these policies will become a reality only when we begin to truly understand that poverty is an issue of us, rather than an issue of them.

Tuesday, April 02, 2013 - Correlation and Divergence

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

Correlation and Divergence

by Sinclair Noe

DOW + 89 = 14,662
SPX + 8 = 1570
NAS + 15 = 3254
10 YR YLD + .02 = 1.86%
OIL - .16 = 96.91
GOLD – 23.20 = 1577.20
SILV - .76 = 27.36

Yesterday I told you the big economic report this week will be the jobs report on Friday. Many people like to discount the jobs report, claiming it doesn't give a thorough picture of the labor market; and there is some validity to this complaint. The Philly Fed has produced a slightly more comprehensive report, known as the Coincident Index; this measures  four variables (nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and real wage and salaries) wrapped into one index, designed so that it roughly reflects gross domestic product growth. Nationally, the Philadelphia Fed’s coincident index rose 0.3% in February for a 2.8% year-on-year gain. They also provide state by state breakdown. Alabama, Illinois, and New Mexico saw declines in the February report; 45 states notched advances.

With the stock market, or at least the Dow Industrials and Transports, and the S&P 500 hanging out around record territory, you might think we would see more signs of an improving economic cycle; bond yields should be rising at the margin, and commodities should be catching a bid. None of that is happening. While the big stock indices have been climbing other parts of the broader market have broken down since the end of January; areas that should have a correlation to stocks. One of the most common correlations is copper. If the economy is thriving, then copper should be in big demand. Copper is used extensively in construction and electronics and many other uses that would signal a booming economy. When gold outperforms, you can think of it as a risk off play, money is looking for a safe haven. So, if the economy is really strong, you would expect to see copper higher and gold flat or down. Since the start of the year, both copper and gold have been down; possibly indicating a weak economy mixed with complacency. Of course, it's easy to be complacent when the Fed is pumping $85 billion a month into the market.

This is not to say I'm bearish, certainly not bearish on a market that is consistently hitting new highs. I'm just saying that nothing has changed with the old idea of Sell in May, and the pattern of the past couple of years for a sell-off in summer. Much of the move higher can be attributed to the Federal Reserve QE to infinity, which also explains many of the divergences we're seeing from other areas. One of the big concerns is the hit stocks might take once the Fed begins to tighten. If Bernanke and Co. were crazy enough to surprise everyone by suddenly raising rates or pulling back on quantitative easing, equity markets would tank big time. But the Fed won't do that. They'll instead be very careful and transparent and appropriately plodding about unwinding precisely to avoid that melt down. "No surprises" has to be their watchword these days. Of course the Fed doesn't completely control corporate earnings, and there are usually a few surprises during reporting season.

The euro is steady even though the Cypriot central bank confirmed that large depositors at the largest bank in Cyprus would lose approximately 60% of their savings over 100,000 euros. This is well above the initially stated reduction of 30% to 40%. Other than that there was no new bad news out of the euro zone.

Fears remain that the deal to rescue Cyprus will not be enough to totally eliminate the risk of default later. Last summer at the height of the panic over Spain’s banks, the euro zone embarked on the initial step towards banking union. The idea was to break the “doom loop” under which weak banks were dragging down weak governments and vice versa. Leaders agreed that the European Stability Mechanism (ESM), the zone’s bailout fund, could be used to recapitalize bust banks, but only once an effective supervisory mechanism was in place. The European Central Bank was chosen to be that supervisor. But the countries with money didn't like the idea of bailing out the countries without money, not to mention their faltering banks. The result is that the Euro zone doesn't have a good plan in place to have banks go bankrupt.

The core countries took a hard line that no taxpayers’ money could be used to bail out the banks, meaning large depositors will face big losses. And the losses for the Cypriot depositors is looking like 60% above and beyond the 100-thousand euro insured amounts. And the Eurogroup president has let slip that this is the new template for resolving bank busts. Of course, the Cyprus banks had multiple problems, but their biggest problems came from holding Greek bonds, and when Greece imploded, the bondholders took a haircut, resulting in 2.7 billion-euro in losses for the Cypriot banks.

The bottom line to this story is that the Eurogroup doesn't have a working plan in place to deal with bankrupt banks. It's a dangerous situation. And the bottom line for Cyprus is even worse: capital is leaving the country. The draconian capital controls have restored a sense of calm to a disorderly situation but businesses don't have working capital. And nobody is talking about how to rebuild the economy.

Here are some of the other news headlines out of Europe:

New York Times: "Unemployment in Euro Zone Reaches a Record High"WSJ: "Sixth Quarter of Contraction Looms for Euro Zone">Der Spiegel: "Shredded Social Safety Net: European Austerity Costing Lives"WSJ: "Spain Says Budget Gap Is Wider Than Reported"WSJ: "Italy Unable to Form Government"New York Times: "Debt Rising in Europe"

So, while the US stock market hits another record high, the Eurozone is hitting a depression.  Washington seems determined to follow in Europe's footsteps. We've already had a couple of rounds of austerity ourselves -- in the last deficit deal, and now in the "sequester" cuts.  The president and the Republicans both employ pro-austerity rhetoric which argues that deficits are our biggest problem. They just disagree about where and how it should be imposed.

A Manhattan federal judge, Sidney Stein, has signaled he will not rubber-stamp Citigroup's proposed $590 million settlement of a shareholder lawsuit accusing it of hiding tens of billions of dollars of toxic mortgage assets. The judge asked lawyers for the bank and its shareholders to address several issues at an April 8 fairness hearing, including requested legal fees and expenses of roughly $100 million, and the absence of payments by former Citigroup executives.

The $590 million settlement resolved claims by Citigroup shareholders from February 26, 2007 to April 18, 2008 that the bank failed in those years to properly write down risky debt, often backed by subprime mortgages, and concealed the risks. The shareholder settlement is separate from a $730 million accord with bondholders last month.

Now, you may remember another federal appeals court judge in New York, Jed Rakoff, rejected a $285 million settlement between Citigroup and the SEC over the alleged defrauding of investors. Judge Rakoff thought the settlement was letting Citigroup off too easy. Last week, District Judge Victor Marrero in Manhattan cited that case (the Rakoff case) in delaying a decision to approve the SEC's $602 million insider trading settlement with a unit of Steven Cohen's hedge fund SAC Capital Advisors. Maybe there is a trend developing. When the regulators continue to let the banksters slide with nothing more than a slap on the wrist, well after a while, it's just unacceptable.

Thursday, March 28, 2013 - The Good Shepherd

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

The Good Shepherd

by Sinclair Noe

DOW + 52 = 14,578
SPX + 6 = 1569
NAS + 11 = 3267
10 YR YLD un = 1.85%
OIL + .59 = 97.17
GOLD – 8.90 = 1597.50
SILV - .33 = 28.46

For the week, the Dow rose 0.4 percent, the S&P 500 advanced 0.8 percent and the Nasdaq gained 0.6 percent.

Thursday marked the end of the trading week. The US stock market will be closed tomorrow in observance of the Good Friday holiday.

For the month of March, the Dow climbed 3.7 percent, the S&P 500 rose 3.6 percent and the Nasdaq added 3.4 percent.

For the first quarter, the Dow shot up 11.2 percent, the S&P 500 jumped 10 percent and the Nasdaq climbed 8.2 percent.

The best performing stocks in the S&P since the start of the year: Netflix, Best Buy, Hewlett-Packard, H&R Block, and Micron Tech. The worst performers included: Cliffs Natural Resources, JCPenney, US Steel, Garmin, Apollo Group, and Newfield Exploration.

For the Dow Industrial Average and the S&P 500 it was a record high close. Whoopee! The last all-time closing high for the S&P 500 occurred on October 9, 2007 at 1,565.15. The intraday all-time high was reached a couple of days later, on October 11, 2007, at 1,576.09. But just so we avoid any double standards, let's look at the real value versus the nominal value. The real value refers to the inflation adjusted price of the S&P compared to the nominal value, which is not adjusted for inflation. Using the Bureau of Labor Statistics CPI Inflation Calculator; the 2007 intraday all time high of 1576, when adjusted for inflation would be 1,764.

But wait, there's more!

For those of you old enough to remember, we were setting highs in the S&P back in March 2000, at the 1553 level. There has been quite a bit of inflation over the past 13 years, and if we adjust that 1553 number for inflation, the S&P 500 would need to reach 2093 in order to hit a real all time high. Don't hold your breath. We're about 30% shy of the real record. What this really means is that the S&P 500 has a really big, negative real return over the past 13 years.

Maybe the market does reflect the economy after all. It looks like the economy is just barely slogging along. The Commerce Department revised the fourth quarter Gross Domestic Product to show the economy growing at a 0.4% annual rate. The early guess at GDP had been slightly negative, so this is an improvement, but it isn't good enough to help the labor market. Much of the weakness came from a slowdown in inventory accumulation and a sharp drop in military spending. Consumer spending expanded at a 1.8 percent annual rate. The report showed business investment rose at a 13.2 percent rate, a bigger gain than initially estimated. The extra growth was mostly from more construction spending by businesses.

A fairly orderly open for the banks in Cyprus. The longest lines were journalists gathered in anticipation of a bank run which didn't happen. For depositors on the street it was orderly resignation.

The implications are less than orderly. European officials are hurriedly denying that the Cypriot bail-in is a "template". Markets know otherwise. The good bank/bad bank model adopted in Cyprus shows how banks can be recapitalized without government funds while still protecting insured depositors - thanks to senior bondholders and uninsured depositors taking losses. And some are even claiming this is an acceptable template. In the case of Cyprus, it was a way for the European Troika to go after tax dodging Russians, Putin's henchmen.

The larger template is that bondholders and depositors are now on the hook for gambling banksters. For bondholders there is always a certain amount of risk, and a need for due diligence. For the rest of the uninsured depositors, we now hear that it the responsibility of the depositor to have certainty about the institution where they make deposits.

The problem is that individual or even corporate depositors don't know the soundness of a banking institution; nor do the banking regulators, and in many cases, the management of the banks are clueless. If there is to be any hope of trust in financial institutions, there is a definite need for restructuring; for smaller banks that can safely and securely hold deposits, not take the deposits and go gambling in the nearest credit market casino.

Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case. In most legal systems, the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet.  Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.

The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. And if you think the banking system in the US is safer than the banking system in Europe, think again. The big US banks have not changed their ways since the crisis of 2008. The big US banks can actually use deposits to fund derivatives exposures. And remember that depositors are unsecured creditors, and remember that the 2005 Bankruptcy Act made derivatives counterparties senior to unsecured creditors.

And the recent investigation into the JPMorgan London Whale trade should serve as notice that any attempts at regulation are at the best, incomplete. JPMorgan is the largest derivatives dealer in the world, gambling tens of trillions in the derivatives casino. We did learn that when the London Whale started losing billions, the bank sought to hide that information, and doubled down on bad bets. The ease with which the bank hid losses and fudged valuations should set off flashing red lights for investors, and now for uninsured depositors.

The Cyprus haircut on depositors was called a “wealth tax” and was written off by commentators as “deserved,” because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers; you know, the same bunch that usually have a “get out of jail free card”.

Now that the Cyprus banks have re-opened, it looks like the crisis wasn't much of a crisis. Cyprus is so small that I was telling you it really shouldn't make much of a difference. The Euro-Union has a printing press, they could have printed enough currency to resolve the Cyprus Crisis before brunch. It was just a tiny crisis, like the island itself. Forget about it. Move along.

Except for the brief moment when the president of the Eurogroup let slip that Cyprus could be a model for future European bailouts. He quickly retracted that comment, but the cat was out of the bag. And even if confiscating deposits won't be the template for bank bailouts, the model is in place. We know that tool is in the toolbox. As for the crisis itself; this is the new model for effecting change; declare a crisis; manufacture a crisis; scare people; the Euro is collapsing; the sky is falling; we're going over a fiscal cliff. Whenever you hear the fear you can bet that somebody is trying to slip something past you. When someone cries wolf, someone is trying to herd the flock.

A good shepherd only cries wolf when there is true danger.

Wednesday, March 27, 2013 - What Does That Mean?

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

What Does That Mean?

By Sinclair Noe

DOW – 33 = 14,526
SPX – 0.92 = 1562
NAS + 4 = 3256
10 YR YLD - .05 = 1.85%
OIL + .35 = 96.69
GOLD + 5.90 = 1606.40
SILV - .07 = 28.79

With just a couple of trading days left in the first quarter, it looks like the S&P 500 will finish the quarter with its highest valuation in three years. At its current price, the S&P 500 has an LTM P/E of 16.1x; allow me to translate. The Price to earnings ratio, or P/E, over the last twelve months, (LTM) is 16.1. We get this number by taking the stock's current price divided by the company's 12 month earning per share. As an example, if a stock is priced at $10 and had earnings of $1, the P/E is 10. If they had earnings of $5 the P/E is 2; if they had earnings of 50 cents, the P/E would be 20. After gaining 9.2% year-to-date and growing its multiple, the S&P 500 will enter earnings season with high expectations. However, the current multiple is still low by long-term standards, so good earnings could sustain the rally. Maybe.

The Fed continues to throw money at Wall Street through its accommodative easing; Europe hasn't imploded yet; things could change and there could be a big event, but absent that, the stock markets will be paying attention to earnings. Forward looking P/E for the upcoming 12 months are expected to come in around 15.2. Now, in the past quarter the laggards have been technology companies, energy companies, and financials; while the leaders have been consumer companies and healthcare. One of the things to consider is whether the laggards can pick up the slack.

So, when we enter the first quarter earnings season, it will be interesting to see if there is a rotation to the energy or maybe the tech sectors. Tech should really be important when it comes to sustainability of the rally. Another area to watch is Emerging Markets, down more than 7% from the start of the year. If the markets are destined to move higher, the overseas equities would need to show strength, and might even represent an upside opportunity. Let me caution that I'm not making predictions here, just offering some thoughts on what might be important to watch.

Another thing to consider is that the US economy went flat-line in the fourth quarter; GDP was initially reported as negative and then revised to just barely positive, and in this environment, the stock market hits record highs. It won't be easy to turn in earnings numbers that support those new higher prices.

Lots of attention on Cyprus, especially tomorrow, when the banks are scheduled to reopen, with sharp restrictions; withdrawals will be limited to 300-euros per day. Big mess; lots of photo ops tomorrow. The Cypriot economy is struggling; they've gone almost two weeks with nothing but limited ATM withdrawals. Fitch just got around to downgrading the three biggest Cypriot banks.The banks are facing big losses and that is radiating out through the island economy. The private sector has already started cutting back.

When the banks reopen, they will confiscate deposits; nobody knows how much, but they will be taking from the accounts over 100,000-euro. The reversal of the decision to ‘tax’ insured depositors constitutes a last minute restoration of common sense. By forcing losses on uninsured depositors and the banks’ bondholders, taxpayers have to bear a smaller burden of the bailout loans; and this is a good thing.

One of the disturbing revelations is that the Euro-zone technocrats says this is the template for the future. It is now up to depositors to know the bad investments the banks hold, even if the banks themselves are withholding information or are clueless.

The Memorandum of Understanding, which is the deal that is supposed to explain how much the Troika will steal from bank depositors, has not been written up yet and, thus, the deal is utterly incomplete. In particular, we have no idea what degree and type of austerity will be imposed upon a collapsing social economy. And when a deal is reached, Cyprus is going to continue to be subject to the austerian predilections of the Eurozone, and we can see how well that is working out in Greece. A break, though more painful initially, might have been better in the long run. Cyprus should be “no big deal”, and it may still slip from memory, but it may also signal a turning point.

And with all that mess it's easy to forget about the mess in Italy. They had an election, with no clear winner, and today we learn they can't form a coalition government. The euro dropped below $1.28.

Remember the rest of Europe? Yesterday, S&P downgraded Bankia in Spain. They also cut their euro-zone gross domestic product forecast to negative 0.5% from the earlier estimate of a 0.1% decline.

The Bank of England’s Financial Policy Committee says British banks must come up with 25 billion-pounds in fresh capital by the end of the year to start plugging an estimated 50 billion-pounds ($75 billion) capital shortfall across the sector.

The largest US banks: Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo, together have paid $61 billion to settle credit-crisis and mortgage claims over the past three years, according to SNL Financial. But wait, there's more! Research firm Compass Point Research estimates that U.S. banks will wind up owing a further $24 billion related to the repurchase of faulty mortgage loans.

At least eight federal agencies are investigating JPMorgan; federal prosecutors and the FBI in New York are also examining potential wrongdoing. A recent misstep points to the growing friction between JPMorgan and regulators as well as to the concerns within the bank. JPMorgan misstated how the bank may have harmed more than 5,000 homeowners in foreclosure. The bank’s primary regulator, the Office of the Comptroller of the Currency, is expected to collect a cash payment from the bank to remedy the flawed review of loans. The problems stem from January, when JPMorgan and other big banks agreed to a multi-billion dollar settlement over foreclosure abuses. As part of the pact, the bank agreed to comb through each loan file to spot potential errors, a process that the regulators will use to help determine the size of the payouts to homeowners. While assessing 880,000 mortgages, JPMorgan overstated the potential harm for more than 5,000 loans.

In April senior executives are expected to meet with investigators who are examining the London Whale trading loss. A handful of executives have already met with authorities, but the second round will include Mr. Dimon. While he is not suspected of any wrongdoing, the officials hope Mr. Dimon will help build a case against traders in London suspected of lowballing their losses.

Federal prosecutors in Manhattan are examining JPMorgan’s actions in the Madoff case, suspecting the bank may have violated a federal law that requires banks to alert authorities to suspicious transactions. The comptroller’s office is investigating similar issues.

Marketwatch reports that Bernie Madoff is speaking out from prison, claiming  the banks knew of his Ponzi scheme all along. Madoff says that ‘the banks must have known,’ and were complicit and contributing to my crime.” He specifically points out JPMorgan Chase, Bank of New York Mello, HSBC, and Citicorp.

Madoff wrote that “the trustee seems unwilling to act on my offer” to help and he is therefore “offering this information to the appropriate governmental committees in the hope that this information will prove helpful in future regulation of the appropriate institutions.” The House financial services committee and the Senate banking committee had no immediate comment on whether they had received any information from Madoff.

Madoff’s comments come as prosecutors are looking at whether J.P. Morgan failed to fully alert authorities to suspicions about Madoff’s finances. Madoff’s comments also come as JPMorgan Chase is reportedly embroiled in a squabble with regulators over a government probe into the institution’s relationship with Madoff. According to a January Reuters report, the OCC, JP Morgan’s chief regulator, has been unable to obtain documents it has requested from the big bank in connection with an investigation into its relationship with Madoff.

The report cites a letter from Treasury Department inspector general Eric Thorson to JPMorgan’s general counsel, Stephen Cutler, saying the OCC has been unable to obtain what it is seeking. Madoff had an account at JPMorgan Chase that he used to transfer funds between offices.

The headline of the day comes from the Economist, under a section titled Catholicism and economics, the story is headlined “The Poor Pope” and the subtitle is: “Francis wants to emphasise the church's teaching on poverty. What does that mean?”

I'm not surprised that the folks at The Economist don't know what religion teaches us about poverty; the surprising part is that they turned their ignorance, or at least their indifference, into a headline.

Tuesday, March 26, 2013 - Miles to Go

Miles to Go

by Sinclair Noe

DOW + 111 = 14,559
SPX + 12 = 1563
NAS + 17 = 3252

10 YR YLD - .01 = 1.91
OIL + 1.40 = 96.21
GOLD – 5.90 = 1600.50
SILV - .09 = 28.86

The Dow Industrial hit a record hit close today, taking out the March 14 closing high. The S&P 500 came within a couple of points of the high close; it is having a hard time breaking through the ceiling; you just have to content yourself with the idea that the index has more than doubled from the lows of March 2009.

The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines, fell 7.1 percent to 12.77. The gauge has tumbled 29 percent for the year. It is a reflection of complacency.

We have many things to cover today.

Home prices were up in January and the year over year improvement in prices was the fastest in 6 years. The S&P Case Shiller Index of existing home sales was up 0.1% in January, and the year over year gains were 8.1%. On a year-over-year basis, all 20 cities measured by the Case-Shiller index improved, led by a 23.2% surge in Phoenix, with New York bringing up the rear with a 0.6% advance.

Sales of new U.S. homes fell 4.6% in February to mark the biggest drop in two years, though poor weather likely played a big role. Sales slowed to an annual rate of 411,000, down from a revised 431,000.

The consumer confidence index dropped to 59.7 in March, down from 68.0 in February. Most of the drop came from a decline in the expectations index, which slumped to 60.9 from 72.4, though the present situation index also fell, to 57.9 from 61.4. Consumer fears about the sequester are believed to have hurt the confidence numbers. We have nothing to fear but fear itself. It still holds true.

Orders for long-lasting goods surged in February largely because of gains in the volatile aircraft and defense segments, but demand was mixed for other manufacturers. Durable-goods orders climbed 5.7% last month to a seasonally adjusted $232.1 billion after a revised 3.8% drop in January. Orders outside of transportation fell 0.5% to mark the first decline in six months.

There has been a great deal of attention focused on the Dow Industrial Average back to new record highs; less attention on the Dow Transportation Average. The Transports include railroad companies. Shale-energy production exceeds pipeline capacity, and this will continue to be the case for many years ahead. Eventually, new pipelines will be built, but it takes time, and the production of shale oil is just getting started, and it's unlikely that the new pipelines will be enough. Railroad systems are already in place. Energy companies have invested over $1 billion dollars in new rail terminals near the shale operations. They have also put 20,000 new tank cars in service, which is an investment in the billions of dollars

There had been plans to reopen the banks in Cyprus today. Not gonna happen. Maybe Thursday. And when the banks open, there will be capital controls in place, meaning there will be restrictions on withdrawals. Larger depositors could see 40% confiscations. And that is just to raise the money for Cyprus to earn the dubious right to a bailout; the terms of which will likely drive the economy into a depression. Yes, there are protests in the streets of Nicosia.

A state-appointed emergency manager has taken control of the Detroit city government and started a drastic restructuring of its finances and operations. The first order of business was to extend an olive branch to the city government. The manager, Kevin Orr made clear that he alone would be responsible for decisions on how to stem the city’s mounting cash shortfall and reduce an estimated $14 billion in long-term liabilities.

“The statute spells out some pretty clear powers,” he said, referring to the state emergency-manager law that allows him to sell city assets, renegotiate labor contracts and possibly recommend a bankruptcy filing.

There were protests in Detroit, just a few dozen.

Another day, another mind-blowing fact about the staggering difference between the haves and the have-nots. Incomes for the bottom 90 percent of Americans only grew by $59 on average between 1966 and 2011 (when you adjust those incomes for inflation), according to an analysis by Pulitzer Prize-winning journalist David Cay Johnston for Tax Analysts. During the same period, the average income for the top 10 percent of Americans rose by $116,071.

The Federal Reserve has cited Citigroup for failure to comply with federal law requiring banks to establish protections against money-laundering. They did not impose a fine. The Fed's action follows up on a similar order issued against Citigroup last year by two other bank regulators, the Office of the Comptroller of the Currency and the FDIC, which cited it for "deficiencies" in its compliance with the Bank Secrecy Act. The Fed said that Citigroup lacked effective systems of governance with respect to its Bank Secrecy Act and anti-money-laundering compliance programs. Citigroup has 60 days to submit a plan explaining steps the bank has taken to boost its compliance efforts. Some day, some day.

As it did before the financial crisis, Wall Street is bankrolling academics to bolster its case against regulation. Back then, the research gave warm tongue-baths to the virtues of derivatives. This time, the beneficiary is high-speed trading.

A highly publicized research paper from Columbia University claiming that high-frequency trading benefits society and shouldn't be regulated too much was paid for by -- surprise -- a high-speed trading firm.

Unlike most academic papers, this one, by Columbia Business School economics professor, was announced to the world last week and turned into an op-ed headlined "The Reality Of High Frequency Trading."

The argument is that high-speed trading bolsters that magical market stuff known as "liquidity," pushing stock prices higher and making companies richer and more willing to spend money, making us all wealthier. None of that has actually happened yet, of course, with markets and the economy flat since the advent of high-speed trading a decade or so ago. Never mind all that, though: Regulate high-speed trading too much and the liquidity could go away; so says the new research paid for by high speed traders. And bad things happen when the liquidity goes away.

A derivative is a financial product derived from another financial product” (for example, a futures contract tied to a stock index) — in practice, the term applies to a whole world of financial products that are written on a one-off basis between two entities called “counterparties,” as opposed to products that are traded on a broad, well-regulated market. Futures contracts are gambling — I can bet on the Dow to go down or up, for example — but trading in futures contracts is regulated gambling, in which winners are protected from losers, and in many cases, losers protected from themselves.

Not so, derivatives, in the usual meaning of the word. Derivatives in that sense are contracts between parties who want to trade risks, but they aren’t market-traded. They aren’t standardized. And counterparties aren’t vetted by any controlling institution.

It is now estimated that derivatives market has been growing. One of the biggest risks to the world’s financial health is the $1.2 quadrillion derivatives market. It’s complex, it’s unregulated, and it ought to be of concern to world leaders that its notional value is 20 times the size of the world economy. But traders rule the roost — and as much as risk managers and regulators might want to limit that risk, they lack the power or knowledge to do so. A quadrillion is a big number: 1,000 times a trillion.

That refers to the notional value. For example, if I bet on a basketball game, say $24 on the Lakers and $26 on the Clippers, I don't really have $50 of risk, just $2 dollars at risk, or $2 notional value. But the derivatives market is so big that the notional value is now $12 trillion, give or take; a much smaller number, but almost the size of the US GDP, and about 20% of the world economy.

Those numbers about the size of the derivatives markets are just guesses, because the market is unregulated, zero controls. Nobody knows the true size or the true dangers.

Monday, March 25, 2013 - We Have a Template

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend. 

We Have a Template

by Sinclair Noe

DOW – 64 = 14447
SPX – 5 = 1551
NAS – 9 = 3235
10 YR YLD un = 1.91%
OIL -.03 = 94.78
GOLD – 3.80 = 1606.40
SILV + .09 = 28.95

This week started in the Mediterranean, on a tiny, faraway island. Cyprus has apparently reached a deal with the Troika. Cyprus' banks have been closed for the past week and will not reopen until tomorrow, or possibly until Thursday. The deal involves the Troika stealing from bank accounts over 100,000-euros, in order to prop up Cypriot banks and then burden the Cypriots with a bailout package chock full of debt. The deal involves raising $7.5 billion from senior bondholders an people with more than about $130,000 in their accounts, which is the insured amount. Smaller account holders won't be raided. Once the $7.5 billion is raised, Cyprus will qualify for a $13 billion bailout from the Troika. In return for the bailout, Cyprus must drastically shrink its outsized banking sector, cut its budget, implement structural reforms, raise taxes, and privatize state assets

The citizens of Cyprus won't get to vote on this. Last week, the Cypriot Parliament unanimously rejected the bank account theft. So, the weekend negotiations have managed to strip Cyprus of democracy and then plundered the bank accounts; and that's just the beginning.

The Dutch chairman of the Eurozone, Jeroen Dijsselbloem, announced that the  heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe,saying: "If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."

These comments will probably alarm countries like Ireland and Spain that had been hoping to access the ESM bailout fund in order to restructure banks without killing off their financial sector by inflicting huge losses on investors. Effectively, the deal creates a new type of Euro currency; there is the euro held in financial institutions and subject to 10% devaluation at a whim, and then there is the physically held euro. And the money held in closed banks really doesn't have much value does it? I mean it is a bit more difficult to spend, after all.

How will this play out? Is Cyprus contained? The island nation has secured a short-term sovereign cash fix, which will do nothing whatsoever to address Cypriot public debt sustainability or the economy -other than hurt both.

Meanwhile a major taboo has been breached. The threat is that bank runs start in the margins, or in this case, the other periphery countries, based on a recognition that their bank is at risk plus a concern that they will be made to take losses, as large depositors were in Cyprus. Maybe people will be lining up at banks to withdraw money; they've certainly lined up at ATM machines; but the threat of a run has been reduced even by the fact that depositors under €100,000 were spared. However, the slow-motion departure of depositors from periphery banks is likely to resume.

We have a template.

The Federal Reserve's aggressive easing of monetary policy has bolstered the economic recovery. So says Ben Bernanke.

In prepared remarks to a group of academics in London, Bernanke said the integrated nature of the global economy meant the whole world benefits from a sturdier outlook.

"Because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not ‘beggar-thy-neighbor' but rather are positive-sum, ‘enrich-thy-neighbor' actions," he said.

In response to a deep financial crisis and recession, and subsequent weak recovery, the Fed not only lowered overnight interest rates to effectively zero but bought more than $2.5 trillion in mortgage and Treasury securities.

Domestic critics say the central bank's vastly expanded balance sheet, now topping $3.1 trillion, risks future inflation. But Bernanke has noted that inflation is forecast to remain at or below the central bank's 2 percent target for the foreseeable future.

Economic growth, meanwhile, remains more of a question mark, as gross domestic product will likely expand at only around 2 percent this year.

We hear it all the time. The Federal Reserve is pushing/manipulating/forcing the stock market higher. There are a few different ways I’ve seen this argued.The FED is improving the economy via ZIRP, QE, etc. This in turn is lifting the market.The FED is forcing people out of risk-free/low-risk assets into risky ones. Thus forcing people into stocks.The FED, buy ‘printing money’ is putting all this new money out there, which ends up in the stock market. The FED, or its henchmen in the Plunge Protection Team, is literally buying the market.

Now, the first two are legit arguments.The FED is certainly doing its part in trying to get people out of risk-free assets and into risk assets. However I also believe the economy is healing. Now, one must remember that the stock market is not the economy. It does not reflect everything in the economy. I don’t want to get too fundamental but basically the market, or at least the S&P500 reflects the conditions of the 500 companies listed in the index. So just because unemployment is high, it doesn’t mean other parts of the economy are not healing/healthy.

 Profits, Trade, and employment all have recovered or are healing. We can argue what is driving this. Market Monetarists would probably argue its all thanks to the FED. Libertarians would probably argue its thanks to the resiliency of the innovative private sector economy. It's probably somewhere in between. The FED has helped. The private sector is resilient. But that’s another conversation (the cause of the improving economy). The cause of the rising market is NOT just the Fed.

I am sure I can find other relationships that exist but correlate to a lesser degree. Yes, I understand correlation does not equal causation. But its going to be hard to argue that recovering profits, trade, and employment do not equal higher stock prices. I’m all ears if you could do that.

Now, just because a relationship exists, doesn’t mean its always going to be right. These relationships can get volatile, change, or totally lose correlation. So what might work today won’t work tomorrow. The market is more than just “The Fed!”, the Fed just happens to be the 800 pound gorilla. So, we hope for the best, without forgetting the track record.

Stocks finished lower last week, snapping a three-week winning streak. A big rally Friday, however, took the edge off what had been a much poorer showing through Thursday.  The angst among U.S. investors created by the financial crisis in the small island nation—just 0.2% of the euro area's gross domestic product—almost makes it seem as if the market is searching for a reason to correct after its quick 9% rise this year. While the pain for the Cypriot people is real, the stock market isn't worried about Cyprus, per se. The U.S. GDP "creates a new Cyprus by lunchtime,"

Cyprus was an excuse. There are many investors who say the market is due for a correction, and many who want the market to correct so they can buy in at lower prices; "When that happens, it's hard for the market to go down…There don't seem to be legs to the downside."

That doesn't mean the market can't produce a 5% to 7% correction, but that isn't likely until you see signs internally that it is weakening, such as breadth worsening or sectors not participating. With the first quarter ending next week, some volatility could come from "window dressing," as institutional investors rearrange their portfolios for their end-of-quarter statement by purchasing winning stocks and shedding losers.

If the stock market is searching for an excuse to correct, it might have to look elsewhere because the euro zone is running out of peripheral countries with huge debt problems. Of course, now, we have a template, and it is not a good one.