Tuesday, July 01, 2014 - The Good, the Bad, and the Depressing

The Good, the Bad, and the Depressing
by Sinclair Noe

DOW + 129 = 16,956
SPX + 13 = 1973
NAS + 50 = 4458
10 YR YLD + .05 = 2.56%
OIL - .13 = 105.24
GOLD - .80 = 1327.10
SILV + .02 = 21.08

Record high closes for the Dow and the S&P.

The record setting bull market run refuses to stumble. The S&P 500 has not seen a correction, a drop of 10%, for 1,002 days, and counting. This marks the fifth longest stretch without a correction since 1928. The average time between corrections is about 18 months; we’ve now gone 33 months without a 10% pullback.  

The Institute for Supply Management said its manufacturing index registered 55.3% in June, down slightly from May’s reading of 55.4%. Any number above 50% signals expansion. Separately, the research firm Markit said its final reading of US manufacturing conditions in June totaled 57.3, compared with a preliminary reading of 57.5; still the highest reading since May 2010. So the manufacturing sector has expanded for 13 consecutive months, but it wasn’t a month over month increase, and we have to remember that manufacturing was expanding in the first quarter as the broader economy was contracting by 2.9%. Today’s reports were decent news for manufacturing, but hardly great.

The Commerce Department reports construction spending increased 0.1% in May, following a 0.8% increase in April. Construction activity totaled $958 billion at a seasonally adjusted annual rate in May, up 6.6% from a year ago. Single-family home construction was down 1.4% while apartment construction dropped 0.6%. The hotspot for construction was a 4.3% rise in construction of power generating facilities.

The upshot is that the economy is continuing to improve from the deep freeze of old man winter, even if the recovery is tepid. Most economists and analysts had called for 3% growth in the first quarter, not a 2.9% contraction. Now that the weather and the economy have thawed, we’re hearing talk of 3% growth going forward.

The strongest S&P 500 sector this year has been Utilities, up 17%. The S&P 500 Energy sector is up 13%, with the following subsectors: Oil & Gas Equipment and Services rising 28%, Oil & Gas Storage and Transportation up 25% and Oil & Gas Exploration up 22%.The weakest S&P 500 sector so far this year has been Retailing.

June auto sales beat expectations with Chrysler, Nissan, Toyota and Hyundai all posting healthy gains compared with the same month a year earlier. General Motors had a small increase and Ford’s sales declined. June new car sales approached 1.4 million, about the same as a year earlier. Most analysts were forecasting a 2% to 3% decline for the month. GM recalled an additional 8.5 million cars yesterday, which means that GM has now recalled 29 million cars since the start of the year, more than the total number of vehicles it sold in 2011, 2012, and 2013 combined. It’s also more than the 22 million vehicles recalled by all automakers last year.

AAA predicts that nearly 35 million Americans will take a road trip of 50 miles or more on the Independence Day weekend. The current national average price for a gallon of regular gasoline is $3.68, compared with $3.48 a year ago. According to AAA, gasoline prices are 20 cents a gallon higher due to “market fear about Iraq”.

Sunnis and Kurds walked out of the first session of Iraq's new parliament after Shi'ites failed to name a prime minister to replace Nuri al-Maliki; so, the prospects are poor for a new unity government that might prevent Iraq from collapsing. Meanwhile, the ISIS rebels continue fighting; they control suburbs  just west of Baghdad; they have been waging fierce battles in Tikrit, north of Baghdad, and there have been clashes to the south of the capital, leaving the city surrounded on three sides. The United Nations says more than 2,400 Iraqis had been killed in June alone, making the month by far the deadliest since the US "surge" offensive in 2007.

Geopoltical hotspots continue to flare up. Ukrainian forces struck pro-Russian separatists bases in eastern Ukraine with air and artillery strikes. The ceasefire came and went, and won’t be renewed. Russian president Putin accused the Ukrainian prime minister of shunning the road to peace; while Russian foreign minister Lavrov warned of a “new round of bloodshed”.

 A follow-up on yesterday’s Supreme Court ruling in the Hobby Lobby case, which dealt with a closely held corporation’s objection to paying for contraceptives in employees’ health care under the Affordable Care Act mandate. The Supremes said corporations are people, my friend, and they have religious beliefs, and so they are exempt from the mandate. There had already been exemptions for churches and non-profit organizations; in those situations the government determined that contraceptives would be paid by the government. This was the solution put forth in 2012, and revised in 2013, whereby taxpayers could pick up the tab for contraceptive coverage, instead of religious employers, as a solution to the First Amendment issues in question.

Writing for the majority in the Hobby Lobby case, Justice Alito wrote: “[the White House] could extend the accommodation that HHS has already established for religious nonprofit organizations to non-profit employers with religious objections to the contraceptive mandate. That accommodation does not impinge on the plaintiffs’ religious beliefs that providing insurance coverage for the contraceptives at issue here violates their religion and it still serves HHS’s stated interests.”

In other words, while the government can’t compel Hobby Lobby to finance contraceptives, it can compel taxpayers to do so. Another name for taxpayer funded healthcare is “single payer”. I’m not sure if the Supremes intended this, but they just justified the government to establish a single payer health plan, at least for contraceptives.

There was a time when a majority of Americans were confident in the Supreme Court, but according to a new Gallup poll just 30% say they are confident in the highest court. That’s the good news; people have more confidence in the Supremes than in any other arm of government, but that may not be saying that much when confidence in the presidency stands at 29% and in the Congress at 7%. Which means Congress is even less popular than head lice, or T-Mobile, or Facebook.

The Federal Trade Commission says T-Mobile made money the old fashioned way, by charging customers hundreds of millions of dollars in bogus charges. The practice is often referred to as "cramming"; businesses stuff a customer's bill with bogus charges associated with a third party. In its complaint filed in federal court, the Federal Trade Commission claimed that T-Mobile billed consumers for subscriptions to premium text services such as $10-per-month horoscopes that were never authorized by the account holder. The FTC alleges that T-Mobile collected as much as 40% of the charges, even after being alerted by other customers that the subscriptions were scams.

Facebook has its own little scam. It modified hundreds of thousands of users' accounts by prioritizing 'positive emotional content' to see if it could make them happier or sadder, without telling them what it was doing.

Researchers from Cornell University and the University of California filtered information going into the news feeds of 689,000 users; that includes the constant flow of links, videos, pictures, and comments by friends. When positive emotional content from friends was reduced, users would post more negative content themselves, essentially becoming unhappier. The opposite happened when negative emotional content was reduced. The process has been dubbed “emotional contagion”.

The study, published in the journal “Proceedings of the National Academy of Sciences of the USA”, concluded: “Emotions expressed by friends, via online social networks, influence our own moods, constituting, to our knowledge, the first experimental evidence for massive-scale emotional contagion via social networks.”

A spokesman for Facebook said the research was conducted over a single week and none of the data was associated with a specific person's account. Instead, they said the site wanted to make its content more “relevant and engaging”.

Just to be clear, another name for emotional contagion is empathy, something that is in short supply at Facebook. What we really learned from this experiment is that the people at Facebook have spent so much time staring at a computer screen that they have become disconnected from emotional reality, and have to rely on scientists to run secret experiments on hundreds of thousands of lab rats, I mean customers, to discover that people get upset when their friends are unhappy. Even worse, the experiment confirms that social networks now have the power to change the emotional well-being of millions of lab rats, I mean customers, on a whim; just to see what happens; devoid of empathy.

Now that’s depressing.

Monday, June 30, 2014 - Narrow Decisions Leave the Doors Wide Open

Narrow Decisions Leave the Doors Wide Open
by Sinclair Noe

DOW – 25 =  16,826
SPX – 0.73 = 1960
NAS + 10 = 4408
10 YR YLD - .02 = 2.51%
OIL - .23 = 105.51
GOLD + 11.80 = 1327.90
SILV + .09 = 21.06

Today’s session marked the end of trading for June as well as for the second quarter. After a run to record closes, the S&P 500 Index posted a quarterly gain of 4.7%, and the Dow Jones Industrial Average had an increase of 2.2%. The Nasdaq Composite Index had a quarterly gain of 4.9%. It marks the sixth straight quarterly gain for both the S&P and Nasdaq. With six straight quarterly gains, the Nasdaq has had its longest streak of advances since 2000, while the S&P 500 has had its best run since 1998. The Dow, meanwhile, posted its fifth positive quarter of the last six.

For the first half of 2014, the S&P 500 is up 6%, with the Dow industrials up 1.4%, and the Nasdaq up 5.4%. Airline, pharmaceutical, and utilities stocks led advancers during the period, which was marked by the impact of bad weather, and a 2.9% drop in first-quarter gross domestic product. Yields on Ten year Treasury notes started the year at 3.03%, dropped down to 2.71% at the end of the first quarter, then dropped to 2.45% at the start of June. The S&P 500 has scored 22 record closing highs so far this year, which has increased concerns among some investors that the market might be due for a technical pullback. Yet the CBOE volatility index, or VIX, Wall Street’s fear gauge, has held near multiyear lows.

This week will likely see light trading with a holiday shortened week. The markets will close Friday for Independence Day. The monthly jobs report will be issued on Thursday.

Meanwhile, oil prices have advanced steadily from 98.46 a barrel at the start of the year, to 101.58 at the start of April, to 102.87 at the start of June.

The precious metals have also shown some recent signs of life. Spot gold started the year at 1206 an ounce, while silver began the year at 19.54. Since June 1^st, there has been a modest rally from 1252 for gold and 18.91 for silver. This is not a huge rally, and it doesn’t mark a challenge to old highs, but it might signal a bounce off recent lows.

Let’s start with a couple of cases from the Supreme Court. You recall that last week we noted the Supremes had been, uncharacteristically unanimous on several cases; that came to a screeching halt today in the case of Burwell v. Hobby Lobby and Conestoga Wood. In a 5-4 opinion authored by Justice Alito, the court ruled that the Obama administration has failed to show that the contraception mandate contained in the Affordable Care Act is the "least restrictive means of advancing its interest" in providing birth control at no cost to women.

The Affordable Care Act contains a provision requiring most employers to cover the full range of contraception in their health care plans at no cost to their female employees. The Obama administration had granted an exemption for churches and accommodations for religious hospitals, schools and nonprofits, but for-profit companies were required to comply with the coverage rule or pay fines.

Hobby Lobby, a Christian-owned craft supply chain store, and Conestoga Wood Specialties Store, a Pennsylvania wood manufacturer owned by a family of Mennonites, challenged the contraception mandate on the grounds that it violates their religious freedom by requiring them to pay for methods of contraception they find morally objectionable. The Religious Freedom Restoration Act says that the federal government may not put substantial burdens on religious exercise.  The owners of those companies believe certain forms of contraceptives are forms of abortion, in violation of the religious beliefs of the company’s owners.

So, the court was dealing with a couple of issues. First is a company like Hobby Lobby considered a person? This is important because the Religious Freedom Restoration Act protects “persons” but doesn’t mention for-profit corporations. Justice Alito wrote: "Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law."

The other issue was whether the mandate for contraception coverage imposed a substantial burden on Hobby Lobby. Well, it’s a pretty easy argument that anything the government requires a person to do is a substantial burden, so…, strike two.

The case is being billed as a battle between women’s rights and religious rights.

The opinion was written narrowly so as only to apply to the contraception mandate, not to religious employers who object to other medical services, like blood transfusions or vaccines. But there is no certainty the ruling will be interpreted narrowly. What if a company objects to something the government does, outside the realm of health care? Time will tell. Another point came when Justice Ginsburg wrote: “One might ask why the separation [between business and owner] should hold only when it serves the interest of those who control the corporation.”

The opinion applies to small, closely held corporations, but what if a big, publicly traded corporation makes a similar claim? As the majority itself noted, no big, publicly-traded corporation has emerged to make such a claim. The Court doesn’t have to rule on a question it isn’t asked. And a closely held corporation can still be pretty big. Hobby Lobby has 572 stores. “Closely held” refers to a corporation that has more than 50% of the value of its outstanding stock owned by 5 or fewer individuals. These corporations are thought to make up 90% of corporations; these corporations account for about 52% of private employment, or a little more than 60 million people. Hobby Lobby is being described as a narrow ruling but it has the potential to affect tens of millions of workers.

Now that the court has recognized that corporations have religious exercise, the door has been opened. All it takes is for the right plaintiff to walk through it.

The Supremes also issued an opinion in the case of Harris v. Quinn, ruling 5-4 that some government workers are not required to pay union dues. In writing for the majority, Justice Alito concluded that there was a category of government employee, a partial public employee, who can opt out of joining a union and not be required to contribute dues to that labor group. What is a partial public employee? In this case it refers to home-care aides who typically work for an ill or disabled person, with Medicaid paying their wages.

The court declined to strike down a decades-old precedent that required many public-sector workers to pay union fees, so this does not apply to employees such as teachers or police officers who work directly for the government.

The case, Harris v. Quinn, was brought by eight Illinois workers who provided home health care to Medicaid recipients. Several of the original plaintiffs were mothers who, helped by Medicaid, were personal home-care assistants to their disabled children and opposed joining the union and paying any union fees. Justice Alito wrote in the majority opinion: “Agency-fee provisions unquestionably impose a heavy burden on the First Amendment interests of objecting employees.”

The case deals with the “fair share” fees that most unions charge all employees, including nonmembers, to support collective bargaining. These fees prevent free-riding. Unions are required by law to bargain on behalf of members and nonmembers alike, all of whom benefit from collective bargaining. If some employees could simply decline to pay to support collective bargaining, all would have the incentive to similarly opt out, thereby undermining the union and harming all employees. It’s a classic case of the free-rider problem.

Because the case only deals with partial public employees, it is being called a narrow decision, however, by giving a constitutional underpinning to the anti-union “right to work” stance, the court short-circuited that process, retreating from its decades-long practice of giving states broad latitude in making economic policy, including labor policy. In this way, the court became very much involved in economic policy.

So, today the court split on two different cases, and in those splits they have opened up Pandora’s Box. We are likely to see and hear much more on these issues over the next few years.

Another court ruling today, didn’t quite make it to the Supremes, but potentially still important; the New York state Court of Appeals ruled that towns can use zoning ordinances to ban hydraulic fracturing, or fracking. Numerous municipalities across the state have either banned fracking or are considering doing so, and the trend may accelerate because of the court’s ruling. Of course, a state law in New York does not apply in other states, but it may be the start of a trend if not necessarily a precedent.

General Motors recalled more than 8.4 million vehicles worldwide today, bringing its total figures for the year above 28 million cars, more than the 22 million recalled last year by all automakers combined. GM said it was aware of seven crashes, eight injuries and three fatalities in the recalled vehicles, but said that there was no conclusive evidence that a defect had caused them. The death toll is  just from the latest round of recalls; 13 other deaths associated with other GM recalls involving ignition switches will result in payments of at least $1 million per family; at least that is the starting point unveiled today by a compensation expert hired by GM.

In economic data today; the National Association of Realtors (NAR) said its Pending Home Sales Index, based on contracts signed last month, increased 6.1% to 103.9, the highest level since September of last year. Contracts increased in all regions of the country, with the Northeast and West experiencing the largest gains. The Pending Sales Index looks at contracts for existing homes, with the anticipation there will be an actual sale in about 2 months; so it looks like there might be a little boost for home sales. However, signed contracts were down 5.2% from May of last year. Existing home sales are expected to decrease by 2.8 percent this year to 4.95 million, compared to 5.1 million sales in 2013.

There is a magazine called “The Banker” and each year they publish rankings of the profits and capital strength of the 1,000 biggest banks in the world. They estimate that last year the top 1,000 banks posted a record $920 billion in profit. This was the industry’s largest-ever annual haul, comfortably beating the pre-crisis peak of $786 billion in 2007. Last year's global profits were up 23% from the previous year to their highest ever level.

China's banks made $292 billion in aggregate pretax profit last year, or 32% of the industry's global earnings. Last year China Construction Bank shoved aside America's JPMorgan Chase to become second largest in terms of tier-one capital. And the total Tier 1 capital of Chinese banks has also overtaken that of the US for the first time ever, at $1.19 trillion, to make it the largest single banking sector in the world. ICBC (formerly known as Industrial and Commercial Bank of China) kept the top spot; with more than $200 billion, and it is also the world's most profitable bank, with $55 billion last years. Four Chinese banks made the top ten list for profits, including: ICBC, China Construction Bank, Agriculture Bank of China, and Bank of China.

Chinese officials have ramped up investment in real estate through the state controlled banking system to counter weaker than desired growth. They will likely continue this stimulus, even if it means construction of buildings that will sit vacant. Then there is the $5 trillion dollar question of the health of China’s lightly regulated shadow banking system.

The top US banks in terms of Tier-one capital are JPMorgan, Bank of America, Citigroup, and Wells Fargo. Banks in the United States made aggregate profits of $183 billion, or 20% of the global tally, led by Wells Fargo's earnings of $32 billion. The top 10 US banks in the 2014 ranking have an aggregate capital-to-assets ratio of 7.84%. This compares with a ratio of just 4.47% for the top 10 banks in the EU. To some extent, the difference is explained by US Generally Agreed Accounting Principles (GAAP), which allow netting of derivative positions.

Until 2007, Mitsubishi UFJ Financial Group was a banking giant in terms of tier-one capital, now it ranks tenth, and it is the only Japanese bank in the top ten. In the Top 1000 ranking 20 years ago, all the top six positions were held by Japanese banks. With 20/20 hindsight we can see that the Japanese banking boom was unsustainable. And now China’s banking boom seems to be getting ahead of itself. Chinese banks capital-to-asset ratio is 2 percentage points lower than that in the US, which basically means that if loans start to default, they have a smaller cushion.

Over the past 15 years, Chinese banks average profit growth has been more than 50% per year; while assets have risen more than 20% per year and China’s economic growth has been just under 14% per year. And in the past 4 years, the Chinese economy has slowed from those double digit growth levels, even as Chinese bank profits have accelerated. It seems unlikely that this path is sustainable, and more likely that there is some combination of lower growth rates in the banking sector or stronger growth rates in the Chinese economy.

Ten years ago, Europe counted five banks among the world's top ten. Today there is only one, HSBC, in fifth place. Struggling Eurozone banks contributed just 3% overall to global profits, down from 25% before the 2008 crisis, as recovery remains slow or non-existent in many countries. There are no French or Spanish or German banks in the top ten. Italian banks lost $35 billion last year, and occupy four of the top five spots in terms of the biggest annual losses. And European banks accounted for 24 of the top 25 losses.

Meanwhile, BNP Paribas is in hot water. Today, BNP pleaded guilty in New York state court, admitting to transferring billions of dollars to blacklisted countries under US sanctions. The plea to one count of falsifying business records and one count of conspiracy is part of a broader settlement deal with state and federal authorities. As part of that deal, BNP agreed to plead guilty to criminal charges and pay about $8.9 billion.

BNP is the seventh bank to settle a criminal sanctions violation case but the first to plead guilty; prosecutors consider BNP to be the worst offender. Like other banks, BNP hid the names of Sudanese and Iranian clients when sending transactions coursing through its New York operations and the broader American financial system, but the wrongdoing was more pervasive at BNP, stretching from at least 2002 into 2012, after the investigation was already in full swing.

The BNP investigation centered on its commodity-trade finance business in Paris and Geneva. About 30 executives who worked there have resigned, gone on leave, been fired or relocated since 2012. Unauthorized dollar payments were made on behalf of oil companies to Sudanese or Iranian entities. Prosecutors also reviewed metals and agriculture commodity deals, as well as non-commodity transactions. In total, the bank is suspected of hiding about $30 billion in transactions.

BNP will prevent certain units within BNP’s headquarters in Paris, as well as offices in Geneva, from processing payments in dollar denominations, also known as dollar clearing, for one year beginning in 2015. The deal also requires BNP dismiss 13 employees. The deal comes six weeks after Credit Suisse pleaded guilty to helping American clients evade taxes. Both banks could have faced the loss of their bank charter in the US, which is considered to be the Wall Street equivalent of a death penalty for a bank. That did not happen. Prosecutors have managed to extract a criminal guilty plea but only a civil penalty, a slap on the wrist, even if it is a nearly $9 billion slap.

In the months ahead, prosecutors will shift their focus to several big banks suspected of manipulating foreign currencies; they are expected to use the Credit Suisse, BNP cases as a template for pulling down criminal guilty pleas without harsh punishment, proving what we’ve known for a very long time – the big banks are too big to jail.

Tuesday, April 01, 2014 - Murderers and Cheats

Murderers and Cheats
by Sinclair Noe

DOW + 74 = 16,532
SPX + 13 = 1885
NAS + 69 = 4268
10 YR YLD + .04 = 2.76%
OIL – 1.99 = 99.59
GOLD – 5. 00 = 1280.80
SILV un = 19,86

Congratulations Mary Barra, you’ve been named CEO of General Motors, one of the biggest companies in America; now head on over to Capitol Hill to take the blame for the people who used to run the company.

Barra’s appearance before a subcommittee of the House Energy and Commerce Committee represented a significant new phase in the company’s crisis since it issued recalls that began in February for 2.6 million Cobalts and other vehicles. The problems with the cars involve faulty ignition switches; GM repeatedly failed to fix faulty ignition switches, despite conducting multiple internal studies of the problem since 2001, and 13 people died in the defective vehicles.

Members of Congress and the families of people killed in GM cars are urging Barra to declare the cars unsafe to drive until new ignition switches are installed. So far, GM has said the vehicles are safe to operate as long as there are no objects attached to the ignition key.  GM conducted several internal investigations of the switch problems, dating back as far as 2001. Company engineers learned that the key in the ignition could be inadvertently bumped into the off or accessory position, causing the engine to lose power and disabling air bags.

Documents show that GM approved the switch for installation in its compact cars in 2002, despite data from its supplier, Delphi that the key turned too easily in the ignition. Meanwhile, the National Highway Traffic Safety Administration knew of problems but did not order earlier recalls. The automaker rejected changes to the switch in 2004 and 2005 despite becoming aware of consumer complaints. In July 2005, the company and the National Highway Traffic Safety Administration learned of a fatal accident in Maryland that killed a young woman. It was the first of what would become a series of incidents in which vehicles suddenly lost power and air bags failed to deploy in a crash.

GM and Delphi changed the switches in 2007, but the new switches were also defective. Federal safety regulators made an internal recommendation to open a formal defect investigation in 2007 after receiving information about four fatal crashes involving air bags that failed to deploy, but the agency declined to pursue a formal investigation because, it said, it “did not identify any discernible trend.”

Last night, Barra met privately with 22 family members of accident victims at GM's offices in Washington. There is nothing that would indicate that Barra was involved in the past problems; she will be very much involved in resolving those problems. There needs to be compensation for families of the victims. And they will have to find out what went wrong, and how it could continue to go wrong for so long. There are still cars on the road with faulty switches. They will have to deal with that and fast. At this point, any more deaths would be tantamount to murder. Maybe we’ve already hit that point.

The executives at GM knew for 13 years that their cars had a defective ignition switch that could and did kill people. They did a "cost-benefit analysis" and concluded that paying off the deceased's relatives was going to be cheaper than having to install a $10 part per car. They then covered up their findings and continued to let millions drive around with the defective part in their cars. There would be no recalls. People died; parents had to bury their children.

Also today in Washington, the Senate Permanent Subcommittee on Investigations released a report on Caterpillar, the company that makes heavy construction and mining equipment. According to the report, Caterpillar paid its tax consultant and auditor, PricewaterhouseCoopers to help set up the transfer of $8 billion in profits to a Swiss subsidiary between 1999 and 2012. The transfers had no economic substance and were made solely to take advantage of the lower tax rate Caterpillar negotiated with Switzerland, which ultimately resulted in about $2.4 billion in tax savings. And even though the tax scheme was just a way of shuffling paper to avoid taxes, the report did not draw any conclusions about whether this was illegal. It will likely result in the introduction of new legislation to make it tougher to skirt tax laws, but then that legislation would have to pass, and there will be armies of lobbyists on the case.

Over the past two years, GE has deployed more lobbyists than any other company to argue for a tax loophole that lets businesses deduct interest earned from overseas lending, according to a new report by Americans for Tax Fairness. This particular tax break will likely cost the US government $62 billion in revenue over the next decade.

GE lobbyists made contact with lawmakers or their staffs at least 863 times over a two-year period between 2011 and 2013 to argue for the loophole, known as the "active financing exemption." Congress is expected to extend the exemption again soon, with bipartisan support. The company paid its lobbyists $63 million to advocate for the exemption and other tax-related interests over that time. Citigroup, the next-busiest company, sent lobbyists half as often to push for the deduction and spent less than $15 million.

All told, the top 30 companies and trade organizations that lobbied for the exemption; major Wall Street banks and other big multinational companies with financing arms, such as GE and Ford; made more than 4,000 contacts with Congress to press for an extension of the exemption. They paid lobbyists $586 million over that time. The tax break essentially lets businesses indefinitely shield from US tax authorities interest they earn from lending money overseas.

It's not clear how much the loophole benefits each individual company, in terms of tax savings. It also can't be determined from lobbying records how much money GE or other companies spent specifically to push for the active financing exemption because companies often lump together spending totals for several issues together. But GE wrote in its 2012 annual report that if the provision were not renewed, "we expect our effective tax rate to increase significantly."

Congress technically did away with the active financing exemption as part of a tax-code overhaul in the 1980s. At the time, lawmakers said it was too easy for companies to cut their tax bill artificially by making it seem as if profits earned in the US were instead earned overseas. Yet Congress reintroduces the exemption every year, as part of a giant package of more than 50 tax breaks known as tax extenders, which the Congressional Budget Office calculates could cost the government $700 billion over the next decade.

Support for the extenders is typically bipartisan. The last round expired at the end of 2013, and Congress is now considering a package that would apply the tax breaks retroactively to the beginning of 2014.

The companies who have pushed hardest for the extension of the tax loophole are among those that are the most criticized for exploiting US tax laws in order to shelter huge amounts of revenue overseas. Though the US corporate tax rate is technically 35%, the companies that employ the active financing deduction and other tax-sheltering mechanisms pay a far lower effective rate.

General Electric, according to some calculations, pays an effective rate of less than zero in many years. GE claimed a tax benefit of $3.1 billion, meaning it claims it overpaid by that much, between 2008 and 2012 on $27.5 billion in profits

According to a new report from ISI Research, US S&P 500 companies now have $1.9 trillion parked outside the country. Some of that is just multinational corporations profits overseas; welcome to globalization; a big part of it is tax avoidance. Apple figured out a way to legally avoid paying corporate income tax on $30 billion of overseas profits. Apple set up a shell company, an Irish subsidiary that didn’t owe Irish taxes because it was managed and controlled from the US, but it didn’t owe US taxes because it was incorporated abroad. Brilliant.

Except, sometimes a big multinational like Apple might want to bring that money back to America, at which point the government taxes the difference between what companies pay in corporate income tax abroad and what they would have paid here. So, if they ever want to get the money out of international limbo, there shouldn’t be any advantage to this kind of tax avoidance scheme. Unless, the government does something stupid, like rewarding this bad behavior, with a tax repatriation holiday; a brief window of amnesty to bring capital back onshore at a fraction of the tax rate, pennies on the dollar. So, all Apple has to do is be patient and wait for the tax repatriation holiday.

And why would the government offer such a gift to tax dodgers? The thinking is that it brings in fresh money, which will be put to productive purpose, spurring economic growth. We tried it in 2004, and it doesn’t work. Growth and investment didn't increase. Even though corporations weren't supposed to use these funds for share buybacks or dividends, they did. That was good news for stock owners; bad the economy and even worse news for workers. Some of the companies that brought the most money back actually laid people off.

Friday, march 28, 2014 - Ukraine, Climate Change, and More

Ukraine, Oil, Climate Change, and More

by Sinclair Noe

DOW + 58 = 16323

SPX + 8 = 1857

NAS + 4 = 4155

10 YR YLD + .04 = 2.71%

OIL  + .30 = 101.58

GOLD + 3.20 = 1295.90

SILV + .13 = 19.92

Consumer spending increased 0.3% in February, but the January reading on spending was revised lower to 0.2%. Disposable income, or the money left over after taxes, rose 0.3% after adjusting for inflation, the most since September. It climbed 2.1% from February 2013. Wages and salaries increased 0.2% after a 0.3% gain. This tells us a few things; consumers are spending what they earn, basically hand to mouth; also incomes and spending are not enough to lift the economy and we will be seeing first quarter GDP estimates revised lower.

Today’s spending report showed purchases of durable goods, including automobiles, increased 0.1% after adjusting for inflation following a 0.4% drop in January. Purchases of non-durable goods, which include gasoline, gained 0.3%. Household outlays on services climbed 0.2% after adjusting for inflation. Today’s data also showed the core price measure, which excludes fuel and food, rose 1.1% from a year ago, the same as in January.

Total prices, which are the ones tracked by Federal Reserve policy makers, were up 0.9% from February 2013, the smallest year-to-year gain since October. That remains well below the central bank’s 2% target.

The Thomson Reuters/University of Michigan consumer sentiment index final reading for March came in at a four-month low of 80, down from 81.6 in February.

Next week’s big economic report will be the Friday jobs report. Unlike the last three monthly employment reports, the March data should be fairly clean of weather effects. And so the forecasts are calling for 200,000 net new jobs, compared to the 175,000 jobs added in February. A reading of 200k or better would confirm the idea that economic activity in the first quarter was slowed by the weather, and stable fundamentals will support strong growth.

US military officials estimate Russia's reinforcement of troops near Ukraine has brought the total forces there to as many as 40,000. The new US estimates of as many as 35,000 to around 40,000 troops are higher than the more than 30,000 total deployments reported earlier this week by US and European sources familiar with official reporting. Ukraine's estimates of Russian forces near the border are far higher than Western figures; the Ukrainians estimate there are 100,000 Russian troops amassed on the border. The military buildup is adding to concerns that Russia may again be readying an incursion into Ukraine following its annexation of Crimea.

The Russian deployments included the establishment of supply lines and a wide range of military forces. These include militia or Special Forces units made up of Russian fighters wearing uniforms lacking insignia or other identifying markings, similar to the first Russian forces to move into Crimea during Russia's recent military takeover there. The Pentagon has said there was no indication that the forces were carrying out the kind of springtime military exercises Moscow has officially cited as the reason for their deployment. Ukraine's government has put its heavily outnumbered and outgunned forces on alert for an invasion from Russia in the east.

President Obama wrapped up a foreign trip today with a visit to Saudi Arabia. The trip started with a visit to The Hague, then an economic summit in Brussels, then a visit to Italy and a meeting with Pope Francis; his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security. It is a safe bet that the conversation with the Saudi King included Ukraine.

So here are a few thoughts: it is possible that the US could sustain a sale of 500,000 to 750,000 barrels of oil per day from the Strategic Petroleum Reserves, the SPR. If the US coordinated with the Saudis to ensure that they did not cut back production; indeed, they could even step up production from 9.7 million bpd; the greater supplies could slash prices almost immediately. Russia gets about 70% of its export revenue from oil and gas, so even a modest drop would be a significant blow. It is estimated that a $12 drop in the price of a barrel of oil could potentially cost Russia $40 billion in revenue.

This might have been part of the discussion but don’t count on it. Saudi incentives aren’t exactly in line with such a move. As one the world’s largest oil producers, Saudi Arabia would suffer from a drop in oil prices. And the fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America Merrill Lynch estimates the Saudis need a global oil price of $85 per barrel for its budget to break-even. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from around $100 a barrel, where they have been for the last few months.

Back in the US, Obama could get an earful from oil producers if he reaches for the SPR spigot. Attempting to saturate the market with SPR oil could lower prices, but that would be pretty damaging to US drillers. The SPR remains a potential weapon in the arsenal against Russia but it is a double edged sword.

A report in The Guardian provides a preview of a UN climate science report due to be published Monday. Government officials and scientists are gathered in Yokohama this week to wrangle over every line of a summary of the report before the final wording is released on Monday; the first update in seven years.

Nearly 500 people must sign off on the exact wording of the summary, including the 66 expert authors, 271 officials from 115 countries, and 57 observers; but governments have already signed off on the critical finding that climate change is already having an effect, and that even a small amount of warming in the future could lead to "abrupt and irreversible changes".

The final report from the Intergovernmental Panel on Climate Change, IPCC, will reportedly say that "In recent decades, changes in climate have caused impacts on natural and human systems on all continents and across the oceans."

"Both warm water coral reef and Arctic ecosystems are already experiencing irreversible regime shifts,” in other words we are already at the tipping point in some areas of the world. The biggest risks are for people living in low lying coastal areas, but there are also risks for inland flooding, as well as extreme heat waves. Drought could put safe drinking water in short supply. Storms could wipe out infrastructure. Climate change will slow down economic growth, and create new "poverty traps". Some areas of the world will also be more vulnerable – such as south Asia and south-east Asia.

The report argues that the likelihood and potential consequences of many of these risks could be lowered if ambitious action is taken to reduce the greenhouse gas emissions that cause climate change, but the report also acknowledged that a certain amount of warming is already locked in, and that in some instances there is no way to escape the effects of climate change.

The administrator of MF Global Holdings' bankruptcy plan has sued the auditor PricewaterhouseCoopers for at least $1 billion over its advice on a $6.3 billion European sovereign debt investment that helped fuel the brokerage's rapid demise.

According to a complaint filed in US District Court in Manhattan, PwC committed professional malpractice by offering "flatly erroneous" advice concerning, and approval of, the off-balance-sheet accounting treatment for the debt by MF Global and its then-chief executive, Jon Corzine. The complaint said PwC knew that the investment would add significant risk to MF Global's already weak finances. It said MF Global would not have taken on the exposure, which allowed it to book immediate revenue, had it received sound advice.

Corzine invested $6.3 billion in debt of countries such as Belgium, Ireland, Italy, Portugal and Spain to advance his strategy of transforming his futures and commodities brokerage into a global investment bank. As Europe's economy weakened, MF Global struggled with worries about the debt, margin calls, credit rating downgrades, and news that money from customer accounts was used to cover liquidity shortfalls, ending in its October 31, 2011 bankruptcy. The complaint said it is the first seeking to hold PwC liable for malpractice over its accounting advice for the sovereign debt. It does not address how customer money was used. Creditors would share in recoveries if the lawsuit succeeds.

General Motors is adding 971,000 cars to its global ignition switch recall, which began in February with 1.6 million vehicles and has been linked to a dozen deaths. GM said the recall is being expanded to include versions of the Chevrolet Cobalt, Chevrolet HHR, Pontiac G5, Pontiac Solstice and Pontiac Sky made during model years 2008-2011. Older versions of those cars, dating back to 2003, were recalled in February, along with the Saturn Ion.

A GM spokesman said "we're not taking any chances" that some of the newer cars could have ignitions that could be switched from "run" to "accessory," shutting down the engine and disabling the cars' power steering, power brakes and airbags. So it looks like GM is finally trying to do the right thing, but only after years of doing the wrong things.

Wednesday, March 12, 2014 - The Next 25 Years

The Next 25 Years

by Sinclair Noe

DOW – 11 = 16,340
SPX + 0.57 = 1868
NAS + 16 = 4323
10 YR YLD - .04 = 2.72%
OIL – 1.96 = 98.07
GOLD + 17.70 = 1368.20
SILV + .43 = 21.42

Let’s run through some of the economic and business news and then we’ll get to today’s anniversary.

Stocks were flat. People are still trying to make heads or tails of this mixed up world. The situation in Ukraine is not improving. The EU agreed a framework for its first sanctions on Russia since the Cold War. Protesters battled soldiers in the streets of Caracas, Venezuela; two more protesters were shot; dozens were injured. Riot police clashed with demonstrators in several Turkish cities for a second day as mourners buried a teenager wounded in protests last summer.

The Senate Banking Committee announced an agreement on legislation to wind down the government-owned mortgage financiers Fannie Mae and Freddie Mac. Share price cratered.

Herbalife says the Federal Trade Commission has opened an inquiry into the company. The FTC confirms the inquiry, but not the nature of the inquiry. Share price cratered.

Copper prices dropped to the lowest level in almost 4 years; this goes back to China, and is a canary in the coal mine for industrial demand. China is one of the metal’s biggest customers and there has been recent poor trade data out of China. Two Chinese solar companies have defaulted in the past week. The general risk from here is that this move in metals prices further destabilizes the Chinese financial system and will raise concerns of a hard landing in China if the authorities can’t get ahead of the pressures and potential contagion effects this move is generating.

A Senate subcommittee plans to hold a hearing in early April on GM's recall last month of more than 1.6 million vehicles with the faulty ignition switches which have been linked to 12 deaths. Most of the affected cars were sold in the United States. Even after the long delayed recall, GM says drivers should not use big, heavy key rings. Not a good repair job.

It is illegal for Tesla to sell cars in New Jersey, other than traditional auto dealerships, which is not the Tesla business model. Guess who pushed that law through the New Jersey legislature; this, even though Tesla does not limit the number of keys you can safely have on a key ring.

Citigroup recently discovered they had made $400 million in fraudulent loans to a company in Mexico, now they’ve uncovered three new sets of problems loans, each at about $10 million.

Fabrice Tourre, the Goldman Sachs trader convicted of defrauding investors in a subprime mortgage product that failed during the financial crisis has been ordered to pay a fine of $825,000. The SEC accused Tourre of concealing from investors how Paulson & Co, the hedge fund of billionaire John Paulson, had helped put together a fund of subprime mortgages called Abacus, and had bet it would fail.  Paulson made a cool $1 billion by shorting Abacus, while investors lost the same amount. Goldman, the company, in July 2010 reached a related $550 million settlement with the SEC. It did not admit wrongdoing but acknowledged and expressed regret that its marketing materials were incomplete. Tourre resigned from Goldman in December 2012, and is pursuing a doctorate in economics at the University of Chicago.

Boeing says the missing 777 Malaysia Airlines jetliner was not subject to a new US safety directive that ordered additional inspections for cracking and corrosion on certain 777 planes. They still have no idea where the jet is.

This week, we’ve been looking at anniversaries: the 5^th anniversary of the bull market, the 14^th anniversary of the bear market, the 3^rd anniversary of the Fukushima disaster. Today marks the 25^th anniversary of the World Wide Web. This is actually a somewhat questionable anniversary; not because of the malware, the misinformation, the internet trolls, the time wasting, and the tedious social media that passes as actual human interaction.

No, this is a questionable anniversary because the world wide web must be differentiated from the internet and even after we had the web, we waited until 1993 to actually have a web page. The web was built on top of the internet. On the internet, the connections are between computers using cables and other physical links; on the web, connections are hypertext links. The web is a way to present information from a software application known as a web browser using Hypertext Markup Language or Hypertext Transfer Protocol, HTML or HTTP. The web was based on a proposal written on March 12, 1989 by Sir Tim Berners-Lee, and then we had to wait until December 1990 for Berners-Lee to release the first web browser, called the WorldWideWeb.

So, what will the web look like in the next 25 years? That is part of the question posed on this anniversary by none other than Berners-Lee in an interview published today in the Guardian; he believes the web should be "accessible to all, from any device, and one that empowers all of us to achieve our dignity, rights and potential as humans." He hopes to re-invent the Web through the "Web We Want" initiative, which would create a universal "Internet Users Bill of Rights"; think of it as an online Magna Carta.

The initiative would build support for national and regional campaigns to create a world where everyone is online and free to participate in the flow of knowledge, ideas, collaboration and creativity over an open Web. Without an open, neutral Internet, we can't have an open government, good democracy, healthcare, connected communities and a diverse culture. And Berners-Lee says: "It's not naive to think we can have that, but it is naive to think we can just sit back and get it."

Among the obstacles to an open, neutral internet, Berners-Lee cites principles of privacy, free speech, responsible anonymity, the impact of copyright laws, and the overhaul of how security services are managed especially in light of American and British spy agency surveillance of citizens.

The web has become an indispensable tool for communications, science, education, health, democracy, entertainment, finance, advertising, and commerce. It has been well argued that the internet is the most significant contribution to spreading knowledge since the introduction of Gutenberg’s printing press, but this web is much faster; Martin Luther’s 95 theses can now be pinned on someone’s Facebook wall and travel round the world in the blink of an eye. The growth of the web has been exponential; actually that is not a strong enough word to describe the growth.

The Web has brought tremendous innovation, but how do we measure innovation’s impact on our standard of living? We can look at the web and easily see that it has been very profitable for many; fortunes have been made, and lost. The most recent fortune will likely go to the innovators behind the Candy Crush game, King Digital; today they announced an initial public offering that values the company at $7.6 billion; and Wall Street analysts immediately started whining that the valuation was low based on trailing 12 month PE of 13.3. This is for a video game. What is the net contribution to economic growth from a video game?

Another way of looking at innovation is price. It is fairly easy to assess the value of innovation if it lowers the price of something, such as a car or food. How do we measure an improvement in quality for something that already exists? The internet has provided people with tremendous information on health and medicine; surgery is more likely to be successful now than before this information was available. How do we measure that?

The financial industry has claimed to embrace innovation. Yes, you can get your bank statement online and businesses can accept digital payments online, but it also led to bankers devising better ways of manipulating markets and the so-called innovation of the vast world of ticking time bombs known as derivative. You can also make the case that the net social contribution from so-called financial innovation was negative.

And for all the good things that we get from the internet, you have to wonder if we’ve squandered this gift of technology. So much effort has gone into advertising and marketing and targeting customers; this makes sense because you have to make money in order for the technology to be viable, but has this emphasis detracted from directing our efforts to improve our standard of living? How can we compare Facebook and Twitter and Candy Crush with the invention of powered air flight, the development of the interstate highway system, the polio vaccine?

This is not to say that social media has a negative social contribution (I’ll leave that distinction to the bankers). Social media can do amazing things: a spike in Twitter posts about upset tummies can alert the doctors to a salmonella outbreak, an amber alert on my phone may save a child’s life, there are massive online campuses that can provide an education comparable to the best universities, great thoughts abound on Redditt, the libraries of the world are now available at the click of a button, and the great cacophony of millions of voices may someday come together in crowd sourced harmony to create beautiful music.

In the past 25 years, we’ve seen some amazing innovation, lots of cool stuff, lots of silly stuff, and a fair amount of bad stuff on the internet. In the next 25 years, maybe we’ll do better.

Tuesday, December 10, 2013 - Impossible Until It Is Done

Impossible Until It Is Done

by Sinclair Noe

DOW – 52 = 15,973
SPX – 5 = 1802
NAS – 8 = 4060

10 YR YLD - .06 = 2.79%
OIL + 1.17 = 98.51
GOLD + 21.60 = 1263.00
SILV + .59 = 20.53

Today federal regulators voted to implement the Volcker Rule. It won't actually be implemented until 2015, but the vote was today. The Volker Rule will lay out specific activities that banks can and can't do.

The final rules would prohibit proprietary trading by banking entities. As required by the Dodd-Frank Act, the final rules would include exemptions for: Underwriting - this exemption would require that a bank act as an underwriter for a distribution of securities (including both public and private offerings) and that the trading desk’s underwriting position be related to that distribution. Market making-related activities - a market-making desk may hedge the risks of its market-making activity under this exemption. Risk-mitigating hedging - this exemption would require that hedging activity is identified specifically. Trading in certain government obligations banks could still trade in Treasuries and muni's, and what the heck, foreign sovereign debt or its political subdivisions.

The final Volker Rule would also clarify which activities are not considered proprietary trading, and it is looking like nothing is considered a proprietary trade with the possible exception of when a bank trader places a bet on the Yankees with his local bookie. You may recall that Jamie Dimon tried to claim that the London Whale was not involved in proprietary trading, rather hedging; of course this was after he claimed he didn't know what the London Whale was doing

The final rules would become effective (appropriately) April 1, 2014. The Federal Reserve Board has extended the conformance period until July 21, 2015. Turning the Volker Rule into regulations has been slowed by a lobbying onslaught. And it looks like the banking lobby has won. The banks met with regulators on a regular and constant basis, and basically rewrote the rules. There was a token appearance from bank reformers, but the odds were against them by about 99 to 1.

The Volker Rule won't be totally worthless. Already many banks have shut down or spun off the desks they used for trading that was clearly solely for their own account, what’s known as proprietary trading. Banks do other kinds of trading that can also make them money, or loses it. Figuring out which trades fall into which category isn’t always easy, and deciding how much risk is too much for which kind of transaction may be even harder. On these issues, how regulators decide to enforce the rules may be as important as the rules themselves. Some regulators may be concerned only with seeing that the markets operate smoothly, other regulators may actually try to prevent banks from trading that would blow up the bank and possibly the global financial system.

The banks say there is no way to distinguish between proprietary trading and hedging and market making. Paul Volker, the former Chairman of the Federal Reserve, the guy the rule was named for; Volker says the distinctions aren't tough: “It's like pornography, you know it when you see it.”

Bottom line is that the banks are going to try to skirt the rules, and whittle them down a bit more before implementation, but if this fails, the logical next step is to make it real simple and reinstate the Glass-Steagall Act.

And here is why it will likely fail: the banks wrote the rules, it's all way too complicated, too big to fail is still a problem – only bigger, and nobody cares. Admit it, your eyes are starting to glaze over. Your concern is whether the ATM will spit out cash, will the bank process your payment to the electric utility, and maybe they can pass out a few mortgages from time to time. So, nobody will say much until the next credit freeze, or the next international crisis when everything goes to hell in a handbasket and the banks come begging for bailouts. When that happens, we can all shout bloody murder.

Don't worry. What could go wrong?

Right now, politicians are gathering in Washington to craft and pass a budget deal and avert another government shutdown, which could happen January 15, unless they can put together a deal. And it looks like they might be close to a deal to de-fuse this fiscal time bomb they set themselves.

Any tentative budget deal might allow spending to rise from the scheduled $967 billion for fiscal 2014 to around $1 trillion. While that increase in outlays would be offset by raising some government fees and possibly cutting federal workers' retirement benefits. The plan does not purport to be any "grand bargain" that would slash the federal deficit. They may have a deal in the next few days, but for right now, there is no deal.

GM is once again General Motors, and no longer Government Motors. The US Treasury sold its last shares yesterday. Bailouts from the Bush and Obama administrations helped GM avoid liquidation and instead reorganized in 2009 bankruptcy. In return, the Treasury became a shareholder in GM. The US said it lost about $10.5 billion on its investment of $49.5 billion, but that's not the entire story.

GM was returned to investment-grade status by Moody’s Investors Service in September after losing it eight years ago; it's back in the S&P 500 index (it had been kicked out back when it was facing bankruptcy). Share price is up over 40% year to date. They're making good cars that are winning awards. And they have a new CEO, Mary Barra, the first female CEO of an automotive company.

According to a study by the Center for Automotive Research, a total automobile-industry shutdown from a liquidation of GM and Chrysler would have cut 2.63 million jobs from the US economy in 2009.  The bailout saved or avoided the loss of $105 billion in transfer payments and the loss of personal and social insurance tax collection in 2009 and 2010.

Eight major technology companies have joined forces to call for tighter controls on government surveillance, issuing an open letter to President Obama arguing for reforms in the way the US snoops on people.

The companies said that while they sympathize with national security concerns, recent revelations make it clear that laws should be carefully tailored to balance them against individual rights. The letter reads in part: "The balance in many countries has tipped too far in favor of the state and away from the rights of the individual — rights that are enshrined in our Constitution... This undermines the freedoms we all cherish. It's time for a change."

The companies signing off on the letter include: AOL, Apple, Facebook, Google, LinkedIn, Microsoft, Twitter, and Yahoo. It sure would have been nice if the tech companies had been loudly supporting intelligence reform before Snowden's disclosures.

And today, more than 500 authors delivered a petition urging the United Nations to create an international bill of digital rights that would enshrine the protection of civil rights in the internet age. The signatories say the capacity of intelligence agencies to spy on millions of people's digital communications is turning everyone into potential suspects, with worrying implications for the way societies work.

The petition says the extent of surveillance revealed by Snowden has challenged and undermined the right of all humans to "remain unobserved and unmolested" in their thoughts, personal environments and communications. "This fundamental human right has been rendered null and void through abuse of technological developments by states and corporations for mass surveillance purposes."

The statement adds: "A person under surveillance is no longer free; a society under surveillance is no longer a democracy. To maintain any validity, our democratic rights must apply in virtual as in real space."

Demanding the right "for all people to determine to what extent their personal data may be legally collected, stored and processed", the writers call for a digital rights convention that states will sign up to and adhere to. "Surveillance is theft. This data is not public property, it belongs to us. When it is used to predict our behaviour, we are robbed of something else – the principle of free will crucial to democratic liberty."

Have you heard about the Doomsday File. Edward Snowden claims he didn't bring a single NSA document into Russia, but as journalist Glenn Greenwald has hinted, he may have access to a trove of pilfered documents stored on a data cloud. British and US intelligence officials tell Reuters they think he may have a "doomsday" cache containing highly classified material to ensure he won't be arrested or physically harmed. He's believed to have enough data to keep the bombshell reports coming for the next two years. It's unclear if intelligence agencies know where the data is stored, but somehow they're aware that at least three people have the passwords, which are only valid at certain times each day.

Of course today also the memorial service for Nelson Mandela. More than 100 current and former heads of state plus tens of thousands of others, attended the service at a soccer stadium in Soweto. Jacob Zuma, the current president of South Africa was booed. President Obama shook hands with Cuban President Raul Castro. It was a peculiar service, rambling and punctuated by high winds and a harsh rain. I think the best quote of the day goes to President Obama, who said: "Nelson Mandela reminds us that it always seems impossible until it is done." And while there were many dignitaries, it was a day for the people, not the powerful.

Thursday, December 20, 2012 - Plan B, Plan S

Plan B, Plan S

by Sinclair Noe

DOW + 59 = 13,311
SPX + 7 = 1443
NAS + 6 = 3050
10 YR YLD un = 1.80%
OIL -.03 = 89.95
GOLD – 18.70 = 1648.20
SILV – 1.06 = 30.02

I'm thinking we just go over the cliff. Why not? It looks more and more that they aren't going to get anything done. They say they are close, they say it is possible, but really, I don't have confidence.

President Obama held a press conference. And he said he had gone at least halfway in meeting some of the Republican concerns. At least halfway? So he's admitted that he's already met them in the middle, and likely gone past the middle into Republican territory. And we're still two weeks out from the fiscal cliff deadline, with Republicans sitting around waiting for the inevitable further concessions Obama will make. Why didn't Obama say something like, "I made a more than fair deal. The GOP rejected it. So now I'm pulling the offer off the table and waiting to see what the GOP has to offer. Clock's ticking!" Instead, the GOP will bank the concessions he's already made, then demand more. Rinse. Lather. Repeat.

Meanwhile, Speaker John Boehner is just playing with himself. He's offered up a Plan B for a vote in the House. One of the touted benefits of "Plan B" is that it only raises taxes for those making $1 million or more. Eric Cantor said this morning, the plan would raise revenue "without hurting many small businesses" or taxpayers. Not exactly.

But a closer look at the tax impacts of Plan B shows that while it raises taxes on most million-plus earners, it also raises taxes for many low-income earners. The non-partisan Tax Policy Center found that the average taxpayer earning $1 million or more in cash income would see their taxes go up by an average of $72,000. A small number of those million-plus earners will see a tax cut, due to an anomaly in the Alternative Minimum Tax.

But lower income earners will also see a tax hike. People making between $10,000 to $20,000 will see their taxes go up by an average of $262. People making $20,000 to $30,000 will see their taxes go up by $219. Some of those low-income earners could see a sizable increase. One in five of Americans who earn less than $20,000 a year will see an increase of $1,070 -- a sizeable amount for low-income earners.

In fact, the only taxpayers who will get an overall tax cut under Plan B are those who earn between $200,000 and $1 million. People making between $200,000 and $500,000 will see an average tax cut of $301. Those making between $500,000 and $1 million will see their taxes go down by $164.

The reason is that Plan B has two parts; raising taxes on high earners and eliminating deductions for low earners. The plan raises the tax rate for those making $1 million or more to 39.6 percent from its current rate of 35 percent. It would also raise the capital gains and dividend tax rates for those earners to 20 percent from 15 percent. Plan B also eliminates many of the Obama-led tax credits that largely benefit low-income earners, including the 2009 enhancements to the child tax credit, the earned income tax credit and others.

Which is just another way of saying that Boehner is playing games because he knows that Plan B will never get through the Senate and never get signed into law. Apparently, it is nothing more than an effort to show some Republicans are willing to stand up to Grover Norquist and vote for a tax increase, for everybody not earning between $200,000 and $1 million; which is something that is so far out of the mainstream conversation that it is absurd. The Democratic leader in the Senate, Harry Reid, at an earlier press conference, said the bill was an empty gesture: "We are not taking up any of the things that they're working on over there now. It's very, very, very unfortunate the Republicans have wasted an entire week on a number of pointless political stunts. The bill has no future, if they don't know it now, tell them what I said.”

The impasse comes at a time when the differences between Obama and Boehner appear to be minimal, with agreement reached on principle and divided only over the final figures. Obama wants the tax increases to kick in at $250,000 rather than $1 million. He is proposing $800 billion in spending cuts whereas Boehner is looking for $1.2 trillion.

Claiming it was not about the figures,Democrats identified the problem as Boehner being unable to deliver Republicans behind a tax-raising measure, and that is probably the reason for the crazy Plan B vote. It might just be a way to measure how everybody might be expected to vote, you know, in a real vote.

Hong Kong financial authorities are investigating Swiss bank, UBS over possible misconduct related to the Hibor, the Hong Kong benchmark interest rate.

Th Hong Kong Monetary Authoritym the city's de facto central bank said on its website that it has launched a probe to determine whether there was any wrongdoing by UBS when it submitted information used to set the Hong Kong Interbank Offered Rate. It will also try to find out if the misconduct had any "material impact" on setting the Hibor rate.

Everyone who has ever claimed that the financial industry is overregulated should be forced to read the United Kingdom's Financial Services Authority final notice on UBS's manipulation of the London interbank offered rate.

UBS disclosed cooperation with antitrust authorities more than a year ago, so it's no surprise that the bank was penalized, though the $1.5 billion penalty was nothing more than the cost of doing business, particularly because UBS had been granted leniency or some parts of the Libor probe. What's most striking about the FSA's filing on UBS is the brazenness of the reported misconduct. According to the FSA, 17 different people at UBS, including four managers, were involved in almost 2,000 requests to manipulate the reporting of interbank borrowing rates for Japanese yen. More than 1,000 of those requests were made to brokers in an attempt to manipulate the rates reported by other banks on the Libor panel.

According to the FSA, the bank's rate manipulation, whether to improve UBS's trading positions or to protect the bank's image, was so endemic that one employee who was supposed to submit rates complained in 2007 of being caught between demands by two different traders who wanted two different fake submissions. "I got to say this is majorly frustrating that those guys can give us s*** as mu c h as they like.... One guy wants us to do one thing and (the other) wants us to do another," he told a UBS manager, according to the FSA. Even after The Wall Street Journal first broke news of suspected Libor manipulation in 2008, UBS managers discussed continuing their rate-rigging, this time with the goal of staying in the middle of the pack of rate reports so it would look as though they weren't engaged in rigging.

The New York Stock Exchange has agreed to an $8.2bn takeover that will hand control of the icon of American capitalism to an Atlanta-based energy trader.

The stock exchange's holding company, NYSE Euronext, has agreed to an offer of $33.12 a share in cash and stock from IntercontinentalExchange (ICE). ICE was founded in 2000, NYSE in 1817. The combined company would have headquarters in both ICE's home of Atlanta and in New York.

The National Association of Realtors reportes sales of existing homes rose 5.9% in November to a seasonally adjusted annual rate of 5.04 million, reaching the highest rate since November 2009, when a tax credit was expected to expire.

First-time claims for unemployment benefits climbed 17,000 in the latest week, that's a level that suggests the labor market is continuing its steady but painfully slow improvement.

The US economy grew more quickly than previously stated in the July-to-September quarter due to stronger trade, faster health-care spending and increased local government construction. The Commerce Department said third-quarter gross domestic product grew at a seasonally adjusted annual rate of 3.1% in the third quarter, which is the fastest rate of growth since the 4.1% pickup in the final quarter of 2011.

Personal consumption is now pegged to have grown at a 1.6% rate, up from a previously estimated 1.4% rate and faster than the 1.5% advance in the second quarter. The change from the previous estimate was due to an upward revision to health-care services, and the growth during the quarter came from durable-goods spending on vehicles.

Other differences between the third-quarter reports: Trade was a bigger help, with exports 0.8 percentage point higher due to revised export prices as well as more goods, and imports 0.7 percentage point lower due to downward revisions to travel and to royalties and license fees.

Government spending also was stronger than previously estimated, showing 3.9% instead of 3.5% growth, due to local and state government construction. The big increase in government spending during the third quarter is expected to be a one-time affair, driven by a temporary surge in defense maintenance costs. Business investment was a drag in the third quarter, dropping by 1.8%. So, now we know what the economy did five months ago.

The Treasury has announced plans to get out of General Motors."GM will purchase 200 million shares of GM common shares from Treasury for $27.50 per share" translates into news reports as “Treasury will lose a gazillion dollars on GM Deal” since after all Treasury paid rather more than $27.50 per share originally, but there are other ways to look at it. One is that Treasury seems to have agreed a deal with GM after the 12/18 close at $27.50 for a stock that had closed at $25.49 and hasn’t touched $27 in ten months; in other words, GM overpaid for stock by $400 million.

Here's the official explanation: GM’s repurchase will be accretive to earnings per share, reducing the auto maker’s total shares outstanding by about 11%. GM expects to take a charge of approximately $400 million in the fourth quarter, which will be treated as a special item.

Getting rid of shares reduces shares outstanding and is accretive to EPS. It’s somewhat less accretive when you overpay for the shares by $400 million and that $400 million is a charge to income. But at least you can call it a special item. Isn't that how all of us do our tax returns?