Tuesday, June 03, 2014 - Always Look on the Bright Side

Always Look on the Bright Side
by Sinclair Noe

DOW – 21 = 16,722
SPX – 0.73 = 1924
NAS – 3 = 4234
10 YR YLD + .06 = 2.59%
OIL + .37 = 102.84
GOLD + 1.40 = 1245.90
SILV + .05 = 18.91

Automakers reported strong sales of new cars in May, the strongest annual sales rate since before the 2008 financial crisis. Industry sales rose 11.3%. Chrysler and GM had their best month of May in 7 years. A record number of recalls at GM since the first of the year did not crimp demand for the automaker's new vehicles. Average transaction price for a new vehicle in May was $32,307, according to research firm Kelley Blue Book, which said average new-car prices were up $653 from a year ago, but down slightly from April.

The city council of Seattle Washington has voted to raise the city’s minimum wage to $15 an hour, the highest level of any major US city. Wages would begin to rise next year, ultimately reaching $15 from Washington state's minimum of $9.32 over three to seven years, depending on the business. Under the plan, firms with more than 500 employees nationally will be given at least three years to phase in the increase, those who provide health insurance subsidies would get four years and smaller businesses would be given seven years. US minimum wage is $7.25, although 38 states have set higher levels. The states of California, Connecticut and Maryland have recently passed laws increasing their respective wages to $10 or more in coming years.

Yesterday we heard the EPA proposal to cut power plant carbon emissions by 30% over the next 15 years. Even before the announcement we heard concerns about how that might affect jobs, most of it conjecture. In 2010 when the country was debating a clean energy bill aimed at cutting carbon emissions by 17%, the Congressional Budget Office predicted how destructive the law would be for American jobs. The CBO report concluded it wouldn’t be destructive at all, rather it would probably add more jobs than it killed.

The report found that overall, unemployment would probably increase in the short term. Workers may lose jobs by the thousands across industries that include coal mining, oil and gas extraction and transportation, the report said. And, it added, people who found new jobs by relocating or by learning new skills would probably be earning lower wages than before.

But the CBO report also said that, as polluting industries like coal mining shrink, industries with fewer carbon emissions would expand by as many as a half-million new jobs by 2025. States that are heavily coal-dependent will have to shift to some degree away from coal and to other, new resources; but the electricity has to come from somewhere, so there will be new facilities built to produce it.

In general, the debate about how environmental regulation will affect the economy is so polarized that studies end up with contradictory conclusions. In a 2012 review of more than two dozen such studies, a team of researchers at a New York University think tank found that studies commissioned by big energy companies usually found that regulations increase unemployment, while those by environmental groups found the opposite.

You’ve probably heard about the controversy surrounding the book Capital in the 21^st Century by Thomas Pikkety. A reporter from the Financial Times says some of Pikkety’s statistics are flawed. Pikkety responded by saying his research is solid. Now we have a new source to support Pikkety. According to a new report by stock market strategists at Bank of America Merrill Lynch, the rich are going to keep getting richer all over the world, pretty much just as French economist Thomas Piketty describes in his bestselling book.

And according to the folks at Merrill Lynch, this represents an opportunity for Merrill Lynch. They write: "We are aware of the controversy over Piketty’s math (see the FT Money Supply blog), but are generally comfortable with the thrust of his analysis, having read his 577-pager, looked at his (problematic) spreadsheets, and cross-checked his data with alternative, credible sources. His questionable assumptions do not detract from the power of his thesis."

Merrill pointed out that it has been predicting the rise of "plutonomies -- economies where economic growth is powered by and largely consumed by the wealthy few" -- for the past decade. While this might sound like a nightmare world for some of us, it is also a chance to make a bunch of money, for those mostly rich people with the means to invest in companies that most profit from the wealthy elite. This includes luxury goods makers, money managers and private banks.

Always look on the bright side.

For the past two years, European Central Bank President Mario Draghi has been saying “whatever it takes”, giving the impression the ECB was ready to take on a stimulus program, jawboning the markets with the hint of bold monetary action, right around the corner. Today, a report showed Eurozone inflation at just 0.5% in May. A separate report showed the Eurozone jobless rate at 11.7% in April, ticking down from 11.8% in March, but still more than 25% in Spain and Greece. For 2 years Draghi said “whatever it takes” and for 2 years he has done nothing. On Thursday, the ECB meets to determine monetary policy and Draghi is expected to do something, and it better be something worth the wait.

It is widely anticipated the ECB will cut its target on loans from one-quarter percent to 0.1%, maybe down to a flat zero; and they are expected to eliminate paying banks on their deposits, cutting that into negative territory, essentially charging the banks to park cash at the central bank. And if that’s all the ECB does, it will probably be considered a huge disappointment; cutting rates won’t change borrowing conditions materially for most companies and it won’t be enough to lift the Eurozone out of the deflationary cycle.

It’s time for another edition of banks behaving badly. This is really an ongoing saga but sometimes we turn our gaze away and focus on other important issues; you might think that means the banksters haven’t been misbehaving, but the truth is their transgressions are never-ending.

Last month, Credit Suisse agreed to plead guilty to criminal charges of helping tax cheats avoid paying US taxes. Credit Suisse was fined $2.6 billion, which is a hefty fine but the bank basically got off with punishment fitting a civil suit. Still, it sent a message.

The Treasury Department announced that more than 77,000 foreign banks from 70 countries have agreed to share information about US account holders as part of a crackdown on offshore tax evasion. Participating countries include all the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas. Under the law, foreign banks that do not agree to share information with the IRS face steep penalties when doing business in the US. The law requires American banks to withhold 30% of certain payments to foreign banks that don't participate in the program. And if the US banks fail to withhold the tax, they would be liable for it themselves.

Next on the list is BNP Paribas; the Justice Department is looking into claims the French bank broke trade sanctions against Sudan, Iran, and Cuba between 2002 and 2009; essentially, international money laundering. BNP Paribas is facing possible criminal charges and possible penalties of $10 billion. In December 2012, HSBC faced similar charges that it breached US sanctions and laws against money laundering; HSBC agreed to pay $1.9 billion in civil penalties.

 Now, US authorities are seeking criminal charges and a stiffer fine, the equivalent of a year’s profit for the French bank. The precise amount of the fines and the conditions attached to them is still a matter of speculation and probably negotiation. The crimes of BNP are probably no more egregious than the wrongdoing of HSBC, but for a long time BNP refused to admit wrongdoing. If you’ve ever watched a cop show on TV, you know how that works; cooperate and the punishment will be more lenient.

President Obama is traveling to France on Thursday to commemorate the 70^th anniversary of D-Day, the landing at Normandy. And while the visit is supposed to be a celebration of the liberation of France by its allies, relations between France and the US are a bit rocky. Many in France are concerned that America lets its own banks off rather lightly and cracks down on foreign banks instead to appease voters’ hatred of the banksters. American rules sometimes differ from European rules, and criminalize behavior that might be legal in the banks’ home country. And two more French banks, Societe Generale and Credit Agricole, are also thought to be in the crosshairs of American authorities for allegedly breaking sanctions and money laundering.

The French are getting nervous. The French foreign minister says the fine against BNP would be unfair and it would hit BNP Paribas' funds and result in fewer loans for French businesses. They claim the US is using its position as the leading global financial market to bully their banks. So on Thursday, Presidents Obama and Hollande will get together for D-Day festivities and dinner and conversation. The banking fines will be a major topic, but there are other acrimonious subjects; France seems determined to continue military hardware sales to Russia, which might not violate the recently imposed sanctions but certainly violates the spirit of the sanctions.

The US has embarked on a new way of fighting, and it involves sanctions and economic weapons; it is certainly preferable to the battles waged 70 years ago in Europe, but it won’t work if the banksters put their greed ahead of other priorities. The French politicians might whine about the hardships, but they need to get their banks in order, and for that matter so does the US.

Tuesday, May 15, 2012 - JPMorgan is Scary, the California Budget is Easy - by Sinclair Noe

05152012 Script

DOW – 63 = 12,632
SPX – 7 = 1330
NAS – 8 = 2893
10 YR YLD =.01 = 1.78%

OIL - .57 = 93.41
GOLD – 12.20 = 1545.30
SILV -.46 = 27.82
PLAT – 5.00 = 1437.00

So, JPMorgan shareholders held their annual meeting. They decided to pay Jamie Dimon $23 million. They can still afford it; despite a $2 billion dollar loss, JPMorgan is still the largest publicly traded company, the largest bank in the US, and the largest derivatives dealer in the world. JPMorgan invented credit default swaps, they wrote the legislation to reform the derivatives markets, and when JPMorgan went insolvent in the 1980s and in 2007, they were bailed out by taxpayers.A $2 billion dollar loss is not the end of the world, JPMorgan is not in imminent danger, but I don't think this will end well. The really scary part isn't the loss, but that it only represents one-tenth of the annualized profit. What are they doing to make that kind of money? And if these are supposed to be the best and brightest bankers, what does it say about the others?

The FBI has opened an investigation into the trading losses. We don't know what the FBI is looking at and I won't hold my breath waiting. The SEC has opened an inquiry into JPMorgan's disclosures and accounting practices. JP Morgan maintains that the purpose of the trades that resulted in the $2 billion loss was to hedge exposure elsewhere, as opposed to being proprietary trading intended to generate profits. That’s contradicted by a report citing current and former employees of the chief executive office, including its former head of credit trading. Dimon is claiming even now that this qualifies as a hedge under the current version of the Volcker rule. And the Volcker rule was put in as part of Dodd–Frank at the suggestion of Paul Volcker for the explicit purpose of preventing exactly this kind of transaction. The banks and the leader in the banks' campaign against the Volcker rule has been JPMorgan and Jamie Dimon in particular, who has been brutally rude to Paul Volcker and incredibly arrogant, saying Volcker doesn't understand anything about what he's talking about.

"You can't legislate away stupidity and risk-taking and greed and recklessness. What you can do is make sure when it happens it does not cause too much damage and to do that you have to make sure you have good rules against fraud and abuse, better protections and you force banks to hold more capital against their risk," so says Treasury Secretary Timothy Geithner. He is wrong. You can legislate away quite a bit of stupidity and risk-taking and greed and recklessness. If you can have government creating a fractional reserve system which allows banks to create money out of thin air, then you can legislate how they gamble with that money. The solution is incredibly simple – reinstate Glass-Steagall. Let commercial banks be commercial lenders and the investment bankers can still gamble with their own money. Of course, any meaningful reform is nearly impossible considering the banks have purchased the politicians.

Francoise Hollande has been sworn in as the new president of France. In his inauguration speech he promised a “new path” for France, and then, in his first act as president, he followed the well worn path to Berlin to meet with German Chancellor Merkel. It wasn't easy; his plane had to turn around after being struck by lightning. Seriously. He's never heard of an omen?

Greece can't form a government, and so they will vote again in about one month. Meanwhile, stocks, precious metals, oil, gasoline, and the kitchen sink have all been slipping in price and the reason, from everything I read - is because of Greece. You probably never realized the amazing economic control Greece is able to exercise on world markets. It's reported that Greeks withdrew nearly $900 million dollars from Greek banks yesterday; kind of a run on the banks.

I keep getting the feeling that what we've been watching play out in Greece will eventually play out in the US, an if so, it might start in California. Governor Brown announced an ugly budget, featuring cuts in Medi-Cal payments to hospitals and nursing homes, (remember the talk about health care “death panels”? Eliminate Medi-Cal and see what happens) cuts to those who care for the disabled, cuts to state courts and cuts in hours and pay for state employees. Construction on courthouses, will be stalled and the court system will be even more underfunded. And although few Californians have much sympathy for state workers, they are struggling to fill the gaps in agencies that are experiencing layoffs and, if Brown gets his way, will be rewarded for their extra work with a 5% pay cut. So far schools have been largely spared from this grisly exercise, but that will probably change in November if voters fail to approve a tax-hike initiative.

Brown's proposed budget presumes that voters will approve the tax-hike initiative in November, which would increase the state sales tax by a quarter of a percent and raise income taxes on the wealthy. These taxes would generate an estimated $8.5 billion through the end of the budget year, and voters would blow another gaping hole in the budget if they reject them. Brown addresses this possibility by including "trigger" cuts in his budget proposal that would reduce funding for schools and community colleges by a whopping $5.5 billion and higher education by $500 million, while cutting game wardens, park rangers, lifeguards and other popular positions and services. There is a word for these kinds of cuts, it's a Greek word – austerity.

Facebook is expected to increase its offering price from its initial range, giving the company a valuation possibly as high as $104 billion. Governor Brown is expected to announce a 15% tax on IPO valuations on Saturday. Problem solved. This budget stuff is easy.

So, do you think the economy has slowed enough to warrant the Fed stepping in with another round of stimulus?

Home builder sentiment improved in May to the highest reading since the depression. The National Association of Home Builders/Wells Fargo housing market index rose to 29 from 24 in April. The April index was initially reported to be 25. The reading, though the best since May 2007, is still well short of the 50 level that indicates that more builders view conditions as good than poor. Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April.

The Commerce Department said April retail sales growth slowed to 0.1% Taking the first four months of 2012 together, the U.S. economy appears to be growing at a modest 2% to 2.5% clip. In April, online retailers, furniture outlets, auto dealers, pharmacies, and sports and leisure stores all posted solid sales increases. Internet and catalog retailers got a 1.1% boost while spending on autos climbed 0.5%.

Consumer prices were unchanged in April as lower gasoline prices offset rising food, apparel and car prices, The Labor Department said prices didn’t change on a seasonally adjusted basis and that so-called core prices, which exclude food and energy, rose 0.2%. Gasoline prices dropped 2.6% on the month, while food prices dropped were up 0.2%. For the past 12 months, consumer prices are up 2.3%.

So, do you think the economy has slowed enough to warrant the Fed stepping in with another round of stimulus? The economy is actually in much better shape than the past couple of weeks in the financial markets, nothing exciting but shuffling along while the markets stumble. The broader economy can crash and burn and the Fed would be frozen but when the markets whine, it usually gets the Fed to take action. Not this week, but it is a setup for next month's FOMC meeting. 

Tuesday, May 08, 2012 - The Situation in Europe Isn't What You Think

DOW – 76 = 12,932
SPX – 5 = 1363
NAS – 11 = 2946
10 YR YLD - .04 = 1.84%
OIL - .46 = 97.30
GOLD – 33.70 = 1605.80
SILV - .62 = 29.57
PLAT – 18.00 = 1517.00

The markets did a double take. We knew what was happening in Europe. Yesterday, the markets acted as if nothing had happened. This morning, the sky was falling. And then as the day progressed, the markets realized the sky wasn't falling, or  perhaps the markets remembered that the Federal Reserve will backstop the markets. And the Fed meets again in June 19^th, and that's not too far away. Of course, before the Fed can make an announcement on yet another round of Quantitative Easing, the sky has to fall, at least a little; stock markets have to wobble, oil prices need to slip, gold prices need to be slapped around. And just when you imagine there is a deep dark deflationary abyss, the Fed can ride to the rescue with another round of cheap money for undeserving bankers.

The euro fell for a seventh straight session against the dollar, dropping below $1.30, which was considered a fairly significant level of support. Today's euro weakness is overwhelmingly tied to Greece's difficulty putting together a government. Greece's two main pro-bailout parties failed to win a majority in weekend elections, leaving questions over the country's ability to avert bankruptcy and stay in the euro. Greece's Left Coalition party has a chance to form a government opposed to the country's EU/IMF  bailout after the mainstream conservatives failed to cobble together a coalition. The chances are looking like slim and none. The Left Coalition is trying to back away from pledges made in exchange for a EU/ IMF bailout; this basically means they want to tell the bankers to go to hell and they don't care if they get kicked out of the Euro as a result. The right wing is saying Greece must accept the bailout deal and remain in the EU; the left wing is saying the popular verdict renders the bailout deal invalid. If a government can't be formed, then they will call for another round of elections.

So, the next question is: what happens if Greece exits the Euro? Not much. If you haven't seen this coming, you haven't been paying attention. International banks have sharply reduced their exposure to Greek and other peripheral government debt. If Greece leaves, it is already baked into the cake and it may be the best thing for the Greek people. Except... if Greece leaves, then Spain and Portugal and Italy might consider leaving the Euro or renegotiating their deals. That does not mean there would be no market impact. The premium investors demand to hold peripheral debt rather than German benchmarks would rise and the euro might fall even more. Overall, the situation in Greece is important politically but not financially. France is another story.

François Hollande, the newly elected Socialist French president, demands a change to the EU's economic policies, with a shift from austerity to growth. European Union leaders are to hold an emergency summit; not today; the summit will be held May 25^th. Germany and France are battling over the euro-zone’s "fiskalpakt", signed by 25 EU countries, that enshrines austerity measures into European treaty law and requires countries to change their constitutions to outlaw high levels of state spending. Mr Hollande is refusing to back such a change or to allow the EU courts new powers to strike down national budgets that breach the fiscal pact's "golden rule", and wants to renegotiate it to dilute the focus on austerity in favor of growth.

So, the elections in Europe showed voters were fed up with austerity, and they prefer a growth policy. Well, yes, sort of. There is more to it. The voters were also expressing their disgust with German imposed austerity. Germany is the instigator for austerity imposed on the periphery countries, and even on France. Germany wants more cutbacks in social spending, it wants higher taxes on the average citizen, and it wants friendlier policies for corporations; the Germans don't want these policies for Germany but they would like to impose this on the southern Euro-countries. And what we have heard is that the southern Euro-countries are lazy, and living off government handouts, while the Germans are hard working, productive, efficient, and thrifty.  What you are not hearing is that this is a Euro version of the 99 Percent movement.

The German version of austerity calls for austerity for the 99%, but not for the wealthiest One-Percent. We've seen this playbook before. It is the Federal Reserve playbook and it calls for an enormous amount of liquidity to be fed into the economy by the central banks. The liquidity is injected directly into the banking system and provides the banks with reserves as the central banks buy up toxic assets in exchange. A zero interest rate policy also provides banks with essentially free loans which can then be used to speculate in various markets. Theoretically, you might think the money injected into the banking system would be circulated throughout the economy to juice growth, but that's not how it works. The banks hoard the money and they gamble with the money. Instead of jobs, growth and stability, the opposite happens; growth is stifled, jobs destroyed, and wealth is redistributed to the small minority known as the one-percent.

Nobody likes to have austerity imposed on them, yet most people realize that emerging from tremendous debt will be difficult and require some sacrifice; the voters were saying the burden should be shared by the people who most benefited in the past from this corporatist plutocracy, who are manipulating the system currently to avoid any harm to themselves, and who show not the slightest concern about the burdens imposed on 99% of the population.  The elections were not necessarily a mandate for a new round of massive expansion of government debt, rather it was telling governments to redirect the current government spending away from propping up the corrupt corporate oligarchy. The Greek people are suffering economically. Goldman Sachs played a significant part in making the Greek debt situation worse. Goldman Sachs received hundreds of millions. Goldman Sachs made out like thieves in the night.

So, why not take away the bailouts? Why not stop the equity extraction businesses, the vulture capitalism, the excessive leverage, the stock option programs that reward short term corporate profits at the expense of long term viability and jobs? Why not reinstate discipline that punishes unsound judgment with the loss of jobs and wealth, not with golden parachutes? Why shouldn't badly run companies be allowed to fail? Why shouldn't success in business be predicated on more than the ability to bribe government officials with campaign contributions to grease the way for unfair advantages and special privileges.

Cases in point: a kid steals a 12 pack of beer from the 7-11 and ends up in prison; John Corzine steals $1.2 billion from client funds and we're still waiting for the police to show up. Or what do you think would happen to you if you forged a check and got caught? Prison, followed by probation. Forge tens of thousands of names and create bogus notaries for mortgage notes – no problem for the banksters. A student hacks into Sarah Palin's phone and gets indicted and convicted in a flash. Rupert Murdoch hacks into a dead student's phone and he gets a pie in the face and a slap on the wrist. You give a cop 20 bucks to fix a ticket and you'll be busted for bribery. JP Morgan gives the New York Police Department $1 million dollars and they have their own private security force; better yet, Goldman Sachs coughs up a few million in campaign bribes, or donations, and they get one of their guys appointed as Treasury Secretary. The list goes on, and on, and on.

We hear malarkey about how the voters went for communists and socialists and neo-nazis. The Europeans have dealt with a corrupt corporate oligarchy in the past; maybe they really wanted to vote for capitalism but there isn't anybody representing that ideal. Maybe they just wanted a level playing field. Maybe we shouldn't fear the socialists in France; maybe we should fear what they're replacing. Maybe we should hope they're going to effectuate change, because if they don't get change with their votes, they may move on to more drastic solutions.

Bank of America has started sending letters to thousands of homeowners, offering to forgive a portion of the principal balance on their mortgages by an average of $150,000 each. The principal reduction offers from Bank of America Home Loans are the result the $25 billion dollar multi-state settlement that came about in the wake of the robo-signing scandal. BofA  started making prinicpal reduction offers in March to a narrow group of homeowners who were already in the process of seeking mortgage modification. The bank estimated that the earlier wave of trial reduction offers to about 5,000 people could amount to more than $700 million in forgiven principal. But homeowners have to make at least three timely payments for the reductions to become permanent. This is BofA's punishment for robosigning; of course many of these mortgages being modified might have ended up in default, so it works out pretty good for the bank.., as always.

BofA holds its annual shareholder meeting tomorrow in Charlotte, NC. Expect protesters, maybe quite a few. In response, the city of Charlotte is beefing up police presence in a two-block radius surrounding the bank's headquarters, where the meeting will be held. Earlier in the year, the city deemed it an "extraordinary event," which allows the Charlotte police force to reallocate officers as it sees fit.  The bank also  hired off-duty Charlotte police officers to sit inside the meeting, as well as a private security firm to work outside.

Senate Republicans on Tuesday blocked consideration of a Democratic bill to prevent the doubling of interest rates on some student loans. Along party lines, the Senate voted 52 to 45 on a key procedural motion, failing to reach the 60 votes needed to beat back a filibuster and begin debating the measure.  Republicans say they want to extend Democratic legislation passed in 2007 that temporarily reduced interest rates for low- and middle-income undergraduates who receive subsidized Stafford loans to 3.4 percent from 6.8 percent. But the Republicans would not accept the Senate Democrats’ proposal to pay for a one-year extension by changing a law that allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.

Doubts about Europe’s political and economic future drove prices down for a wide range of commodities. Metals prices were hit hard. Gold, silver, platinum and palladium all fell. Energy and agricultural products were mixed. You might think there would have been a flight to safety, but that flight was for Treasuries, not metals. That might change soon.

Thursday, May 3, 2012 - Jobs More or Less, Europe More or Less, HSBC Mess

DOW – 16 = 13, 206
SPX – 10 = 1391
NAS – 35 = 3024
10 YR YLD unchanged = 1.92%
OIL +.09 = 102.63
GOLD – 17.90 = 1636.80
SILV - .58 = 30.17
PLAT – 28.00 = 1540.00

Tomorrow the government releases the employment report for April. Economists predict the U.S. gained 160k to 175k jobs last month, up from a disappointing 120,000 in March. The preliminary increase in March was the lowest in five months and fell well short of the 246,000 average from December to February.

We've seen several reports on jobs that might give a hint on tomorrow's report:

The four-week average of initial jobless claims was 383,500.Jobless claims declined by 27,000 to a seasonally adjusted 365,000 in the week ended April 28.

The Labor Department said continuing claims decreased by 53,000 to a seasonally adjusted 3.28 million in the week ended April 21. Continuing claims reflect people already receiving benefits. ADP’s report on private-sector payrolls slowed to 119,000 from 201,000 in March. The employment component of the Institute for Supply Management’s manufacturing report rose to 57.3% from 56.1%, on a scale where readings over 50% indicate expansion. The employment component of the Institute for Supply Management’s services report slowed to 54.2% from 56.7%, on a scale where readings over 50% indicate expansion. Planned layoff announcements rose 7% to 40,559, according to Challenger, Gray & Christmas.

What does it mean? It means wait until tomorrow's report and we'll find out. This is not the kind of report that you bet on. This is a report that calls for caution. There is a good chance the report could disappoint the market, no matter what the number. I say that because the market looks like it's ready for a sell-off. We've talked about the seasonality of the market, and for the past month I've been telling you to sell in May and go away. It's May already.

The Labor Department estimated productivity fell at an annual rate of 0.5% in the first quarter, down from a revised gain of 1.2% in the fourth quarter. The fourth-quarter increase was previously reported as 0.9%. All of the decline took place outside the manufacturing sector. Manufacturers, which have led the recovery since the U.S. exited recession in 2009, boosted productivity by 5.9%, as output jumped 10.8% and hours worked increased by 4.6%. Much of the gain likely stemmed from a big pickup in auto sales.

Excluding extraordinary items, GM reported a profit of 93 cents a share. That’s 8 cents more than Wall Street expected. GM’s North American operations made money. The company is relying less on incentives than it did a year ago. That means its unit margins are much healthier. GM saw record first-quarter demand for its cars in China, helping to boost revenue 4% to $37.8 billion. Even though GM posted a profit of more than $1 billion dollars, GM's European operations lost money.

In Europe, ECB President Mario Draghi did not offer any indications that further monetary stimulus is on the horizon. Speaking at a Euro-zone conference, Draghi said the most recent economic indicators “are not enough to change our baseline scenario, which foresees a gradual recovery in the course of the year.” At the same time, Draghi said it remained “premature” to begin discussing “exit strategies” from the central bank’s efforts to shore up liquidity across the euro zone. He said policy makers felt monetary policy remained “accommodative” given historically low nominal interest rates and negative real interest rates—interest rates minus inflation—across much of the euro zone.

The ECB’s Governing Council, meeting today in Barcelona, left the bank’s key lending rate unchanged at 1%, as expected. At least 11 euro-zone countries have seen at least two consecutive quarters of shrinking gross domestic product, meeting the widely-used definition of a recession, and more data in the next few weeks is likely to show the broader Euro-zone is in a recession, even while some countries appear to be in a full blown depression. Unemployment in March topped 10.9% for the Euro-zone, that's up from 9.9% one year ago. Even Germany, could feel the ill-effects.

Draghi stirred the growth-versus-austerity debate himself last week by urging European leaders to adopt a “growth compact” alongside the recently adopted “fiscal pact,” which aims to enshrine tough budget rules. Today, Draghi said he saw “no contradiction” between the pair. We'll see about that.

Francoise Hollande looks to be the next President of France. He leads the incumbent, Sarkozy, by several points in the polls. Sarkozy has been loyal to German Chancellor Merkel, praising the German economy as a model for France and rejecting the possibility that strong countries such as France and Germany would provide guarantees for joint euro bonds.

Hollande pledged to renegotiate the new fiscal pact if he is elected, Merkel wants none of that, saying: “The fiscal pact has been negotiated, it was signed by 25 government heads and is already ratified by Portugal and Greece. It is not renegotiable.”

Hollande responded immediately in a television interview, indicating he was not alone in rejecting the pact as it stands: “It is not for Germany to decide for the rest of Europe. I’m getting lots of signals, direct and indirect, from other governments, even if they are conservative.”

In his debate with Sarkozy, Hollande noted that it is the two countries that have not adopted severe austerity measures — Germany and the United States — that have shown stronger economic growth in the wake of the financial crisis and recession. Who will buy German manufactured goods when nobody else in Europe has any money? You could ask the same question about who will be left to buy US exports.

Germany, which benefited from 10 years of highly favorable terms of trade under the euro, has not needed to run up its debt or cut its government spending. The U.S. under the Obama administration opted for fiscal stimulus to counter the deflationary impact of the crisis. Hollande appears to be on the same page and his election could tip the balance in favor of those who see growth as necessary to save the euro, not unmitigated austerity. Of course, there is still the matter of an election this weekend.

Mortgage rates hit new record lows last week. Now we question the why and wherefore. Are low rates symptomatic of underwhelming growth and economic concerns? Are low rates signaling that we haven't really hit a bottom in the housing market? Or , are the low rates providing the fuel that is indeed lifting the housing market? Freddie Mac said the 30-year mortgage rate fell for a second week, to 3.84%, down from its previous all-time record low of 3.87% on February 9. The 15-year fixed average also fell to a new all-time low of 3.11%.

The Boston Fed has released a research paper on the cause of the housing crisis. They conclude the financial industry did not deceive mortgage borrowers and investors but instead everybody was just overly optimistic about house prices. There was no problem with the mortgages, no problem with the synthetic derivatives, no problem with transparency and disclosure. I think I'll file that one under “self serving bull”.

In 2003, the Federal Reserve Bank of New York and New York state bank regulators ordered HSBC Bank USA to do a better job of policing itself for suspicious money flows. The bank promised to beef up its anti-money laundering division. HSBC told regulators that it would fully address all deficiencies in the bank's anti-money laundering policies and procedures. Now Reuters is reporting that HSBC has fallen short. They reviewed documents from law enforcement officials that show that from 2005, the bank violated the Bank Secrecy Act and other anti-money laundering laws on a massive scale. HSBC did so, they say, by not adequately reviewing hundreds of billions of dollars in transactions for any that might have links to drug trafficking, terrorist financing and other criminal activity.

In some of the documents, prosecutors allege that HSBC intentionally flouted the law. The bank created an operation that was a "systemically flawed sham paper-product designed solely to make it appear that the Bank has complied" with the Bank Secrecy Act and is able to detect money laundering

In the Miami office - an important center for HSBC's private-banking and retail operations - a longtime private banker was fired for alleged sexual harassment after he warned compliance officers that clients were engaged in shady dealings.

In one email exchange submitted as evidence in that case, employees debated whether the bank should help a Miami client get around U.S. sanctions by moving the client's business to HSBC's Hong Kong office. 

The revelations come as HSBC confronts multiple investigations into its internal policing abilities. The Justice Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Manhattan district attorney, the Office of Foreign Assets Control and the Senate Permanent Subcommittee on Investigations are scrutinizing client activities such as cross-border movements of bulk cash, and transactions linked to Iran and other parties under U.S. economic sanctions. HSBC said in its February filing that it was likely to face criminal or civil charges related to the probes.

To date, the only enforcement action detailing any anti-money laundering shortcomings at HSBC was a 2010 consent order from the Office of the Comptroller of the Currency, the Treasury agency that is HSBC's chief regulator. The OCC, calling HSBC's compliance program "ineffective," told the bank to conduct a review to identify suspicious activity. This "look-back" was expected to yield a report to HSBC and regulators. The status of the report isn't known.

Some of the problems uncovered in the investigation: The bank understaffed its anti-money laundering compliance division and hired "gullible, poorly trained, and otherwise incompetent personnel." HSBC failed to review thousands of internal anti-money laundering alerts and generate legally required suspicious activity reports, or SARs, on transactions picked up by the bank's internal monitoring system.   In May 2010, the bank's backlog of alerts was nearly 50,000 and "growing exponentially each month."  Hundreds of billions of dollars moved unchecked each year through various bank operations because of lax due diligence and monitoring of accounts with foreign correspondent banks.

 In some instances, "management intentionally decided" not to review alerts of suspicious activity. An investigation summary also says, "There appear to be instances where Bank employees are misrepresenting" data sent to senior managers, and where management altered risk ratings on certain clients so that suspect transactions didn't set off alarms.

Since 2005, the bank has filed only 19 suspicious activity reports relative to the receipt of bulk cash and banknote activities. People familiar with HSBC and the reports said 19 is a low number given the risk of the clients. Between 2005 and 2010, banks and other depository institutions filed more than 3.8 million SARs, according to the Financial Crimes Enforcement Network, a bureau of the Treasury Department.

HSBC is the fifth-largest bank in the world in terms of market value, HSBC had $2.6 trillion in assets at the end of 2011 and operations in 85 countries and territories. Its North American business, which includes HSBC Bank USA and a consumer finance unit, accounts for about 5 percent of HSBC's profit.

There is a tendency for cases like this to end up in settlement, a possible fine, and no admission of wrongdoing. You have to wonder what it would take for a big bank like HSBC to lose its bank charter. But for now, the banks act as if they are entitled to do whatever they want, and since they have big political influence – they get away with it. What does it take to destroy a bank charter? Money laundering, tax evasion, supporting terrorists, drug trafficking – that's just business as usual. 

Wednesday, May 02, 2012 - Jobs Report, Euro Elections, California Budget, and Watching Paint Dry

DOW – 10 = 13,268
SPX – 3 = 1402
NAS + 9 = 3059
10 YR YLD -.03 = 1.92
OIL +.14 = 105.36
GOLD – 8.50 = 1654.70
SILV - .32 = 30.75
PLAT – 9.00 = 1569.00

This is shaping up to be a wild weekend. Friday we get the jobs report. Then, in Europe there will be elections in France and Greece. On a personal note, I'm going to paint the patio on my house, so I'll be watching paint dry, just to counterbalance the rest of the world.

The monthly jobs report, already the most highly anticipated data of the month, will be getting a little extra attention this Friday after a disappointing report on GDP late last week. A bad jobs report and a weak GDP report might be enough to trigger another round of Quantitative Easing from the Federal Reserve. The economy is adding and will continue to add jobs; that is not in question. It is the rate of job growth.

Expectations are that there were about 160k to 175k new jobs created in April, up from 120,000 in March, and an unemployment rate that remains steady at 8.2%. The lowball guesses are for only about 125k jobs. With the addition of 120,000 jobs, March marked the 15th straight month of jobs growth, but it broke a three-month streak in which the economy had added more than 200,000 jobs.

Now we are only a couple days away from finding out whether March's report was a fluke or the beginning of a new, disappointing trend of declining growth in the labor market. A not-so-promising sign: The private sector added only 119,000 jobs in April, down from a downwardly revised 201,000 in March and well short of expectations. The ADP report is not always a good indicator for the monthly report.

Manufacturing grew in April at the fastest pace in almost a year, propelled by a pickup in orders that signaled factories will remain a source of strength for the US Expansion; that according to a report yesterday from the ISM. Still the numbers seem disappointing and the outlook less than bright. Overseas demand for US made-goods risks fading as global growth slows.

Spain's economy contracted in the first quarter, putting the euro region's fourth-largest economy into its second recession since 2009, and at some point, you have to consider multiple, rolling recessions are in truth, a depression. S&P downgraded Spain last week,and today the Spanish IBEX traded below the March 2009 closing lows and near the lows of 2003. The US markets didn't seem to be bothered by the problems in Europe. You love to see a market move higher on bad news, but sometimes that is just a chance for the smart money to time an exit.

The U.K. economy shrank 0.2 percent in the first quarter after contracting 0.3 percent in the prior three months as Britain slid into its first double dip recession since the 1970s. Defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

In France, the Socialist candidate Mr. Hollande beat out Sarkozy in a runoff a couple of weeks ago and is favored to win this week. Mr. Hollande opposes austerity and will cause more thana few headaches for German chief Angela Merkel. This could be a problem for Merkel or for Mr. Hollande; we'll see.. The bottom line is the market has realized Mr. Sarkozy probably isn't going to win.

The global economy is uneven. The growth has slowed in China and India. And North Americas is a recovering but far from fully recovered economic environment.

There is no recovery. There is a slow grinding improvement, not enough to lift us to that righteous circle of sustainability, but enough to keep us afloat on vast mountains of stimulus, mainly from the Fed. And so we'll watch the results of the jobs report, and we'll see if there is any indication the Fed will move again. Meanwhile, we'll be reminded that the Fed has been acting and not acting on the monetary policy and over on the fiscal policy side, we've seen deadlock for quite some time. Our response has been wrong for quite some time. It isn't just a recession, or the possibility of a double dip. We entered a depression, a small “d” depression, and we failed to recognize it and we failed to respond appropriately; quite a mistake for great student of the Great Depression, Bernanke. We are living in a world of zombie economics, just shuffling along, and very little sign of higher level intellect guiding our path.

Real wages for real workers are not growing and America’s crushing debt is strangling growth, and maybe that means we would be lucky to see 2% GDP growth, maybe we're lucky to see any growth at all. Both political parties can share blame for the trouble; the Republicans want to limit spending and Democrats don’t want to cut programs, and so they are at an impasse. Little is likely to change regardless of this year’s presidential election.

And what we are likely to see in the markets is a slow grinding decline into the summer. Not because the economy is so terrible but because it isn't so great. The Fed has been propping up the markets with monetary policy but that hasn't helped Main Street and it hasn't done much – or rather it hasn't done enough to improve the jobs report. We have the most stimulative fiscal and monetary policy in the history of this country and here we are three years into the recession and it's not ended. Does that mean the policy is a failure or does it mean that we weren't really in a recession but rather in a small “d” depression?

Even in an election year we have to deal with the seasonal nature of the markets. Sell in May and go away. And by the time we come back, we should have a good idea about how this whole austerity issue is working out, and how the 99 percent are fairing against the 1 percent, and how the red and blue are fairing against each other, and how monetary policy is fairing against fiscal policy.

Sometimes, the best choice is to just step aside. Take the summer off. That's about the best investment advice there is, unless your just a high frequency trader with a USB port on the back of your neck. Take some time off, visit the family and friends. Some of you have already started doing this. You've turned off CNBC. Maybe we are finally spitting out the lure.

I heard a great investment analogy this weekend. The idea was that as investors we should act like a trout. The trout tends to take a position in the stream and just hang out waiting for the passing current to deliver a tasty morsel. It's a low energy solution, effective even if it is a little boring - kind of like watching paint dry.

The legislative analyst’s office has a new number for California: $3 billion. That’s the total amount that tax revenue has lagged behind goals set by Gov. Jerry Brown’s administration in the current fiscal year. Much of that gap comes from a disappointing April, the most important month for income taxes. Income taxes were $2 billion short of the $9.4-billion goal, and corporate taxes fell $143 million short of an expected $1.53 billion.

When April's poor results are tacked on to earlier shortfalls, the state has fallen about $3 billion behind tax goals. Yesterday, the ratings agency Standard & Poor's already warned that poor tax revenue was imperiling California's financial recovery. It's unclear exactly how much this year's budget deficit will grow because of the tax shortfall. Brown's administration estimated the gap at $9.2 billion in January, but has since said it will grow. The updated budget proposal that is expected by May 14.

Fitch Ratings, in conjunction with Oxford Economics, issued a new report today and it claims that without the unprecedented stimulus actions by the federal government triggered by the 2008 financial crisis, the Great Recession might still be going on. But those actions came with a price -- soaring budget deficits and rock-bottom interest rates that hurt savers.

The actions by policymakers in Washington -- including the $700-billion bailout fund, the $831-billion stimulus package and the Fed's ZIRP, zero interest rate policy -- continued to boost the nation's total economic output by more than 4% annually two and three years after the end of the Great Recession in mid-2009.

The boost from those policies helped the U.S. gross domestic product increase 3% in 2010 and 1.7% last year, "implying that the U.S. might still be mired in a recession absent this stimulus."

The U.S. economy would have seen little or no growth in the two years after the recession technically ended in June 2009 without the policies. And the stimulus actions appear "to have significantly softened the severity of the decline" in GDP in the year immediately after the recession.

Though the Fed's monetary policy actions were helpful, fiscal stimulus by Congress and the White House "had the strongest positive impact on consumption during the recent recovery.”

The conclusions mirror findings in February by the Congressional Budget Office and a 2010 study on the economic effect of the $831-billion stimulus package known as the American Recovery and Reinvestment Act.

The Fitch analysis looked more broadly at all federal stimulus policies, such as the large-scale asset purchases by the Fed. And although the study said the stimulus policies "appeared to have achieve their intended effect," it warned that the actions have come with negative consequences.

"The very high deficits of the last few years have led to unprecedented levels of government indebtedness, which will weigh on the federal government for years and require contraction in spending. Furthermore, while low rates clearly benefit borrowers, at the same time, they hurt savers."

The deficits, and the inability of the Obama administration and lawmakers to make deep enough cuts in a deal last summer to raise the debt ceiling, led Standard & Poor's to downgrade the U.S. credit rating.

For the past couple of years we've been hearing that the response to a depressed economy is to cut spending and balance budgets. While there is no question that cleaning up indebtedness will take time and effort, the calls for austerity are creating a bigger mess. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment. European leaders spent years in denial, insisting that their policies would start working any day now; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

There seems to be a shift in sentiment. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

What happens next? The push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the crisis. And the only ones that seem to benefit are the speculators and the bond vigilantes. Ultimately, Spain, Greece, Italy, the Netherlands, and others do have an alternative to endless austerity, one that may be forced on them by events: exit the euro, with all the financial and political fallout that follows. And on the current course, that’s what’s coming. For California, the choice is not a possibility.

Tuesday, April 24, 2012 - As the Euro Turns, Counting Protesters at Shareholder Meetings

DOW + 74 = 13,001

SPX + 5 = 1371
NAS – 8 = 2961
10 YR YLD +.03 = 1.96%
OIL +.20 = 103.75
GOLD + 3.20 = 1642.50
SILV -.03 = 30.93
PLAT – 14.00 = 1550.00

Yesterday's edition of “As the Euro Turns” included the collapse of the government in the Netherlands when it could not agree with a key allied party on budget cuts to bring the deficit below the EU-mandated 3 percent. In France, Socialist Francois Hollande led the first round of presidential elections; he has vowed to renegotiate a European treaty tightening rules on debt. All that was absorbed today. After all, the Dutch still have a Triple-A credit rating; they will probably pay their bonds.

It does appear, at least for today, that the Euro has turned; as if a sudden transformation has swept the continent. Austerity is dead. Keynes has been resurrected and placed on a pedestal in Brussels, right next to a chocolate covered waffle. There was a mass awakening that countries cannot cut their way to prosperity. Angela Merkel is fighting back against the austerity backlash; she argues the “credibility” of the Eurozone is at risk without more austerity and continuing cutbacks. But austerity isn't working and its hard to maintain credibility in the face of failed policy.

Here is the problem: If a government (say Greece) has a massive deficit and now they are trying to balance their budget, the government will be making the situation worse by imposing cuts, both because government expenditure is part of the GDP, and because of the multiplier effect of government deficits on the economy. A government trying to cut deficits by reducing government expenditures and raising taxes is bound to make their economy contract, which would then have a negative impact on tax collection, and consequently make the deficit worse. At the same time, because GDP contracts, the government is making the denominator of the debt-to-GDP ratio decrease, making the situation worse in such a metric. Sisyphus never had it this tough.

The Europeans have tried austerity and it hasn't been fun and the overall economy is now probably in a second recession, largely caused by slowing demand, caused by (drum roll please) austerity! And, worst of all, the economy may be entering a negative feedback loop: low demand leads to more unemployment which leads to lower demand ... you get the idea. As for the whole "confidence will return" argument: businesses don't invest in slow-growth environments when there is obviously slack demand.

And Merkel is facing opposition. A criminal lawsuit has been filed against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens. It's thought the bailouts could leave the Germans on the hook for trillions of euros. And the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors; not exactly the original idea behind a European Union. Merkel’s reputation as a hardliner for fiscal reform is wobbly. She’s about to lose her only ally (Sarkozy) in the push for austerity. And this is happening while inflation is rising in Germany, the economy is contracting – possibly heading into recession - and Germans are openly outraged regarding the EU bailouts.

The French still have a couple of weeks to decide if they want to dump the far right conservative Sarkozy in favor of the far left socialist Hollande.. The rhetoric is getting interesting: Francois Hollande, the Socialist presidential front-runner in France, doing his best Andy Jackson imitation: “Let me tell you who my rival is. It does not bear a name or have a face, it’s the finance industry. In the past twenty years, the financial industry has taken control of our societies, of our lives and threatens our states.”

Sarkozy set the standard for France’s approach to bank regulation by passing a 0.1 percent tax on all financial transactions within the country. Sarkozy tried to promote the tax worldwide but his proposal was too far to the left for the.... (wait for it) Obama administration. Hollande, meanwhile wants to go even further, separating retail and investment banking, banning “toxic” financial products, and preventing French banks from operating in tax havens. The third place in the runoff election went to Marine Le Pen, considered very far right. After the vote of Sunday she said: “We have blown apart the monopoly of the two parties of banking, finance and multinationals.” The far right is running against big business and the financial industry.

Wells Fargo held its annual shareholder meeting in San Francisco today. Depending on who you read, a couple of hundred, or 500, or a thousand or thousands (plural) of protesters showed up. Some of the more clever protesters actually hold stock certificates and they were able to get inside. I still haven't seen reports on what they may or may not have said inside the meeting. Six protesters were arrested.

Protests are planned for General Electric's shareholder meeting in Detroit tomorrow. A couple of thousand are expected to protest. Protesters interrupted a speech by GE Chief Executive Jeff Immelt in Detroit today, yelling "pay your fair share," before being escorted out of the event. A Citizens for Tax Justice report released in February said GE had an effective tax rate of 11 percent in 2011. GE disclosed in filings with the U.S. Securities and Exchange Commission that its overall tax rate - on both foreign and US earnings - was 7 percent in 2010 and negative 12 percent in 2009.

Morgan Stanley says U.S. high-yield obligations, otherwise known as junk bonds, were in a “sweet spot” as borrowers cut their debt loads. JPMorgan said junk yields will fall more than half a percentage point by year-end. Bank of America favors debentures rated in the middle tier of speculative grade. Gains on U.S. high-yield, high-risk bonds, which are little changed since the end of February, are set to accelerate as central banks respond more aggressively to contain Europe’s fiscal imbalances, Morgan Stanley and JPMorgan said. While forecasting the default rate will rise this year, Moody’s Investors Service says the figure will stay below historic averages.

The Justice Department says a BP engineer intentionally deleted more than 300 text messages that said the company's efforts to control the Gulf of Mexico oil spill were failing, and that the amount of oil leaking was far more than what the company reported. Criminal charges have been filed against the engineer, Kurt Mix of Texas. Two years after the explosion that killed 11 men and spilled millions of gallons of toxic oil into the Gulf, and destroyed unknown amounts of marine life and crippled the livelihood of millions of residents of the Gulf – and we finally have a criminal charge – the first criminal charge - for obstruction of justice.

The Federal Reserve's top policymakers are meeting behind closed doors for two days, tweaking their economic forecasts and reevaluating their game plan for boosting the US recovery. Or maybe they'll order pizza and play pinochle. And then tomorrow morning, they'll announce the same thing they announced a few weeks back. They can't raise rates; they will continue to have a very accommodative monetary policy which they will not call QE3

A new case of mad cow disease has surfaced in a dairy cow in California. Mad cow disease, or bovine spongiform encephalopathy (BSE), can be fatal to humans who eat tainted beef. The World Health Organization has said that tests show that humans cannot be infected by drinking milk from BSE-infected animals. The disease is always fatal in cattle, however. There have been three confirmed cases of BSE in the United states, in a Canadian-born cow in 2003 in Washington state, in 2005 in Texas and in 2006 in Alabama.

Apple sold 11.8 million iPads in the last quarter, the latest version of which hit store shelves in mid-March. That compared with the average forecast of up to 13 million. Apple sold 35.1 million iPhones - which accounts for about half its revenue; and that was a little better than expected. Net income rose to $11.6 billion, or $12.30 a share, from $6 billion, or $6.40 per share, a year earlier. That also outpaced Wall Street's target of $10.04 a share. There margins are freaky high and they just might take over the world at this rate.