Tuesday, August 19, 2014 - It’s Just a Matter of Time

It’s Just a Matter of Time
by Sinclair Noe

DOW + 80 = 16,919
SPX + 9 = 1981
NAS + 19 = 4527
10 YR YLD+ .02 = 2.40%
OIL (sept) = 94.48
GOLD – 2.00 = 1296.20
SILV - .18 = 19.50

The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.4%, but energy costs declined 0.3%; the first drop in energy prices since March. Consumer prices have risen an unadjusted 2% over the past 12 months, down slightly from June. Prices surged in the early spring but have since tapered off. Excluding volatile food and energy prices, the core rate has risen 1.9% in the same span, unchanged from the prior month. Almost all of the increase in consumer prices can be traced back to housing costs, or shelter prices; over the past year, shelter prices are up 2.9%.

Hourly wages have risen about 10% overall since June 2009, to $24.45 an hour. But over the same span they’ve slipped 0.3% in “real” or inflation-adjusted terms. Since the Great Recession ended five years ago, the amount of money Americans earn each hour after adjusting for  inflation has actually fallen. And that largely explains why the economy is growing so slowly.

The Federal Reserve should be in no hurry to raise interest rates because there is no serious threat from inflation, at least not now.

According to the US Travel Association and GfK, a market research firm, you might not take a vacation this year. About 40% don't plan on using all of our paid time off. The share of American workers taking vacation is at historic lows. In the 1970s, about 80 percent of workers took a weeklong vacation every year. Now, that share has dropped to a little bit more than half. The declining popularity of vacation has wide-ranging effects not just on workers, but also on their employers and indeed the overall economy. Studies have found that taking fewer vacations is correlated with increased risk of heart disease; other research has shown that workers who take vacations, or even a small break during the workday, are more productive when they return. This vacation aversion is a North American phenomenon; the US is the only “advanced” economy that doesn’t require companies to give paid vacation days.

Housing starts rose to an eight-month high in July. Groundbreaking for new housing jumped 15.7% last month to a seasonally adjusted 1.09-million unit annual pace; this follows 2 straight months of declines. Groundbreaking for single-family homes, the largest part of the market, increased 8.3% in July to a seven-month high. Starts for the multi-family homes segment, such as apartments, jumped 33%.

Home Depot reported quarterly profit today. Profit rose 14% to $2.05 billion. Sales rose 5.7% to $23.8 billion. The number of transactions rose 4.2%. Home Depot said it expects same store sales to grow faster in the second half of the year, as more people take on remodeling projects. However, Home Depot maintained its full-year sales growth forecast of about 4.8%. Lowe's, the world's second-largest home improvement company, is scheduled to report results tomorrow.

Back in 2006 bust, when the housing market went bust, Phoenix was one of the first cities to get hammered with lower prices; in 2011, Phoenix was one of the first cities to snap back; prices, off by nearly 60% from peak, then rebounded sharply; home prices are up nearly 46% from the 2011 low. The number of homes in some stage of foreclosure has fallen to about 4,300 homes today from more than 50,000 four years ago.

Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. Investors accounted for nearly 15% of homes bought in June, down from about one-quarter last year and one-third of sales in June 2012. The market is moving away from from bargain-hunting investors, who typically pay cash for distressed properties, to traditional buyers with mortgages. The Phoenix market is slowly moving back to normal, but there is still a long way to go.

Employment in Phoenix, after expanding at an average annual pace of 2.6% and 2.8% in each of the last two years, is up just 1.5% so far this year. When people don’t have a job or are not secure in their jobs, they don’t buy houses. The sluggish local economy is compounded by consumers still too battered from the bust to think about getting a loan. Some don't have sufficient equity to turn a house sale into an adequate down payment on their next purchase. Others suffered credit blemishes or income hits that make banks reluctant to lend.

Reuters reports Phoenix based PetSmart is exploring a potential sale of the company. Jana Partners, which has reported a 9.8% stake in PetSmart, has been calling on the company to pursue a sale after what it calls years of financial underperformance. There is no guarantee the review will lead to a deal and PetSmart could still determine that it would be better off on its own.

Today marks the ten year anniversary of Google. The company went public August 19, 2004 at a price of $85 a share; and it’s gone up 1,304% since then. A few stocks have done better over that time, but only a few, and of those, only Apple was in the S&P 500 10 years ago when Google went public. Today, Google’s revenue tops $65 billion, more than all but 40 US companies. Net profit margins exceed 20%, higher than all but three. Ten years ago, Google had a forward PE of 52; today, the forward PE is 20. So as share prices have constantly moved higher, valuation has constantly moved lower; which is a neat trick.

Over the past 10 years, or you could say over the past 25 years, a great deal of wealth has flowed to the tech giants of Silicon Valley; which means that the wealth has flowed away from Wall Street. And the techies have finally figured out they don’t need Wall Street bankers to make a deal. According to data from Dealogic, approximately 70% of the tech deals completed in early August have been sealed without a Wall Street bank consultant helping the buyer identify the transaction. And over the past two years, the trend has been growing, with more than half the tech deals in 2012 occurring without a banker working on behalf of the buyer. This M&A consulting shift highlights a subtle but growing divide between fee-eager bankers and the tech giants of today.

Maybe the problem is that the banks just have a hard time remembering who their clients are. Case in point: you may remember the story of Standard Chartered, the British bank, which back in 2012 paid about $667 million to settle charges that it had engaged in money laundering by making transfers for clients in Iran and other countries that were covered by American sanctions. They had to add compliance monitors. A few months later the bank’s chairman denied any wrongdoing, which was a direct violation of the settlement; and he was forced to quickly recant. Today, it seems that all of those new legal staffers and crime-fighting committees also didn’t get the memo about what they are meant to be doing. New York’s financial regulator slapped another $300 million fine on Standard Chartered for “failures to remediate anti-money laundering compliance problems as required” in its previous settlement.

Part of the bank’s 2012 agreement included hosting an independent monitor permanently installed by regulators on-site to vet anti-money laundering procedures. This monitor was back-testing the bank’s processes and found them lacking, particularly when it came to flagging suspicious dollar transfers from its Hong Kong and United Arab Emirates affiliates.

In a statement, Standard Chartered said that it “has already begun extensive remediation efforts and is committed to completing these with utmost urgency.” And this time they really, really mean it; not like last time. So, this raises the question of how many times a bank can break the law, and get away with a slap on the wrist. What does a bank have to do before they forfeit their charter?

The New York State regulator, Benjamin Lawsky, said: “If a bank fails to live up to its commitments, there should be consequences. That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”

So, the penalty is nearly $1 billion in fines over the past couple of years, but actually works out to about 12% of bank profits over the same time.

You might also remember last month when Attorney General Eric Holder announced the $7 billion settlement with Citigroup for its role in packaging troubled mortgages into securities and selling them as investments in the years before the crisis, even though a bunch of Citigroup bankers knew better and did it anyway. And last November, there was a settlement with JPMorgan. And there is a chance that later this week we will see a settlement announced with Bank of America.

It all falls in line with the “too big to fail” idea known as the Holder Doctrine, which stems from a 1999 memo, when then Deputy AG Holder included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern. Holder was thinking of the collapse of Arthur Anderson after the collapse of Enron. So, now Holder holds to the idea of settlement over prosecutions.  Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong.

The problem is, of course, that these settlements allow for the Wall Street bankers to get away with their bad behavior without being held the slightest bit accountable. And with no real deterrent, as Standard Chartered has just confirmed, it’s just a matter of time until they do it all over again. 

Thursday, July 17, 2914 - Unleash the Hounds of War

Unleash the Hounds of War
by Sinclair Noe

DOW – 161 = 16,976
SPX – 23 = 1958
NAS – 62 = 4363
10 YR YLD - .06 = 2.47
OIL + 2.55 = 103.75
GOLD + 18.40 = 1319.20
SILV + .37 = 21.26

A Malaysian Airlines passenger jet, Flight 17, a Boeing 777, has crashed near the Ukrainian-Russian border; all 295 passengers are dead. US intelligence officials say the jetliner was shot out of the sky by a surface to air missile; they could not confirm who fired on the plane but it is believed the missile was launched by separatists in Ukraine or by Russian forces positioned across the border from the crash site.

Yes, more than four months ago, another Malaysia Airlines plane, Flight 370 from Kuala Lumpur to Beijing, disappeared with 239 people on board, and that plane remains lost, despite ongoing searches in the Indian Ocean. Flight 17 is believed to have had 280 passengers and 15 crew. Early reports indicate the passengers included 55 Dutch, 23 Americans, and 9 Britons.

The crash today involved a flight from Amsterdam to Kuala Lampur, but the flight went down in the Donetsk region of eastern Ukraine where pro-Russian separatists have been fighting Ukrainian forces for several months. The separatists denied responsibility. The separatists were quoted by the Russian news agency Interfax as saying that they had found the “black box” flight recorder. Other Russian reports said the rebels planned to call a three-day cease-fire to allow for an investigation.

Aviation authorities knew this was a dangerous area prior to today’s crash. Three months ago, the FAA prohibited US airlines and US pilots from flying over parts of Ukraine. Today several airlines re-routed flights. Ukrainian military planes have been shot down in the conflict in eastern Ukraine, including earlier this week, but the crash Thursday was the first downing of a commercial airliner.

Ukraine’s recently elected president, Petro Poroshenko, called it an act of terrorism. Russian president Putin says Ukraine is responsible for the crash, apparently because they have not maintained peace in the area and have not been in control of their airspace. Shooting down a 777 at 33,000 feet would require fairly sophisticated military equipment.

Any sign or Ukrainian, Russian, or separatist involvement in the downing of a civilian airliner could lead to an escalation of tensions in the region. Already, there is a recording of an alleged phone conversation between a leader of the separatist movement in Donetsk and a Russian military intelligence officer, where the Russian officer says they have shot down a plane. No groups are claiming responsibility.

If it turns out that the separatists shot down the passenger jet, the incident almost certainly will become a tipping point in marking them as terrorists and not mere rebels. To the degree he continues to support them, Putin himself risks shifting to dangerous new diplomatic terrain and harsh new sanctions by a West united against him to a degree it has been at no time since the Cold War. He will be seen as backing an indefensible rogue element. This might convince doubters in the EU to move forward with tougher sanctions against Russia and it could lead to tougher US sanctions. Russia’s deniability of direct support for the rebels would be demolished, making Putin’s international position more difficult.

Just yesterday President Obama imposed a new round of sanctions against Russia, targeting some of the largest Russian companies in finance, energy, and the defense industries. The announcement reflected a decision by Obama to take more stringent steps than those taken by the United States’ European allies, which have far deeper economic ties to Russia. Meeting in Brussels, leaders of the European Union refused to match the American measures and instead adopted a more tempered plan that blocks new development loans to Russia and threatens to target more Russian individuals.

Washington imposed sanctions on Russia’s largest oil producer Rosneft, its second largest gas producer Novatek, its third largest bank Gazprombank, and also 8 arms manufacturers, and a few others. Yesterday, Moscow denounced the sanctions as primitive revenge for events in Ukraine and pledged to retaliate. Also yesterday, Ukraine officials accused Russian forces of shooting down a Ukrainian military jet in the Donetsk region. Obama said Wednesday that the new sanctions were largely aimed at punishing Russia for not preventing the flow of weapons into Ukraine to supply pro-Russia rebels seeking independence from Ukraine.

At this point, nobody really knows who did what and for what reason. Civilian planes have been shot down by various militaries in the past and it did not necessarily result in war, however, the conflict in Ukraine has just escalated significantly.

Meanwhile, Israel moved ground troops into Gaza today. The ground offensive includes heavy artillery and naval shelling and helicopter fire and tanks. For the past 10 days Gaza militants and Israel have been firing rockets at each other. The Gaza militants have reportedly fired more than 1,300 rockets into Israel, but Israel has a high tech defense system called the Iron Dome, and so the bombing has only resulted in one Israeli death. The Israeli rocket attack on Gaza has been much more precise, even to the point where the Israelis would phone ahead and tell civilians they had a minute or so to vacate a building before a bombing. Palestinian health officials say more than 230 Palestinians have been killed in Israeli air and naval strikes.

Before dawn on Thursday, about a dozen Palestinian fighters tunneled under the border, emerging near an Israeli community. At least one was killed when Israeli aircraft bombed the group. The United Nations said Thursday that it had discovered 20 rockets hidden in a vacant school in Gaza during a regular inspection on Wednesday. Earlier on Thursday, Palestinian, Egyptian, Israeli and American officials said intense discussions were underway on terms for a cease-fire. Israel had accepted an Egyptian proposal for a cease-fire that was rejected by Hamas, which continued to fire rockets at Israel.

Palestinian residents and journalists in Gaza reported heavy artillery fire from ground troops in the north and from Israeli naval gunboats stationed near Gaza’s port, as well as a continuing air assault. Residents in the northern Gaza Strip said tanks were moving in. The Israeli strikes hit a range of targets, including a rehabilitation hospital and earlier killed four young children as they played on a roof in eastern Gaza City. At the same time, scores of rockets from Gaza continued to stream into cities all over central and southern Israel.

On Wall Street, the geopolitical problems made folks jittery. The VIX was up 3.54 to 14.54, which represents a 32% increase. We saw oil and bonds and gold jump higher in what looks  like a safe haven move.

It is still earnings season, and let’s touch on a few of the big reports today. Google reported a second-quarter profit of $3.4 billion, or $4.99 a share, compared with a profit of $3.2 billion, or $4.77 a share, for the year-earlier period. Revenue was $12.6 billion, up from $11.1 billion in the year-earlier period. Google missed expectations on earnings but beat revenue projections. Shares were down in after-hours trade.

Just the opposite for Big Blue; IBM said its second-quarter earnings climbed 28%, helped by its restructuring moves, while IBM reported its ninth consecutive quarter of lower revenue.

As expected, Microsoft announce massive layoffs today, what was unexpected was just how massive, 18,000 jobs will be cut, 15% of the workforce; 12,500 coming from newly acquired Nokia. Just after Microsoft bought Nokia, Nokia started making Android-based phones. This was a surprise since Microsoft makes its own mobile operating system — Windows Phone. The new Microsoft CEO Satya Nadella had no desire to continue with Android. He wants Microsoft's operating system to be the company's only mobile operating system.

A threatened strike on New York's Long Island Rail Road was averted on Thursday when the transit authority and labor unions reached a tentative contract deal.

Truckers will be back on the job Monday at the ports of Los Angeles and Long Beach, ending a five-day strike that disrupted cargo flow. The truckers voted to end their work stoppage against three companies late Friday after the firms promised no retaliation. The truckers say they have been unfairly classified as independent contractors rather than employees, allowing the companies to avoid labor laws and charge the drivers for fuel, maintenance and other fees. The drivers walked off the job last Monday in the fourth such protest this year and dockworkers refused to cross the picket lines.

Coincident to the plane crash and the story of Russian sanctions, Bloomberg Businessweek reports today on a nearly 4 year old story dealing with a different type of attack by Russia.  Reportedly, the Russians hacked into the Nasdaq in October 2010. And this was not just some silly hackers putting a virus on your computer, this was an attack on the code of a major financial institution, a digitized weapon, orchestrated by the Russian government.

It isn’t the first time a country has launched a cyber-attack against another country. The US was probably the first, with deployment of the Stuxnet worm, which switched off the safety mechanisms at Iran’s uranium processing facility in 2010. The October alert prompted the involvement of the National Security Agency, and just into 2011, the NSA concluded there was a significant danger.

While the Nasdaq hack was successfully disrupted, it revealed how vulnerable financial exchanges are to digital assault; as well as banks, chemical refineries, water plants, and electric utilities. One official who experienced the event firsthand says he thought the attack would change everything, that it would force the US to get serious about preparing for a new era of conflict by computer. He was wrong.

In fact the investigation revealed that Nasdaq networks had been infected for quite some time, by a variety of sources. The rules of cyberwarfare are still being written, and it may be that the deployment of attack code is an act of war as destructive as the disabling of any real infrastructure. Just think of the possibilities if the Nasdaq were to really crash, completely and totally, and if everything run through the exchange was deleted.

Wednesday, July 02, 2014 - Milk and Cookie Binge

Milk and Cookie Binge
by Sinclair Noe 

DOW + 20 = 16,976
SPX + 1 = 1974
NAS – 0.92 = 4457
10 YR YLD + .07 = 2.63%
OIL – 1.18 = 104.16
GOLD + 1.10 = 1328.20
SILV + .18 = 21.25

Record highs for the Dow and the S&P 500. We celebrate with milk and cookies. It’s good, it’s wholesome.

Unlike Goldman Sachs, which apparently likes to celebrate with binge drinking at strip clubs; at least that’s the accusation by 2 former Goldman employees suing Goldman for discrimination against women. Support for their claims includes statements of former Goldman Sachs employees, expert statistical analyses and evidence on earnings and promotions from the firm’s own records. According to filings with the court, female vice presidents earned 21 percent less than men and female associates made 8 percent less, the former employees claimed; about 23 percent fewer female vice presidents were promoted to managing director of the bank relative to their male counterparts.

We’ll stick with milk and cookies.

Tomorrow we’ll get the monthly jobs report, one day early due to the holiday shortened weekend. Today we got the ADP Employment Report showing private nonfarm payrolls increase 281,000 in June. That’s the best ADP report since the fall of 2012. That would be a very good number indeed if it translates to the government report tomorrow. The ADP report should not be used as a predictor of the government jobs report. Both reports tend to move in the same direction in the long term, but month to month fluctuations can be quite pronounced. It is expected tomorrow’s report will show 215,000 net new jobs in June.

Here’s another indicator; the ISM manufacturing employment index was unchanged in June at 52.8%; the historical correlation between the ISM employment index and the BLS employment report suggest the economy lost about 5,000 manufacturing jobs in June; the ADP report showed the economy added 12,000 manufacturing jobs last month.

The best way to boost the economy is to have more people working, which then equates to more people spending. Even though the unemployment rate has dropped to 6.3%, that’s still high; and long term unemployment is still a problem, and indicates there is still slack in the labor market. Just as important as the number of jobs created is the quality of the jobs created. For several years, the trend has been for lower paying jobs, where wages are below the average of $24.38 an hour. There has been some improvement this year, with 61% of the 1.07 million new jobs in 2014 paying above the average hourly wage. So, keep an eye on wage growth in tomorrow’s report; it will be a critical component in overall GDP growth.

So, as we wait for the jobs report, we are left to question whether the economic recovery is really gaining traction. Dr. Copper says yes. Copper closed at its highest price in more than 4 months. Copper for September delivery gained 6 cents, or 1.9 percent, to settle at $3.27 a pound. Since copper is an industrial metal used in everything from buildings to cars, it’s considered a good economic indicator, however it might be a better indicator of growth in China, the world’s largest buyer  of copper.

Federal Reserve chairwoman Janet Yellen delivered a speech to the International Monetary Fund and she says the Fed has the right focus on jobs and inflation, and should leave stability concerns to regulation. Many economists and investors are concerned the Fed’s policies have fostered potential financial asset bubbles. Yellen said today: “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

Yellen said she saw pockets of increased risk-taking across the financial system that could warrant a more "robust macroprudential approach" if those concerns grew.

BNP agreed on Monday to pay almost $9 billion while admitting criminal violations of United States sanctions. BNP admitted to funneling and hiding some $30 billion in transactions to Iran, Sudan, and Cuba. The bank will also be barred from clearing any financial transactions in dollars for a year starting in January. Credit Suisse and a subsidiary of UBS also pleaded guilty recently to tax avoidance and interest-rate rigging, respectively. JPMorgan Chase, Bank of America and other United States banks have paid billions of dollars in penalties but have, so far, avoided criminal liability. The French government says that’s not fair.

And while it might be easy to dismiss the French for whining, they are correct. New research suggests that overseas firms like BNP Paribas do in fact pay bigger fines and plead guilty more often than United States companies. United States criminal fines from 2001 to 2010 were about five times greater on average for foreign firms than for their American counterparts. The average penalty was 22 times bigger for foreign companies after adjusting for the type of crime and whether the company was listed. One reason may be that prosecutors single out only the most serious cases abroad. Another reason might be because prosecutors are afraid of hurting a domestic business. Another reason might be that prosecutors are spineless wimps in the face of the political clout of US banks.

What we have learned is that businesses and investors don’t seem to care about the criminal convictions of Credit Suisse and BNP and that might signal that if a conviction will not shut down the company, then there’s no reason not to convict, international or domestic.

Yesterday we told you about that creepy experiment by Facebook, designed to make you feel good or bad by filtering out good or bad content. Facebook faces a government investigation in Europe over its study of whether manipulating people's news feeds could change their emotions. Facebook won't be helped by the fact that the company didn't alter its terms of service to disclose to users that their posts would be used for research until four months after the experiment took place.

The implementation of the European Union's so-called "right to be forgotten" policy is already having a worrying impact on the media, with at least two outlets revealing on Wednesday that links to articles of theirs have been scrubbed from Google. A European court ruled in May that Google must remove links to articles from its search engine if the subjects of the post asked it to. The court specified that links could be scrubbed if they were "inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed."

When the ruling came down, some worried that it would place too much power in the hands of public figures who wished to have unflattering information about themselves hidden. On Wednesday, the Guardian and the BBC both disclosed that just such an occurrence seemed to have taken place with stories of theirs. The Guardian case involved 6 articles that were taken down from Google’s European platforms. The BBC case involved Stan O’Neal, the former head of Merrill Lynch, implicated in the subprime mortgage scandal. Is the data in the BBC report "inadequate, irrelevant or no longer relevant"? Hmm.

Solar installers SolarCity and SunRun have filed a lawsuit against Arizona’s revenue department over the state’s decision to apply property taxes to third-party solar-power systems. SolarCity and SunRun have popularized leasing, rather than owning, residential rooftop systems. The companies install and maintain the systems in return for monthly payments that are generally less than a homeowner’s monthly power bill. 

Arizona’s revenue department last year decided to tax leased solar panels, resulting in $152 extra in property taxes for the first year of a homeowner’s leased $34,000 solar panel array, a charge that would decrease as the value of the array goes down; still it’s a large enough increase to wipe out most or all of the savings from going solar. Until last year, both owners and leasers of solar panels didn’t have to pay property taxes. There are concerns that applying taxes on systems would wipe out the savings from solar leasing and stunt solar-power growth in Arizona.

Wednesday, May 14, 2013 - Crumbs and Curds

Crumbs and Curds

by Sinclair Noe

DOW – 101 = 16,613
SPX – 8 = 1888
NAS – 29 = 4100
10 YR YLD - .07 = 2.54%
OIL + .37 = 102.07
GOLD + 11.00 = 1306.70
SILV + .22 = 19.85

The days of milk and cookies can be fleeting; one day the world seems sweet and creamy, and the next day you’re left with nothing but crumbs and curds. The Russell 2000 index of small and mid-caps, dropped 1.6% falling below the 200 day moving average; since hitting a high in March the Russell is down 8.7%. The Dow Jones Internet Index has plunged 17% from a 13-year high in March.

There is a strong tendency among the Wall Street hype-sters to “buy the dip”, with the pitch being that if stocks plunge, it’s really just a buying opportunity if you are patient. What they don’t say is that it is almost impossible to be patient if you run out of capital, but putting that aside, the stocks will all come roaring back someday. Yea, I’m not going to tell you that. Some stocks will recover. Some stocks don’t come back.

Here’s a quote from a Citigroup analyst’s note to clients: “We believe the recent pullback represents a particular opportunity among large cap Internet stocks, with multiples having retraced to levels not seen for more than two years, with no/little change in fundamentals, and with investment profiles that sync well with what portfolio managers are seeking in today’s market.”

Among the favorite downtrodden internet stocks: Facebook, down 18% from its high; LinkedIn, down 43%; and AOL, down 31%, seriously I was surprised to learn that AOL still trades. I would have thought that anybody who lived through 1999 would have shunned AOL permanently. Did we learn nothing from the dot.com days? Certainly the Wall Street analysts learned nothing; they rode the market all the way down back in the day, all the time screaming “buy, buy, buy.” I’ll say the same thing I said back then, you can’t go broke taking a profit.

Treasury bonds rallied. The yield on the 10-year Treasury note touched 2.523% at one point, its lowest level since Oct. 31. While today’s move had all the markings of a short squeeze, the storyline is that the European Central Bank will pump more liquidity into the economy next month. Bank of England Governor Mark Carney signaled there is no rush to raise interest rates after the bank left its growth and inflation forecasts broadly steady in its latest inflation report. And Federal Reserve Chairwoman Janet Yellen said last week that the Fed would continue to keep interest rates near zero for a considerable period to support the economy and inflation remains low. Yellen is scheduled to speak tomorrow.

Today we had a report on inflation at the wholesale level. The Labor Department’s Producer Price Index, or PPI, increased 0.5% in March. The PPI was overhauled in January for the first time since 1978, largely to include services such as retail, health care and financial advice. Previously the index only looked at the price of goods: food, energy, housing and the like. That makes sense, but it has also lead to some wicked wild spikes and dips in the PPI. More likely the CPI, prices at the retail level, are more accurate, running in the range of 1.5% annualized rate.

There’s just something about the bond market that doesn’t feel right. Rates should not be dropping if the economic recovery is really underway. If the first quarter was a weather related aberration, and the second quarter is bouncing back, rates should not be dropping.

After ending 2013 at 3.03%, 10-year Treasury yields have declined 50 basis points year to date. Sovereign yields have collapsed throughout Europe and have generally fallen around the globe. What's behind the decline? Are there potential ramifications for stocks and the global economy? These are critical questions, especially considering the bullish consensus view of accelerating US and global growth.

The Ukraine crisis likely marks an unfortunate end to an era of global cooperation (of a sort) and a return to Cold War tensions and risks. Geopolitical risks exacerbate the vulnerabilities of financial market excesses. And the global central bankers’ response to the collapse of 2008 has resulted in trillions upon trillions of dollars of mispriced financial assets and ever greater leveraged speculation. When the Fed was pumping $85 billion a month into the markets - that was not de-leveraging. With QE winding down, there is impetus for the leveraged speculators to take more risk averse positions; toss in a geopolitical flare-up and greed transforms to fear.

Former Fed Chairman Alan Greenspan was speaking at a financial summit in Washington today and he said that current calculations of the federal government's budget deficit and fiscal outlook understate the risk of long-term trouble, because they do not take into account such "contingent liabilities" as the risk of a major Wall Street bank collapsing. Typically, deficit hawks invoke the phrase "contingent liabilities" to call for cuts to Social Security and Medicare, arguing that official government accounting understates the long-term taxpayer costs of such programs. But Greenspan didn't make a hard pitch on entitlement cuts, focusing instead on the risk of bank bailouts.  

Bond prices are going up nonetheless because the big money is seeking a safe haven in a gathering storm.

Europe’s highest court Tuesday gave people the means to scrub their reputations online, issuing a ruling that could force Google and other search engines to delete references to old debts, long-ago arrests and other unflattering episodes. Embracing what has come to be called “the right to be forgotten,” the Court of Justice of the European Union said people should have some say over what information comes up when someone Googles them.

The decision was celebrated by some as a victory for privacy rights in an age when just about everything, good or bad, leaves a permanent electronic trace. Others warned it could interfere with the celebrated free flow of information online and lead to censorship. The ruling stemmed from a case out of Spain involving Google, but it applies to the entire 28-nation bloc of over 500 million people and all search engines in Europe, including Yahoo and Microsoft’s Bing.

Google is already getting requests to remove objectionable personal information from its search engine. Europeans can submit take-down requests directly to Internet companies rather than to local authorities or publishers under the ruling. If a search engine elects not to remove the link, a person can seek redress from the courts.

The criteria for determining which take-down requests are legitimate is not completely clear from the decision. The ruling seems to give search engines more leeway to dismiss take-down requests for links to webpages about public figures, in which the information is deemed to be of public interest. But search engines may err on the side of caution and remove more links than necessary to avoid liability. Google has said it is disappointed with the ruling, which it noted differed dramatically from a non-binding opinion by the ECJ's court adviser last year. That opinion said deleting information from search results would interfere with freedom of expression.

Some limited forms of a “right to be forgotten” exist in the US and elsewhere, for example, in regard to crimes committed by minors or bankruptcy regulations, both of which usually require that records be expunged in some way.  And some things probably are better off forgotten.

In 1897 silver and gold dealers-slash-bankers in London began gathering each day to post their metals prices. They would meet in a basement and compare prices and then average prices and come up with something called the “fix”. There was a morning fix and an afternoon fix for both gold and silver. This became the price for precious metals. There has long been speculation that the bankers who set the fix might occasionally alter the prices to suit their own trades, in other words the fix was rigged and manipulated.

The basic price setting formula worked well for the bankers and it was adopted by the Libor and the Forex and the ISDA and others who liked the idea of controlling prices for a major market. Turns out the Libor and the Forex and other markets were indeed manipulated, and investigations are ongoing. And then the regulators got the bright idea that if all those markets were rigged, maybe the original, the gold and silver fix, maybe they were rigged. Investigations are underway. 

And so Deutsche Bank has decided they don’t want to be part of the London silver fix. They have announced they are resigning their post effective as of August 14, 2014. That leaves just two primary dealers to set prices for silver, HSBC and Bank of Nova Scotia; not enough to matter; and so the London Silver Fix will close down. The London Gold Fix will continue for now, but by the middle of August there will be no more London Silver Fix. And all of the banks that continue to trade in silver will have to find new ways to rig the market.

People used to think price manipulation in major markets never occurred. More evidence today, Bloomberg reports on a research paper that uncovered evidence that some traders got early news of Federal Reserve rate announcements and then traded on it during the Fed’s media lockup. The paper, covering September 1997 through June 2013, detected abnormally large price movements and imbalances in buy and sell orders that were “statistically significant and in the direction of the subsequent policy surprise.” The moves occurred during the window between when Fed announcements were supplied to the news media and when they were permitted to be released to the public.

The researchers calculate that the traders made off with somewhere between $14 million and $250 million in aggregate profits. A spokesperson says the Fed “enhanced its media release security procedures” last October “to better protect the information against premature release.”

Wednesday, April 16, 2014 - What is Really Plausible

What is Really Plausible

by Sinclair Noe

DOW + 162 = 16,424
SPX + 19 = 1862
NAS + 52 = 4086
10 YR YLD + .01 = 2.63%
OIL + .05 = 103.81
GOLD - .20 = 1303.20
SILV + .07 = 19.73

Let’s start with some earnings news and then we’ll move over to economic data.

Google posted $3.4 billion in net income, or $5.04 per share, in the three months ended March 31, compared to $3.3 billion, or $4.97 per share, in the year-ago period. Revenue rose 19% to $15.4 billion, but analysts had estimated $15.5 billion, and the shares were getting clobbered in late trades.

IBM reported its lowest quarterly revenue in five years; IBM reported revenue of $21.7 billion for the quarter, but that marks the eighth consecutive decline in quarterly revenue. The company has been restructuring its business by cutting jobs and selling its low-end server business. This is not what you would call a growth model.

Also, from the faulty business model file: Bank of America posted a $276 million loss for the most recent quarter. The financial results included a pre-tax expense of $6 billion, or approximately 40 cents a share after tax, to cover litigation costs as the bank moved to resolve mortgage-related litigation fallout from the financial crisis that began in 2007 and other issues; far worse than the $3.7 billion investors had braced for. The bank today agreed to a $584 million settlement of litigation over nine residential mortgage-backed securitizations insured by the Financial Guaranty Insurance Company. The FGIC said the securitizations were sponsored by Countrywide, which Bank of America bought in 2008.

Since the 2008-2009 financial crisis, Bank of America has logged some $50 billion of expenses for settlements of lawsuits and related legal costs, before taxes. Without those charges, its income before taxes would have been about three times higher. When does it end? How do you factor this when you try to value shares of a company? The simple answers: it ain’t over yet, and don’t even try.

In economic news: China reported that its economy grew at its slowest pace in 18 months at the start of 2014, but the increase was better than expected and showed some improvement in March.

From the Census Bureau: privately owned housing starts in March increased 2.8% from February to a seasonally adjusted annual rate of 946,000; single family housing starts increased 6% from the month before at an annual rate of 635,000. Building permits authorized were down 2.4% from February at a seasonally adjusted annual rate of 990,000, but it’s still 11.2% higher than March of last year.

The Federal Reserve reports industrial production increased 0.7% in March, following a 1.2% advance in February; for the first quarter industrial production moved up at a 4.4% pace. The increase in industrial production, which beat economists' expectations for a 0.5% gain, reflected in part a 0.5% rise in manufacturing output. There were also hefty increases in production at mines and utilities.

The Federal Reserve has just released its April Beige Book, a collection of anecdotes on economic conditions from business contacts across each of the 12 Fed districts. Economic growth increased and consumer spending rose, at least for people who weren’t completely snowed in. The Fed seemed quite fascinated with the weather, mentioning it more than 100 times; it’s like they had never seen snow before, and they seemed amazed that it makes actual work difficult for some people.  

Transportation, manufacturing, financial services, and auto sales all improved, though the reports on residential housing markets were “varied.” The Beige Book also talks of delays to crop plantings and shipments of commodities, as well as a pig virus that hurt hog farming. Labor market conditions continued to slowly improve with minimal wage pressure, and prices were generally stable or slightly higher.

Fed Chair Janet Yellen delivered a speech to the Economic Club in New York. She said the economy is improving, it will continue to improve, and by 2016 it will be normal, and then it will all be good. Yellen said: “I find this baseline outlook quite plausible.”

Yellen laid out 3 questions that will guide the Fed policymakers: Is there still significant “slack” in the labor market? Is inflation moving back toward 2 percent? What factors may push the recovery off track?

Is there still significant “slack” in the labor market? Why yes, yes there is. The unemployment rate is at 6.7% and Yellen would prefer to see it closer to 5.2% or 5.6% and she thinks it will take about 2 more years to get there. Further slack exists in the share of the workforce working part time and the long term unemployed and the low level of participation in the workforce. Toss in almost no wage pressure.

Is inflation moving back toward 2 percent? Yellen said inflation significantly persisting below 2% was more likely than inflation moving substantially above 2%. At the moment, the Fed’s favorite measure of inflation is less than 1%, well below the Fed’s annual inflation target of 2%.Inflation is likely to gradually move back toward the central bank’s target. Yellen said that to some extent, the low rate of inflation seems to be due to factors that are likely to be temporary, including lower consumer energy prices and a drop in import prices.

What factors may push the recovery off track?  Yellen says there can be a lot of ‘twists and turns’ in the economy” and the central bank has no “fixed idea” about what will come to pass. The Fed will try to set the course and Yellen said the central bank’s new forward guidance can serve as an “automatic stabilizer” that helps investors from overreacting to “twists and turns” the economy may take.

She cited the ongoing fiscal drag on the economy. This is a recurring theme; we heard Bernanke talking about this for a long time. Allow me to translate from Fedspeak to plain language. The Federal Reserve is responsible for monetary policy; Congress handles fiscal policy. So fiscal drag means that the policies laid out by Congress have hurt the economy. The Fed has tried to stimulate the economy, much like stepping on the accelerator while the Congress has been applying the brakes. That’s a bit simplistic because there are other factors at work. The Fed is stepping on the gas, the Congress is stepping on the brakes, and we’ve got rotten, ill-behaved bratty children in the back seat, reaching over and grabbing the steering wheel and threatening to drive into a brick wall; in this example, the bratty kids in the back seat are the banksters.

Just a little reminder of a story from the Summer of 2013; when we learned that Goldman Sachs was in the aluminum business. Goldman had 27 industrial warehouses in the Detroit area, where they stored aluminum. Goldman also had an interest in the financial markets for aluminum; they bet on price movement in the commodity; and they exploited pricing regulations set up by an overseas commodities exchange, which essentially allowed them to keep aluminum in storage longer than allowed, which keeps it off the market and out of production, which jacks up prices, based upon simple supply-demand, and then they bet on those higher prices. They literally had trucks moving aluminum from one warehouse to another, all around Detroit, but they wouldn’t ship it out for production. The move cost consumers more than $5 billion over the last 3 years.

The inflated aluminum pricing is just one way that Wall Street is flexing its financial muscle and capitalizing on loosened federal regulations to sway a variety of commodities markets. The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. Federal regulators were also looking at JPMorgan and 3 other banks for rigging electricity prices.

Using special exemptions granted by the Federal Reserve and relaxed regulations approved by Congress, the banks have bought huge swaths of infrastructure used to store commodities and deliver them to consumers. After hearing of all the abuses by the banks, some people thought it might be good to rethink these policies. And about 9 months have passed, and finally 2 senators, Sherrod Brown and Elizabeth Warren, have sent a letter to the Fed, suggesting that "As a general matter, [big banks] should be prohibited from owning physical assets like warehouses, pipelines, and tankers."

Aluminum prices have continued to rise not necessarily because the commodity has become more valuable or scarce, but simply because the wait times for physical delivery have steadily grown longer. In some cases, the wait has lasted more than a year. Meanwhile, commodity traders have come up with a unique solution to banks hold physical commodities in warehouses to manipulate prices. The London Metals Exchange will give traders the ability to hedge aluminum prices, as the commodity continues to rise due to lengthy delivery times that have thrown a wrench in a number of supply chains.

Here are a few facts for your consideration: roughly one-third of everything we buy goes to interest; the interest goes to private banks; at the height of the financial crisis over 40% of US corporate profits went to the financial industry, up from 7% in 1980. The simple reality is that I we could just get those crazy banksters under control, we would have at minimum a couple of trillion extra dollars floating through the economy, and we wouldn’t have to worry (as much)  about the Fed and Congress and monetary policy versus fiscal drag, and we would all be talking about the phenomenal economic recovery. And that is not only plausible, but that’s a fact.

Friday, October 18, 2013 - Biscuits on the Dark Side of the Moon

Biscuits on the Dark Side of the Moon

by Sinclair Noe

DOW + 28 = 15,399
SPX + 11 = 1744
NAS + 51 = 3914
10 YR YLD un = 2.59%
OIL + .28 = 101.15
GOLD – 2.70 = 1318.40
SILV + .07 = 22.06

There will be a lunar eclipse a little later this hour. In the West we won't see it, but you can phone your friends in the East. Maybe it explains something.

The S&P 500 index hit another all time record close.

Tobias Levkovich is the chief US equity strategist for Citigroup, and he may have had the best analysis of post-deal state of the markets: “Kicking the proverbial can down the street does not address the long-term fiscal imbalances. The twin decisions of a taper timing push out and the discord in Washington being swept under the rug until January and February roll in could keep P/E multiples more compressed as equity risk premiums stay elevated. Investors typically do not like uncertainty and it is hard to determine how these recent almost non-decisions can be seen as reinvigorating confidence aside from some relief that an imminent likely disaster has been avoided. Nonetheless, one cannot respectably believe that things truly have turned for the better as opposed to averting the worst. The long-term growth of non-discretionary government spending can still prove to be an overwhelming liability and it has not been the primary focus for legislators.”

Larry Summers will not be the next Federal Reserve Chairman, and maybe that gives him a little more time to reflect. In an interview with Charlie Rose, Summers addressed the core problem with the recent and upcoming budget battles: “ I don't know why the obsession should be with entitlements, like the test of a country is did we scale back entitlements? No, the test of the country is did we have a stronger economy for our children than we had for ourselves. That's what is in doubt and that's what we should be focusing on.”

The Iowa Electronic Markets is the only sportsbook in America allowed to bet on US elections. Next year’s midterm elections for Congress are now a tossup between the Republicans and the Democrats. Of course the odds will change over the next year. The attention span of the average voter is …, I'm sorry, what was that?

A Time magazine article published today suggests that Texas Senator Ted Cruz, leader of the conservative effort to tie a curtailment of Obamacare to funding the government, is coming under scrutiny for failing to disclose ties to a Caribbean-based private equity fund; a possible violation of ethics rules. Cruz told Time that the omission was inadvertent and that he is in the process of making corrections to his Senate financial disclosure form.

The government shutdown started on October 1^st; since then the top performing asset classes have been equities, specifically the stock markets in Japan, Spain, the US, and Italy. And of course, Google, which has now become an asset class all its own.

Google joined the $1,000 per share club today, following a better than expected earnings report last night. Google went public in 2004 at $85 a share. Google reported earnings of $10.74 per share, well ahead of consensus estimates of $10.34.

In other earnings news, both General Electric and Morgan Stanley topped Wall Street expectations for the third quarter. GE shares gained 3.6% and Morgan Stanley rose 2.6%.

Home price gains are slowing after a strong bounce off the bottom, potentially marking a new phase for the housing recovery. According to a report from Zillow, home values aren't rising as fast as they were and even dipped in a few hot markets in September. More homes are coming on the market, and Realtors report less competition among buyers.

A new report from PriceCoopersWaterhouse says funding for US startups rose in the third quarter from year-ago levels, as venture capitalists poured money into a growing number of fledging software companies. Total investments in startups rose 17% to $7.7 billion from $6.6 billion in the July-September quarter of 2012. The number of deals rose 7% to 1,005 from 937. The software industry pulled down the largest chunk of funding, nearly $3.6 billion.

The dollar fell to eight-and-a-half-month lows against the euro; down around 1 percent on the week. The Chinese economy grew at an annual rate of 7.8% in the third quarter, accelerating from the second quarter's 7.5% increase.

The 11th-hour agreement to raise the limit on US government borrowing and end a 16-day government shutdown also averted a default on Treasury bonds that had threatened the global financial system, and exposed the vulnerabilities of the economic revival plans of other countries, especially Japan and China. Perhaps no two economies outside the United States have more at stake in Washington's recurring drama than Japan and China. Not only are they the second- and third-largest economies, but they lend Washington more money than any other single nation. Both nations have adopted policies to revitalize their own economies that to some extent rely on the improving economic appetite, stable currency and increasing indebtedness of the US.

There are no bond markets large enough to give China and Japan an alternative to U.S. Treasuries for the dollars they accumulate selling exports. So the prospect of another U.S. default drama next year is likely to lend new urgency to China's preferred solution: conducting less trade in dollars and more in renminbi.

Very Serious People are warning that China might lose confidence in America and start dumping our bonds. That might not be such a bad thing. China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up. China could, possibly, depress the value of the dollar. But that would be good for America; a boon for American exporters.

And a US default would be very bad indeed for Japan, which is attempting to revive domestic consumption and investment, in part, by weakening the yen as part of the policy known as Abenomics. A US default would likely prompt investors to buy yen.

Bottom line is that there will be more talk about an alternative to the dollar as a reserve currency, but there is no place to run. At least not at this time.

The Murdoch Street Journal reports JPMorgan Chase has reached a tentative $4 billion deal with the Federal Housing Finance Agency to settle claims that the bank misled government-sponsored mortgage agencies about the quality of mortgages it sold to them during the housing boom. The deal is for less than the $6 billion the agency initially sought.

HSBC Group just lost, again; this time a $2.46 billion judgment in a long-running securities fraud lawsuit. The shareholder lawsuit alleged that Household International, now known as the HSBC Finance Corporation, misled investors about its lending practices, the quality of its loans and its accounting between 1999 and 2002. The lawsuit has wound its way through United States courts for 11 years and has been regularly noted in HSBC’s corporate filings. A federal jury in 2009 in Chicago found partially in favor of the shareholders, but HSBC and the other defendants have repeatedly challenged that verdict. Yesterday, the $2.46 billion dollar decision was announced in Federal District Court in Chicago. HSBC says it will appeal.

How much does a hamburger on the Dollar Menu cost?

Wrong, it costs much more. The fast-food industry costs US taxpayers about $7 billion a year, according to a report released this week. Researchers at the University of California at Berkeley and the University of Illinois said this subsidy comes about because 52% of fast-food workers are paid so poorly that they must rely on public assistance programs such as Medicaid and earned income tax credits. The fast food industry earns profits, pays dividends to shareholders, and pretty good wages to CEO's, but they stick the low wage costs on taxpayers, whether you eat their food or not.

Taco Bell and McDonald's are welfare queens. There is no free lunch. There is not even, really, a Dollar Menu.

 In 1965, CEOs at big companies earned, on average, about twenty times as much as their typical employee. These days, CEOs earn about two hundred and seventy times as much. That huge gap between the top and the middle is the result of a boom in executive compensation, which rose eight hundred and seventy-six per cent between 1978 and 2011. Last month, the SEC unveiled a rule to require companies to disclose the ratio of the CEOs pay to that of the median worker. The drive for transparency has actually helped fuel the spiralling salaries. For one thing, it gives executives a good idea of how much they can get away with asking for. The idea behind transparency is that full disclosure would embarrass companies enough to restrain executive pay, but the reality is that people who can ask to be paid a hundred million dollars are beyond embarrassment. A more crucial reason, though, has to do with the way boards of directors set salaries.

Boards tend to be comprised of members from peer companies that are bigger and tend to pay their own CEOs more. Also, boards tend to look at the CEO salaries of peer group firms and then peg their CEO's pay to the fiftieth, or seventy-fifth, or ninetieth percentile of the peer group; never lower. With all the companies following the same protocol, salaries ratchet higher, regardless of performance. It's known as the Lake Wobegone effect, where all the CEOs are above average.

Today's program has been brought to you in part by Powdermilk Biscuits. Heavens they're tasty and expeditious. 

Thursday, October 17, 2013 - No Winners, No Free Lunch

No Winners, No Free Lunch

by Sinclair Noe

DOW – 2 = 15,371
SPX + 11 = 1733
NAS + 23 = 3863
10 YR YLD - .08 = 2.58%
OIL – 1.59 = 100.70
GOLD + 37.40 = 1321.10
SILV + .47 = 21.99

The S&P 500 closed at a record high. We don't celebrate a record high on the S&P. When the Dow hits a record high we have milk and cookies. No particular reason, we just don't celebrate.

“There are no winners here,” that was the declaration from President Obama this morning. He then cited the damage done: families going without paychecks, home buyers and small businesses unable to get loans, consumers cutting back on spending, businesses pushing back hiring plans, and increased borrowing costs which add to the deficit.

Washington’s budget battle could result in a $24 billion hit to the US economy. That estimate comes courtesy of ratings firm Standard & Poor’s; they say the 16-day government shutdown and the wrangling over the debt limit shaved at least 0.6%, maybe a full point, off fourth quarter GDP growth. They had been estimating 3% annualized growth in the fourth quarter; now they peg it at 2%. The $24 billion loss is substantial, especially for a self inflicted wound.

But wait, there's more. Macroeconomic Advisers says the whole fiasco likely cost 900,000 jobs and possibly more in the months ahead. And one of the little noticed side stories is that the fiscal cliff inspired sequestration cuts, inspired by the debt ceiling debates of 2011, which cut the country's credit rating, and instituted on the edge of the fiscal cliff from earlier this year; those cuts are still in place. Along with an improving economy, those steps helped U.S. budget deficits fall from 8.7 percent of GDP in the 2011 fiscal year to an anticipated 3.9 percent of GDP for the fiscal year that ended on September 30. But this has all come at a steep cost.

The Congressional Budget Office estimates that the economic benefits of eliminating sequestration “would increase the level of real (inflation-adjusted) gross domestic product (GDP) by 0.7 percent and increase the level of employment by 0.9 million in the third quarter of calendar year 2014 (the end of fiscal year 2014) relative to the levels projected under current law.”

Spending cuts and tax increases since 2011 have cut the deficit by about $3.9 trillion over the next ten years. The sequester accounts for $1.2 trillion of that, about a third of the total. So a rough horseback guess suggests that the total effect of our austerity binge has been a GDP reduction of 2 percent and an employment reduction of nearly 3 million.

If the economy were running at full capacity, deficit slashing wouldn't have this effect. It would be perfectly appropriate policy. Unfortunately, Republicans don't believe in cutting spending during good times and increasing it during bad times. They believe in cutting it during Democratic presidencies and increasing it during Republican presidencies.

Mark Zandi, chief economist at Moody's says: "Increasingly I'm of the view that the reason why our economy can't kick into a higher gear is because of the uncertainty created by Washington." Zandi estimates the fiscal austerity has cost 2.25 million jobs. Without those measures, the unemployment rate would stand at 6.3 percent now rather than 7.7 percent.

"Reckless", that's the word from Richard Fisher; “reckless” fiscal policy will likely force the Federal Reserve to stand pat on monetary policy this month. Richard Fisher, the hawkish president of the Federal Reserve Bank of Dallas, said that the fiscal standoff means even he would find it difficult to make a case for scaling back bond purchases at the Fed's policy meeting on October 29-30. Fisher said taper is not in play because, "This is just too tender a moment."

There are a number of factors the Fed would need to consider in deciding when to pare its $85 billion in monthly purchases of Treasuries and mortgage bonds. The government will release the September jobs report on Tuesday; you'll recall it was postponed due to the shutdown. The Fed will have to digest a great deal of data in a short time before their FOMC meeting on the 29^th; and it will be impossible to assess the full damage of the Fiscal Fiasco, without allowing more time to let everything settle. Then the Fed is scheduled to meet in December; maybe the Fed could taper by then, but they will likely wait to see if lawmakers squander the opportunity presented by the December budget conference committee to agree on measures that enhance short-term growth prospects and longer-term fiscal reforms, while simultaneously removing a recurrent threat of government shutdown and default.

Meanwhile, and notwithstanding the earlier taper talk, the Fed may now have no choice but to stay longer in its intense policy experimental mode; due both to the likelihood of weaker data and to a perceived need to take out insurance for the economy against future political dysfunction. It appears individuals and companies are postponing important decisions, and this will likely lead to lower consumption, less buoyant hiring, and fewer investments in capital expenditures like equipment and buildings, and all that ahead of the economically vital holiday season. Call it self insurance, or merely erring on the side of caution.

It's earnings reporting season. While companies are generally reporting healthy earnings for the third quarter, an unusual number have been warning that the fourth quarter is not going to look as good, in part because of the political turmoil. Of the 105 companies in the S&P 500 that have reported earnings so far, 68 have provided negative guidance.

Today, IBM reported third quarter earnings with a revenue miss of nearly $1 billion, sparking a sell-off in after-hours trading. The company blamed most of the revenue shortfall on a 40% drop in hardware sales in China, as the country gets ready to implement a new economic plan in November.

Google reported a third-quarter profit of $2.97 billion, or $8.75 a share, compared with a profit of $2.18 billion, or $6.53 a share, for the year-earlier period.

JPMorgan has agreed to pay $100 million in fines and make a groundbreaking admission of wrongdoing to settle an investigation into market manipulation involving the bank’s multibillion-dollar trading loss in London, underscoring how far the bank was willing to go to put the blunder behind it. The fine is nothing; the admission of guilt is significant. The trading commission charged the bank with recklessly “employing a manipulative device” in the market for swaps, financial contracts that allowed the bank to bet on the health of companies. The swaps are similar to insurance, but anyone can buy, you don't have to have an insurable interest. Think about your doctor buying a life insurance policy on your life. Not comforting is it?

Steven A. Cohen's SAC Capital Advisors and prosecutors have agreed in principle on a penalty of at least $1 billion to settle a criminal insider trading investigation against the hedge fund. The potential settlement would give Cohen's firm credit for agreeing to pay more than $600 million to settle a civil lawsuit filed earlier this year against the firm by the Securities and Exchange Commission. The hedge fund and prosecutors have yet to resolve other issues such as whether the firm will admit any wrongdoing and whether Cohen may be prohibited from managing money for outside investors.

SAC Capital is in the process of returning much of the $5 billion in outside money it manages for others. About $6 billion of the firm's money belongs to Cohen and his employees.

Mark Cuban was cleared by a Texas jury of using a private tip to avoid a big loss on his 2004 sale of Internet company shares. Cuban, 55, the owner of the Dallas Mavericks basketball team, lashed out at the U.S. government and lead prosecutor Jan Folena after the verdict, saying the government had tried to bully him. The SEC brought the insider trading civil lawsuit against Cuban in November 2008. A judge dismissed the suit in 2009 but an appeals court revived the case the following year. Cuban refused to settle the case and went to trial, even though he said on Wednesday that he had spent more on fees for lawyers than the possible fines for admitting to insider trading. He could have faced up to $2 million in fines.

Taco Bell and McDonald's are welfare queens. They force taxpayers to pay for what they are unwilling to pay their workers. The fast-food industry costs US taxpayers about $7 billion a year, according to a report released this week. Researchers at the University of California at Berkeley and theUniversity of Illinois said this subsidy comes about because 52% of fast-food workers are paid so poorly that they must rely on public assistance programs such as Medicaid and earned income tax credits. The fast food industry earns profits, pays dividends to shareholders, and pretty good wages to CEO's, but they stick the low wage costs on taxpayers, whether you eat their food or not.

There is no free lunch. There is not even, really, a Dollar Menu.