Monday, June 09, 2014 - Record Highs and a Few Crumbs

Record Highs and a Few Crumbs

by Sinclair Noe

DOW + 18 = 16,943
SPX + 1 = 1951
NAS + 14 = 4336
10 YR YLD + .02 = 2.61%
OIL + 1.73 = 104.39
GOLD - .30 = 1253.00
SILV + .05 = 19.16

The major indices are now up for 4 consecutive sessions. The Dow Industrials hit a record high close for the 10^th time this year. The S&P is now up 14 of the last 17 trading sessions. The last time the Dow experienced a 10% correction was back in October 2011; since then, the Dow has gained almost 60% over 32 months without a 10% correction. Typically, you can expect a correction about every 12 months on average. The longest period without at least a 10% pullback was an 82 month run from 1990-1997. The S&P 500 hit a record high close for the 19th time this year. The S&P bull market is now at 62 months and counting, the best run since 1994 to 2000.

The CBOE Volatility Index moved a little higher today to 11.34. On Friday, the VIX hit a low of 10.73, the lowest level since January 2007. The VIX can go low and stay low for an extended period of time. In 2007, after hitting a low, the VIX steadily rose for the remainder of the year but stock prices didn’t peak until the end of 2007. The VIX measures options trades, but does it really mean investors are dangerously complacent? The Murdoch Street Journal reports: “Last week, 39% of respondents to a long-running weekly survey from the American Association of Individual Investors said they were bullish about stocks. That is well above readings of just over 27% in both February and April, when violence in Ukraine weighed on sentiment. But it is far from giddy. In fact, it is in line with the average since the poll's inception in 1987.”

Today had all the signs of a bull market, in addition to record highs, we had a good old fashioned Merger Monday. Tyson foods agreed to buy Hillshire for $8.5 billion, or $63 a share cash. That follows a bidding war between Tyson and Pilgrim’s Pride that pushed Hillshire from $37 a share on May 23 to the current bid.

Drugmaker Merck paid $3.9 billion, or $24.50 a share in cash for Idenix Pharmaceuticals, a 240% premium to Friday’s close of $7.23. Idenix has three drugs to treat Hepatitis C in clinical trials, but none on the market. Chipmaker Analog Devices agreed to buy Hittite Microwave Corp for $2.5 billion, or $78 a share, a mere 29% premium to Friday’s close.

Depending on the source, deal volume is up about 65% to 70% this year. Worldwide, companies are sitting on about $7.5 trillion of cash. With organic top line growth hard to come by in sluggish economies, many are turning to acquisitions.

You can buy a share of Apple for about $93; that following a 7 for 1 split; the first split for Apple in 9 years. A split is generally a non-event. If you owned 100 shares of Apple on Friday, you now own 700 shares, but the price was divided by 7. The financial structure and value of the company doesn’t change.

The yield on a 10-year US Treasury note was up a couple of basis points today to 2.61%. Meanwhile, the yield on the 10-year Spanish government bonds dropped 5 basis points to yield 2.59%. Normally, you would expect a government bond yield to correspond to demand and overall safety of the bond and the country backing the bond. Things are a little upside down. The good news is that investors aren’t expecting the Eurozone to disintegrate; the bad news is that investors aren’t expecting any growth in the Eurozone.

James Bullard, president of the St. Louis Federal Reserve Bank, speaking at a conference in Florida today, said the US macroeconomy is much closer to a normal state than it has been in 5 years and only weak labor markets and low inflation is keeping the Fed’s accommodative monetary policy in place. Last month, Bullard said that while the housing and labor markets remain weak, he expects recovery through the rest of the year, and said inflation would likely move towards the Fed's desired 2% rate.

Bullard told reporters after his speech: “If you get 3% growth for the rest of this year, if you get unemployment coming down below 6%, if you continue to have jobs growth at 200,000, if you continue to see inflation moving back up toward target, I think if we get to the fall of the year and all of those things are transpiring as I’m suggesting they will, that will change the conversation about monetary policy, and there will be more sentiment toward an earlier rate hike.”

The housing market may not be as strong as some Fed policymakers believe. On Friday, the jobs report showed the economy had regained all the jobs lost in the recession, but that isn’t the case for the home building sector. The number of construction jobs has been climbing, rising about 7% in May from a year earlier, to 2.6 million, including electricians and other specialty trade contractors; but that's way down from the high of 3.45 million in April 2006. While jobs overall are back to their pre-recession peak, residential construction jobs are 34% below their peak.

Even five years after the housing meltdown, a sizeable chunk of homeowners remain underwater. About 6.3 million homes, or 12.7% of all properties with a mortgage, were underwater as of the first quarter.  About 1 in 10 homeowners are almost underwater, with less than 10% equity in their homes, meaning it would probably cost them to sell, when including selling related expenses.

A survey released last week by the MacArthur Foundation found that 43% of those polled said it is no longer the case that owning a home is an excellent long-term investment and one of the best ways for people to build wealth. More than half said that buying a home has become less appealing than it once was. And 70% believe the nation is still in the middle of a crisis and that the worst is yet to come.

One major demographic group that isn’t buying homes is the Millennials; they are just trying to pay off student loans. President Obama announced Monday that he will expand a federal program designed to reduce student loan payments. The program, called “Pay As You Earn”, will give as many as five million more Americans with federal student loan debt the ability to cap their monthly student loan payments at 10% of their income and to have their remaining debt forgiven after either 10 years (for government and some non-profit workers) or 20 years (for other workers).

The current program is only available to Americans who began borrowing after October 2007 and kept borrowing after October 2011; the new order will allow students who borrowed money before October 2007 and those who have not borrowed since October 2011 to participate. The new program will begin in December 2015.

Of course, like so much consumer debt, if you pay the smallest monthly minimum, you just string out the loan and end up paying more over time; so, the new plan might not work for everybody. The best idea is to work some numbers, comparing monthly payments and lifetime costs; there are calculators for this at the Department of Education website.

The housing market is just one factor in an economy that doesn’t seem quite as strong as Fed President Bullard suggests. This was supposed to be a breakout year for economic growth but it started with negative GDP in the first quarter. And even though we have regained the jobs lost in the recession we still have nearly 10 million unemployed, and that’s more than 2 million more than in January 2008; and the quality of the jobs, and the pay has gone downhill for most workers. Income growth is at its lowest point since 2007. When people are shopping, they’re using borrowed money.

Corporations and Wall Street raked in profits unseen in their history. At the end of 2013, corporate profits hit an all-time high of $1.9 trillion. Those profits were largely achieved not by growing, but by cutting jobs and investments; and relying instead on mergers, buybacks, stock splits, QE, and other financial legerdemain.

The economy hasn’t really turned positive. It could change. Maybe the Fed will quit QE and try something that actually helps the economy. Until then, enjoy your milk and cookies, or whatever crumbs might come your way.

Thursday, April 24, 2014 - The Bridge From Bubbles to Prosperity

The Bridge From Bubbles to Prosperity

by Sinclair Noe

DOW unchanged 16,501
SPX + 3 = 1878
NAS + 21 = 4148
10 YR YLD unchanged 2.69%
OIL + .46 = 101.90
GOLD + 10.20 = 1294.90
SILV + .20 = 19.75

The Dow closed unchanged. That is just one of those freaky things that happens every few years. I remember it happened in 2008, and 1998 and 1996. I’m fairly sure there were other days where the Dow closed unchanged. I don’t know if there is any particular significance.

Orders to factories for durable goods rose 2.6%, adding to the 2.1% rise in February. The back-to-back gains followed two big declines in December and January, which had raised concerns about possible weakness in manufacturing. The earlier declines, however, were likely tied to bad winter weather.

On the jobs front, the number of people seeking unemployment benefits jumped 24,000 to a seasonally adjusted 329,000 last week. The four-week average of weekly unemployment claims decreased to 316,750, which puts us back to 2007 levels.

The big earnings report today was Microsoft, which posted income of $5.6 billion, or 68 cents per share, compared with $6 billion, or 72 cents, in the year-ago quarter. They beat estimates of 63 cents per share, but take it with a grain of salt; the estimates started the quarter around 80 cents per share.

Yesterday we talked about a tech bubble, and whether we were in one or not, and we looked at comments from Greenlight Capital manager David Einhorn; he says there is a bubble but it doesn’t necessarily mean the bubble will pop any time soon.

Today, Warren Buffet weighed in on whether stocks are too frothy. Buffett says, “we’re in a range, and it's a big zone always of reasonableness." He went on that "Stocks will become worth more decade after decade, not in any precise manner, not in an even manner or anything of the sort, but 10 years, 20 years, 30 years from now, stocks will be worth more than they are today."

A friend stopped by this morning and asked about bubbles; apparently this is a hot topic these days. How do you know you’re in a bubble? The most obvious answer is when it pops, but there are more helpful ways to address the issue.

The first indicator is that prices spike; a parabolic increase in prices. From March 1999 to March 2000, the Nasdaq rose 110%. Think of an airplane that climbs too fast; it stalls out, rolls over and plummets to the ground; same thing in most markets.

The next thing to watch is valuation. Prices can go up very fast, and if valuations also go up fast, we call that “growth”. When prices go up but valuations lag, we call that a divergence, and a bubble in the making. For stocks, this means that earnings need to keep pace with price.

Back in 2000, the P/E passed 44 based upon inflation adjusted 10 year average earnings, or what’s known as the Shiller P/E; now the Shiller P/E stands at 16. However, for some sectors, we are seeing a divergence; the P/E for internet stocks is up around 47. The P/E for utility stocks is 19, but that is significantly above the historical median of 16. One reason for that divergence might be the recent spike in natural gas prices combined with investors chasing dividend yield. A parabolic spike is relative to the underlying asset, which makes it a bit more difficult to identify, but some examples are not tough to spot.

Look at the spike in Bitcoin about 6 months ago; it went from around $150 to almost $1200 in about one month, and its underlying value was impossible to quantify; that was a bubble. It popped. Remember when gold prices jumped up in spring of 2011? Pop. How about bond prices right now in Spain and Italy? Up 1.1 percentage points in 12 months and just slightly above comparable US Treasuries. It might be a parabolic price increase in combination with a divergence from the underlying asset; or maybe it says something about US Treasuries. You decide.

Of course, the valuation of the underlying asset can change very quickly due to an exogenous event. For example, if Russia shuts off nat gas supplies to Europe, it would quickly change the underlying value of Italian or Polish bonds. When the tsunami hit Fukushima, it changed the value of nuclear sector stocks. When the Hindenburg exploded, it was a black swan event for manufacturers of dirigibles.

And then the other indicator to consider is the madness of the masses. As investors identify a price move, they jump in; when everybody has jumped in, there is no one left. Or as Joe Kennedy said in the winter of 1928: “You know it's time to sell when shoeshine boys give you stock tips. This bull market is over.” By the way, the shoeshine boy reportedly told Kennedy to buy stock in the Hindenburg.

So, markets can get frothy and remain frothy, prices fluctuate, and the market can remain irrational longer than you can remain solvent. Spotting bubbles is possible, but tricky; so it’s important to remember you won’t go broke taking a profit.

Some things seem pretty straightforward. You accept that some things will work in very specific ways. You drive over a bridge and you expect that bridge to not fall into the river below. Yea, good luck with that. A report, released today by the American Road and Transportation Builders Association, warned that there are more than 63,000 bridges in this country in need of urgent repair; the dangerous bridges are used some 250 million times a day by trucks, school buses, passenger cars and other vehicles.

 Pennsylvania led the list of structurally deficient bridges, with 5,218, followed by Iowa, Oklahoma, Missouri and California. Nevada, Delaware, Utah, Alaska and Hawaii had the least. Overall, there are more than 607,000 bridges in the United States, according to the DOT's Federal Highway Administration, and most are more than 40 years old, and more than 10% are considered structurally deficient.

States rely heavily on federal funds to pay for road and bridge projects. The Fed collects 18.4 cents-a-gallon tax on gasoline and 24.4 cents-a-gallon tax on diesel to fund the Highway Trust Fund, which then pays out to the states. The Highway Trust Fund may be insolvent by this time next year unless Congress extends a temporary funding measure which is scheduled to expire in September.

The American Society of Civil Engineers estimates it will take $20.5 billion annually to clear the bridge repair backlog, up from the current $12.8 billion spent annually. That’s just the backlog; to really make a difference, it will take an investment of $3.6 trillion by 2020 to keep the transportation infrastructure in a good state of repair.

Meanwhile, we’ve been watching the Fed’s quantitative easing plan for some time and wondering why it hasn’t really helped the broader economy; it has helped banks, but not much beyond Wall Street. This is not to say the large scale asset purchase program hasn’t had an impact; it has. There is fairly concrete evidence that it has led to lower long-term interest rates; which in turn helped lift some real estate markets that were battered after the housing bubble burst. Some real estate markets are downright hot. Home values in San Francisco and Honolulu are at least 20 times as high as estimated rents. In other words, prices have jumped up and there is a divergence with the underlying asset, which has the makings for a bubble, but that just a couple of markets.

The broader real estate market has experienced a slowdown in the recovery and one cannot help but wonder about the extent to which Fed actions to pull back on their large scale asset purchases is implicated in the said slowdown. When former Fed chair Bernanke set off the "taper tantrum" in a press conference in June of last year by pointing out that at some point, the Fed would start scaling back the LSAP, bond and mortgage rates spiked. The 30-year fixed-rate mortgage went up about a point around then from the mid-threes to the mid-fours and has stayed there.

The Fed has tried to explain away the housing slowdown on the bad winter weather, but that’s just part of the problem. The other part of the problem is that the housing recovery only helped recover lost equity, it didn’t help create equity. In other words, it was a recovery effort not a wealth creation effort.

Kind of like the situation right now with bridges. From the day President Eisenhower signed the Federal-Aid Highway Act of 1956, the Interstate System has been a part of our culture; as construction projects, as transportation in our daily lives, and as an integral part of the American way of life.  Every citizen has been touched by it, if not directly as motorists, then indirectly because every item we buy has been on the Interstate System at some point.  President Eisenhower considered it one of the most important achievements of his two terms in office, and historians agree.  Economists recognize that this enormous public works project helped propel the economy, and still does.

Right now, interest rates are low; they won’t stay low forever. Right now, people need jobs; a massive infrastructure project would provide jobs, especially for long-term unemployed workers. Putting more people to work would mean more money moving through the economy, increasing demand, improving productivity. It seems like a no-brainer, until you remember that the problem rests squarely with our elected officials. Maybe the Federal Reserve could stop its insane and ineffective large scale asset purchases; stop the helicopter drops over Wall Street and instead make helicopter drops of cash strategically, directly over about 63,000 bridges. 

Friday, January 31, 2014 - January Out

January Out

by Sinclair Noe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, November 06, 2013 - Banksters Continue Evil Games, Please Pay Their Bill on Your Way Out

Banksters Continue Evil Games, Please Pay Their Bill on Your Way Out

by Sinclair Noe

DOW + 128 = 15,746
SPX + 7 = 1770
NAS – 7 = 3931
10 YR YLD - .02 = 2.64%
OIL + 1.49 = 94.86
GOLD + 5.70 = 1318.60
SILV + .10 = 21.91

A record high close for the Dow Jones Industrial Average. The S&P 500 missed it's all-time high by one point.

Yesterday we told you that a couple of the Fed's top staff economists made the case in new research papers for more aggressive action by the central bank to drive down unemployment by promising to hold interest rates lower for longer. Late yesterday, John Williams, president of the SF Fed, threw fuel on that fire, saying the Fed should wait for stronger evidence of economic growth before winding down its massive QE bond buying program. Today, Cleveland Fed President Sandra Pianalto said tight mortgage credit has been holding back the economy, and will continue to hold back the broader economy from getting back to full strength.

Apparently the Fed heads have bought into the idea of the wealth effect from Wall Street and the housing market as the panacea to ail the economic ills, even though it appears QE is losing punch as time wears on. It can be argued that one of the effects of the financial crisis on US households was a sharp tightening of credit. Households that had previously been able to borrow relatively freely through credit cards, home equity loans, or personal loans suddenly found those lines closed off—just when they needed them the most. But that doesn't mean loosening credit will mean that capital finds its way to Main Street.

Tomorrow the European Central Bank meets to determine monetary policy, and today there was a report on stronger than expected German industry orders; balancing that report were surveys showing only modest growth in Spanish and French businesses, and that might convince the ECB to maintain a dovish stance at the meeting tomorrow.

Six banks are expected to face combined fines of just over $2 billion next month from European regulators for rigging yen Libor interest rates. Additionally, Reuters reports EU regulators will also penalize another group of banks for operating as a cartel in a separate case involving the rigging of the Euribor benchmark interest rate. Authorities in the United States, Britain and elsewhere have so far fined UBS, RBS, Barclays, Rabobank and ICAP $3.7 billion for manipulating rates. Seven individuals face criminal charges. The London inter-bank offered rate (Libor) and its European cousin (Euribor) are used to price hundreds of trillions of dollars in assets, from Spanish mortgages to derivatives. The six banks involved in the cartel case involving rigging Euribor are:Deutsche Bank, JP Morgan, HSBC, RBS, Credit Agricole and Societe Generale

If you notice, there are a couple of names missing from the list of usual suspects. Switzerland's UBS will not be fined because it was the first member of the group to come clean during the European Commission's investigation into wrongdoing; and Barclays, which alerted the European Commission to the suspected wrongdoing in relation to Euribor, will not be fined. A settlement with the EU over cartel allegations would require the banks to admit liability, potentially paving the way for lawsuits from investors and others who believe they have lost money because of the rates manipulation.

But wait, there's more. The foreign exchange or FX market is the largest financial market in the world, with a daily trading volume of nearly $5 trillion, and there are allegations the big banks may have been involved in widespread manipulation of currencies for a very long time; specifically, placing big bets immediately before and after release of the WM/Reuters rates. World Markets, or WM, is a unit of Boston based State Street. WM calculates daily standardized spot and forward rates for global foreign exchange transactions, using rates provided by Reuters. These rates are recognized globally as the standard. The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.

A few months ago, Bloomberg reported traders at  some of the world’s biggest banks had been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during 60 second windows when the benchmarks are set. The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives. 

The WM/Reuters rates are used by fund managers to compute the day-to-day value of their holdings and by index providers that track stocks and bonds in multiple countries. While the rates aren’t followed by most investors, even small movements can affect the value of the estimated $3.6 trillion in funds including pension and savings accounts that track global indexes, which track baskets of securities from around the world each day, are particularly vulnerable because they need to place hundreds of foreign-exchange trades with banks using WM/Reuters rates. The funds buy securities to match their holdings to the indexes they are required to track. 

The issue is most acute at the end of the month, when index-tracker funds invest new money from clients. By concentrating orders in the moments before and during the 60-second window, traders can push the rate up or down, a process known as “banging the close.”

Last week, seven banking giants were sued by A Haverhill, a Massachusetts-based benefit fund, alleging the banks’ manipulation of WM/Reuters rates impacted the value of financial transactions in the US, including foreign exchange trade, and also the pensions and savings accounts that are dependant on the global foreign exchange rates. Additionally, the Massachusetts-based benefit fund alleged that the banks violated Section 1 of the Sherman Antitrust Act. The banks being sued in this case are Barclays, Citigroup, Credit Suisse, Deutsche Bank, Royal Bank of Scottland, UBS, and of course JPMorgan Chase.

If you're wondering why we haven't heard more on the potential JPMorgan $13 billion settlement, one of the sticking points might be the taxes, or more specifically the tax deductions JPMorgan would like to claim on the settlement. Up to $9 billion of the settlement is tax deductible and that means the bank could write $3 billion off their corporate tax bill as a business expense. On Monday, Americans for Tax Fairness and the U.S. PIRG presented Congress with a 160,000 signature petition asking the Justice Department to add a provision to the settlement that would stop this from happening, and a bunch of Congressmen have jumped on board, calling U.S. Attorney General Eric Holder to do something.

Congressman Peter Welch also introduced a a bill to the House that would end the corporate tax deductibility of all legal settlements; he also sent a letter to CEO Jamie Dimon, which reads in part: “It was the taxpayer who initially funded the bailout of Wall Street. It was the taxpayer who continues to endure the consequences of the worst recession since the Great Depression. The taxpayer should not, therefore, be required to contribute a nickel towards the fines imposed for conduct that got America into this mess in the first place.”

Just a reminder that this latest round of rigging means that global benchmarks for interest rates, energy, derivatives, and now currency trades have all been manipulated. It's a rigged game, and and a very expensive game that permeates all facets of commerce and siphons off the profits for the gambling banksters. 

Thursday, March 14, 2013 - Infinite Possibilities

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.

Infinite Possibilities

by Sinclair Noe

DOW + 83 = 14,539
SPX + 8 = 1563
NAS + 13 = 3258

10 YR YLD + .01 = 2.03%
OIL + .41 = 92.78
GOLD + 2.60 = 1591.30
SILV - .11 = 28.91

March 14 is Pi Day, the official celebration of the mathematical constant pi, the number that represents the ratio of a circle's circumference to its diameter. What makes pi so special? It is an incredibly complex way to describe the simplest shape; a circle.

No matter how large or small the circle, the ratio is always 3.1415926, I could go on forever with the number

because, as an irrational number, pi never ends. Some scientific types have calculated pi to 10 trillion digits, but the numbers of pi are random, with no repeating patterns. So pi has an unknown, infinite quality. It never ends, and since it is really a circle, it has no beginning.

So, today is a day of infinite of infinite possibilities. Case in point.

The Dow posted a record high again. This is the tenth straight day of gains on the Dow. Ten day winning streaks are rare; only happened 25 times in the last 70 years. The all-time longest winning streak is 14 days, set back in 1897, and the longest modern day streak was 13 days in January 1987. Of course, length versus the magnitude of the streak are completely different metrics. The current mini-stampede has only delivered a 2.85% gain, making it the fifth weakest of 25 such moves.

There will be some sort of correction will occur sooner or later. The markets won't go up forever. Ultimately, there is an over-riding point of focus in the market, and that is price. Ultimately the market gets back to price. You can buy or sell at a given price, and if you do it right you have enough money to put a roof over your head and bread on your table.

We know the markets have a seasonal tendency to peak about this time of year; that has been the pattern over the past three years, and four years ago, in 2009, the market bottomed. So what is going to happen now? I wish I knew with certainty. What I do know with a fair amount of reliability is that investors and traders tend to get beaten up when they try to impose their will on the markets.

The next question is invariably: should I buy or sell? And I've told you this and repeat: follow your plan. If you don't have a plan, get a plan.

Because these markets are crazy.

On a day full of infinite possibilities, here's an idea that that's really crazy: break up the nation's largest and most powerful banks. There has been some chatter lately, including the Bloomberg story about how the big banks are essentially subsidized to the tune of $83 billion a year, and there is a report due out from the GAO that is supposed to back up that idea of the subsidy.

(Excellent article from David Dayen dealing with JPM)

We’ll get another one Friday, when Carl Levin’s Senate Permanent Subcommittee on Investigations releases their report, along with the hearing on the London Whale trades. We now hear the losses could stretch to $8 billion. Levin’s committee did an excellent job in prior investigations of Wall Street, including Goldman Sachs (which they gift-wrapped to the Justice Department as a criminal referral, only to see DoJ toss it in the wastebasket).

And there is a new report called “JPM – Out of Control” which is a 45 page report on the problems of JPMorgan Chase, and the problems are almost as infinite as the mathematical constant pi. The report is from an analyst named Josh Rosner of Graham-Fisher & Co. and it includes documented case after documented case of serious fraud and abuse, most of which JPM has already admitted to (at least in the sense of reaching a settlement; while “neither admit nor deny wrongdoing”). Rosner writes, “we could not find another ‘systemically important’ domestic bank that has recently been subject to as many public, non-mortgage related, regulatory actions or consent orders.”

Obviously this contrasts with Jamie Dimon’s spotless reputation (at least in Washington) and his bold talk of a “fortress balance sheet.” Yet as you read the report, it’s hard to see the bank as anything but a criminal racket just days away from imploding, were it not propped up by implicit bailout guarantees and light-touch regulators. Rosner paints a picture of a corporation saddled with pervasive internal control problems, and he calculates that since 2009, JPM has paid out $8.5 billion in settlements for its outlaw activity, which equals nearly 12% of net income over the same period.

It’s hard to summarize all of the documented instances in this report of JPM has been breaking the law, but here's a quick list:

Bank Secrecy Act violations

Money laundering for drug cartels;
Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;
Violations related to the Vatican Bank scandal;
Violations of the Commodities Exchange Act;
Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
The AG settlement on foreclosure fraud;
The OCC settlement on foreclosure fraud;
Violations of the Servicemembers Civil Relief Act;
Illegal flood insurance commissions;
Fraudulent sale of unregistered securities;
Auto-finance ripoffs;
Illegal increases of overdraft penalties;
Violations of federal ERISA laws as well as those of the state of New York;
Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
Filing of unverified affidavits for credit card bedt collections;
Energy market manipulation that triggered FERC lawsuits;
“Artificial market making” at Japanese affiliates;
Shifting trading losses on a currency trade to a customer account;
Fraudulent sales of derivatives to the city of Milan, Italy;
Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).

And these are only the ones where the company has entered into settlements or been sanctioned; it doesn’t even include ongoing investigations into things like Libor, illegally concealing inclusions of mortgage-backed securities in employer funds (another ERISA violation), the Fail Whale trades, and especially putback suits for mortgages.

Two case studies stand out. First, JPM is trying to stick the public with losses related to its purchase of Washington Mutual and its related liabilities. JPM wants to shift losses on over $190 billion in MBS onto the FDIC. They hope to get out from under as much as $5 billion in losses in this fashion. It’s impossible to logically follow JPM’s claim that they purchased WaMu but not any of its risk-related activities.

Finally, we have the Fail Whale trade, the subject of the Friday Permanent Subcommittee on Investigations hearing. The case study keys in on JPM’s internal “Task Force” report .It limited the scope of the investigation to late 2011 and 2012, when now-public data clearly shows the problems at the Chief Investment Office going back years earlier, and fully known to senior management at the time. This looks like a clear violation of Sarbanes-Oxley, as top executives annually attested to the accuracy of financial statements now known to be untrue. The Task Force tried to exonerate Jamie Dimon by actually saying in a footnote that he was out of town for a period of time covered by the report.

Do I really think that anything will come of these ever increasing reports that show the banksters are incredibly corrupt? Probably not, but today is pi day; a day of infinite possibilities.

Wednesday, March 13, 2013 - The World Changes, Some Things Don't

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 World Changes, Some Things Don't

by Sinclair Noe

DOW + 5 = 14,455
SPX + 2 = 1554
NAS + 2 = 3245
10 YR YLD un = 2.02%
OIL - .03 = 92.51
GOLD – 5.00 = 1588.70
SILV - .23 = 29.02

Today, the chimney billowed white smoke. The Catholic church has a new pope; Cardinal Jorge Bergoglio; he'll be called Francis, and he is from Argentina. This is a big change; a non-European pope. Though there is some controversy, Pope Francis has been described as a modest man, a simple man, very much involved in social justice, and he is known for his service to the poor. The world changes.

Some things don't change. The poor are still poor, the rich are still rich. A new pope doesn't change that. Record highs for the Dow Industrial Average does not change that. The wealthiest 10 percent of households own 80 percent of all corporate stocks.

It is good times for corporate America. Even as corporate profits have rocketed up by 20 percent a year since the end of 2008, the chieftains are still refusing to increase hiring and are holding down wages. As a result, the share of America's total income that goes to workers has now tumbled to the lowest level in nearly half a century. Today's massive backlog of unemployed and underemployed workers allows corporations to bring in hoards of top-quality applicants and literally toy with them. It's now common for a job-seeker to return five, seven, nine or more times to the same company hiring hall for senseless rounds of interviews - only to have the company whimsically decide not to fill the opening at all.

From Google to Starbucks, major corporations have roughly doubled the duration of their interview process in the last two years. The New York Times noted that one fellow seeking a video-editing job was run through a gauntlet of nine interviews and made to undergo a ridiculous battery of psychological and personality exams, along with a math quiz and a spelling test - after which the company simply closed the opening.

Insulting, yes, but expensive, too. The out-of-work interviewee has to pay for producing work samples and cover the cost of everything from dry cleaning to parking fees. The job-dangling corporation, on the other hand, can simply force existing employees to shoulder a heavier load, while it trifles with applicants looking for what is laughingly referred to in CorporateSpeak as "the purple squirrel" - an applicant too qualified to exist.

The world changes, yet it is still full of inequality. Even as the nation’s life expectancy has marched steadily upward, reaching 78.5 years in 2009, a growing body of research shows that those gains are going mostly to those at the upper end of the income ladder. If you have money, you are likely to live longer and healthier.

The tightening economic connection to longevity has profound implications for the debate about trimming the nation’s entitlement programs. Citing rising life expectancy, influential voices including the Simpson-Bowles deficit reduction commission, the Business Roundtable and lawmakers on both sides of the aisle have argued that it makes sense to raise the eligibility age for Social Security and Medicare.

But raising the eligibility ages — currently 65 for Medicare and moving toward 67 for full Social Security benefits — would mean fewer benefits for lower-income workers, who typically die younger than those who make more.

Overall, life expectancy has improved substantially since the first Social Security payments were issued in 1940. Then, a man who made it to 65 could expect to live 12.7 years, compared with 18.6 years in 2010. A woman who turned 65 in 2010 could expect to live 20.7 more years, compared with 14.7 in 1940.

That trend helped persuade lawmakers in 1983 to slowly move the age people could receive full Social Security benefits from 65 to 67, a change that will be complete in 2027. Now, as the cost of providing old-age benefits has emerged as the key driver of the nation’s long-term budget deficit, there is increasing pressure to again raise the retirement age — this time for both Medicare and Social Security.

But given the widening differences in life expectancy for people on opposite ends of the income scale, that would mean a benefit cut that falls heaviest on people who generally are most reliant on Social Security for their retirement income. It doesn’t take a rocket scientist to figure this out You just have to look at the socioeconomic and demographic differences: unemployment, education levels, and income to understand what is going on. This is fueled by poor economics and a lack of access to health insurance and health coverage.

So, this is the backdrop for competing budget plans in Washington. Yesterday, Paul Ryan presented the Republican plan. From the looks of it, the Ryan budget for fiscal year 2014 looks mostly like the Ryan budget for FY2012 and FY2011, with the added extra of banking the tax hikes he didn’t vote for in the fiscal cliff deal. It includes the same vague goal of marginal tax brackets of 10% and 25%, vouchers instead of Medicare, the repeal of Obamacare while keeping the revenue-raisers from Obamacare intact. In a press conference, Ryan explained: “We are not going to give up on destroying the healthcare system.” There are more details, but it really doesn't matter because it will never pass.

More noteworthy is today's budget plan from Senate Democrats. The topline numbers include $1.95 trillion in deficit reduction over 10 year, split between tax hikes and spending cuts, with $100 billion in new spending on a jobs program. This is smaller than Ryan's $5 trillion in cuts, which all come from the spending side.

The spending cuts are divided up this way: $493 billion in domestic savings, including $275 billion in health care cuts that the Democratic source said would not harm seniors or families. Defense spending would be cut by $240 billion in accordance with troop drawdowns from overseas operations. An additional $242 billion in savings come from reduced interest payments.

It’s perhaps possible to come up with $275 billion in health care cuts that “would not harm seniors or families,” but that would have to include reducing payments to stakeholders, something our captured Congress has found nigh impossible, especially when they’ve already handed over the forced market that insurers and hospitals and drug companies accepted as payment for their token give-backs in the Affordable Care Act.

At any rate, discretionary spending is already on a trajectory lower than what we spent as a percentage of GDP in the Eisenhower Administration. The usual argument here is that cuts to social insurance help “protect” the discretionary budget, but they both come up for cuts here.

Meanwhile, the Progressive Caucus issued their own plan. That budget, titled "Back to Work," offers a list of progressive priorities -- a public option for health care, negotiation of Medicare drug prices, a carbon tax, defense cuts, a financial transactions tax, much higher marginal tax rates for millionaires and billionaires, capital gains taxed as ordinary income, and public works projects, among dozens of other ideas.

In the middle of all of this is the White House. And they appear to be engaged in the tactic of saying different things to different audiences. The President said: “My goal is not to chase a balanced budget just for the sake of balance,” and that he’s focused on growing the economy. He also took a few swipes at the big fat target that is the Ryan budget. And then he told Senate Democrats on Tuesday that his budget to be released in April would align closely with their priorities. He also warned that Democrats need to embrace at least some changes to unsustainable entitlement programs in order to achieve their long-term priorities. But Obama acknowledged that Social Security and Medicare, big drivers of federal spending, wouldn’t survive without some changes to save money. Obama added that Republicans must first agree to more revenue hikes before the White House would concede on changes to entitlement programs.

So, we'll start sifting through all the plans and there is a good chance the politicians won't agree on anything, let alone a grand bargain. They have started the discussions at diametrically opposed positions. Delay is itself a policy. Sins of omission may be less visible than those of commission, but they are no less venal for that. Slowly and incrementally, the erosion of public programs triggered by the sequester is beginning to bite. There is no one dramatic moment in that process, of course, just slow death by a thousand cuts. Or they might just crash the government for lack of any better ideas.

So where is the moral outrage when, due to intransigence, the poorest amongst us find their resources diminished, while the profits and incomes of the privileged bounce back as if the past 5 years never happened?

Gandhi was right: Poverty is the worst form of violence. I don't know what the knew pope will say about poverty, but I hope he has studied Gandhi.