Thursday, October 31, 2013 - Halloween Miracles

Halloween Miracles

by Sinclair Noe

DOW – 73 = 15,545
SPX – 6 = 1756
NAS – 10= 3919
10 YR YLD + .02 = 2.54%
OIL - .53 = 96.24
GOLD – 20.20 = 1323.70
SILV - .83 = 22.01

The S&P closed near its intraday low, but it's been a good October. For the month, the Dow gained 2.8 percent, the S&P 500 added 4.5 percent and the Nasdaq rose 3.9 percent. The S&P 500 is up 23.2 percent for the year so far.

The S&P/Case-Shiller index showed that home prices in 20 large metro areas rose 1.3% from July and 12.8% from August 2012. Prices haven't risen this fast year over year since Feb. 2006. Still, there are signs of a cooling. The rate of monthly increases in the 20 large cities peaked in April. Since then home prices continued to rise, but at a slower pace each month. This month 16 cities reported smaller gains in August compared to July. Las Vegas saw the largest annual increases, with prices soaring from a year earlier  29.2%. In San Francisco prices jumped 25.4%; in Los Angeles 21.7%; in San Diego 21.5%.

The Chicago purchasing managers index jumped to a reading of 65.9 in October, up from 55.7 and well ahead of the consensus of 54.5. Readings above 50 indicate expansion.

The number of Americans filing first-time claims for unemployment insurance fell by 10,000 last week, to 340,000 from 350,000 the week before. Though it's the third straight week that claims have dropped, the number of applications is still within a range that signals a sluggish labor market. The unemployment rate at 7.2% is almost certain to climb in October because of the government shutdown. The jobless rate includes workers who are temporarily laid off from their jobs, even if they eventually get paid for time missed. As a result, the unemployment rate in October will include furloughed government workers as well as private-sector employees laid off by companies that rely heavily on federal contracts. The unemployment rate could jump up to 7.5%. The number of net jobs created, however, might not be affected nearly as much. That number is derived from a separate Labor Department survey of businesses about how many people they hired in a month.

The unemployment rate in the 17-nation eurozone remained unchanged in September at a record high of 12.2 percent. The number of unemployed rose by 60,000 to 19.45 million. The jobless rate for those aged under 25 edged up to 24.1 percent from 24 percent in August. The unemployment rate for the wider 28-nation European Union remained unchanged at 11 percent.

 Figures on government spending and debt were released today. The government's fiscal year runs Oct. 1 through Sept. 30. Total public debt subject to limit was $17.043 Trillion. The deficit through August dropped to $755 billion.

Settlement talks between the Justice Department and JPMorgan are in danger of breaking down over the bank’s demands that it avoid future criminal charges and that another government agency pay some of the $13 billion price tag.

Federal prosecutors have been working with JPMorgan for months to resolve allegations that the bank knowingly sold securities made up of low-quality mortgages in the lead-up to the financial crisis. As of last week, the nation’s largest bank had agreed to a tentaive $13 billion settlement that would expunge multiple government probes. Details of the agreement were being hashed out, but now the sides have reached an impasse.

Attorneys for JPMorgan proposed a deal that would give the bank protection from future criminal investigation. Federal prosecutors assumed that aspect of the deal was settled and were bothered when attorneys asked that the bank be released from future criminal prosecution. There also remains a standoff over whether JPMorgan or the Federal Deposit Insurance Corp. is responsible for losses on mortgage securities issued by Washington Mutual, the failed bank that JPMorgan bought out of receivership for $1.9 billion in 2008. Some of those securities are a part of the complaints that JPMorgan is trying to resolve in its settlement with the Justice Department.

Have your ever heard of the push-out provision? It's a little known provision in the Dodd Frank reforms, and the bank lobbyists have killed it, and lawmakers came together in bipartisan unity to bury it. The idea behind the push-out provision is that the banks would have to separate their swaps trading units from the main bank, where funds are FDIC insured. So, now that the lobbyists have killed the push-out provision, they can gamble in derivatives trading using insured deposits.

Now, if you're wondering why or if this is significant, just look at Cyprus, or if you want to get a bit closer, look at Detroit. Both pensioners and bond holders argue they should have priority in claiming a stake in the city's assets in the bankruptcy process. However, a different class of creditor has legally senior status. Holders of financial derivatives enjoy super-priority in bankruptcy, thank to changes in the bankruptcy law of 2005; they are not subject to the ‘automatic stay’ provision intended to prevent a disorderly grab for collateral by competing creditors. They can press their claim immediately, prior to bankruptcy proceedings and therefore before claims by competing creditors are considered. This may potentially leave nothing for other creditors to divide during subsequent proceedings.

The latest court proceeding in Detroit was to determine if retired city workers might get 16 cents on the dollar, even though the Michigan constitution contains a provision which bans any action to cut pension benefits of public employees, or whether the federal bankruptcy code trumps the state constitution. And if you think Detroit is the only city with these kinds of problems, think again. And if you think it only applies to retirement plans, remember what I just told you about the push-out provision. That's right, the super-priority position of financial derivatives also applies to your FDIC insured bank account.

Bill Gross, the billionaire founder and chief investment officer of Pacific Investment Management Co., also known as PIMCO, writes an investment outlook; kind of a regular newsletter that he posts on the website. The latest from Bill Gross is a bit of a surprise. He says wealthy people need to stop whining about the taxes they pay, realize their success is mostly dumb luck and pay even higher taxes to help the less fortunate. Gross writes in his latest monthly missive, entitled "Scrooge McDucks,": "Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off." It's a Halloween miracle. 

And he continues: “Admit that you, and I and others in the magnificent '1%' grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living.”

And Gross suggests the soaring income inequality of the past few decades is a serious problem for the entire US economy: “Developed economies work best when inequality of incomes are at a minimum. Right now, the U.S. ranks 16th on a Gini coefficient for developed countries, barely ahead of Spain and Greece. By reducing the 20% of national income that “golden scrooges” now earn, by implementing more equitable tax reform that equalizes capital gains, carried interest and nominal income tax rates, we might move up the list to challenge more productive economies such as Germany and Canada.

“I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make.”

Gross notes that the 1 percent now take up 20 percent of U.S. income, up from 10 percent in the 1970s -- a fact he attributes at least partly to the massive tax cuts for the wealthy enacted by Presidents Ronald Reagan and George W. Bush.

Gross also points out that the wealthy have gotten all of the benefit of the explosive rise of the financial sector over the past several decades, along with a 30-year decline in interest rates. Together, these two factors lined the pockets of the wealthy, but left everybody else behind. And Gross offered a policy prescription: “If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing ‘capital’ at lower rates than ‘labor’ should now end.”

And then Gross takes a shot at Carl Icahn, and probably quite a few other captains of industry by adding: “If X can’t grow revenues any more, if X company’s stock has only gone up because of expense cutting and stock buybacks, what does that say about the U.S. or many other global economies? Has our prosperity been based on money printing, credit expansion and cost cutting, instead of honest-to-goodness investment in the real economy?”

Monday, January 7, 2013 - I Went on Vacation and Not Much Changed

I Went on Vacation and Not Much Changed

by Sinclair Noe

DOW – 50 = 13,384
SPX – 4 = 1461
NAS – 2 = 3098
10 YR YLD -.01 = 1.90%
OIL + .21 = 93.30
GOLD – 9.90 = 1647.90
SILV - .02 = 30.26

Forty years ago, Yale Hirsch at the Stock Traders Almanac, created the January Barometer. The idea was simple: as the S&P 500 goes in January, so goes the year. This market prediction tool has been correct 89% of the time since 1950, suffering only seven major setbacks. Since 1950, stocks have finished lower for the year only three times after posting gains in January. When the Dow is positive in January, then the rest of the year is positive 83% of the time, averaging additional gains of 9.59%. Compare that to the Dow’s performance when January is negative. In those years, the February-December returns are positive just half of the time, with an average gain of 2.04%.

As with the full-year results, a positive January typically leads to a positive February. When the Dow closes higher in January, February goes on to average a return of 0.57%, and is positive 63% of the time. When January is negative, February is negative more than half the time, and averages a loss of more than 1%. However, an outsized return in January has not necessarily translated into a bigger return for February. If January is up more than 3.5%, the average February gain is not as big as if January is simply positive.

Price movement in January is also a pretty good predictor of price movement in February for individual stocks; not a perfect predictor but usually moving in the same direction about 80% of the time.

Many investors look to the first five days of January as a gauge of where the markets are going for the rest of the year. During the last 40 years when those five first days were gainers, the markets were up for the entire year 85 percent of the time. For example, last year the S&P 500 Index gained 1.2 percent in the first five days of January. As a result, the S&P 500 Index was over 13 percent. That was close to the historical average. Over the last 39 years, the markets gained an average of 13.6% when the first five days of January were gainers.

Conversely, when the first five days are negative the markets were down for the year, but only 47.8% of the time. The indicator therefore, does not work as well on down periods. You should be aware that, in general, during post-election years the markets have not done well. Only 6 out of the last 15 post-election years saw gains in the first five days of the year. It looks like 2013 will be an exception. Maybe, maybe not. That's why they play the game.

The fiscal cliff is behind us, sort of; there are still the actual implications of the implementation of the changes. Then, we have the debt ceiling, which will be the next catastrophic, OMG, here comes another massive economic sky-is-falling event, they'll shut down the government if they don't get cookies for lunch, political tantrum. Before we move to the next news cycle, let's review briefly the fiscal cliff calamity that was narrowly averted, specifically $205 billion in corporate tax breaks, subsidies and tax loopholes. One of the most egregious giveaways included in the New Year's Eve fiscal cliff deal is an extension of a loophole that allows corporations to book US profits in overseas, tax-free accounts. US companies have about $2 trillion in these offshore accounts.

Another corporate tax benefit included in the fiscal cliff deal is a provision known as bonus depreciation, which allows companies that invest in costly equipment to account for depreciation expenses much faster than they otherwise could. In other words, companies can deduct more in expenses now, lowering their taxable income.

Congress has extended the provision each year since 2008 in an effort to spur business investment during the economic downturn. Bonus depreciation is expected to cost $35 billion this year, according to the Joint Committee on Taxation, and those costs are predicted to rise significantly if Congress keeps extending the benefit. The Congressional Research Service issued a report saying that accelerated depreciation is a “relatively ineffective tool for stimulating the economy.”

I guess that avoiding the fiscal cliff is a good thing; it shows the politicians can do something; even if it's the same old, same old.

New Year, things change, but not much. Let's see what the banksters have been up to. Once again the banks are body slamming the banking regulators. The banks have beaten down the tough parts of Basel III bank-capital standards. The global liquidity standards were designed to ensure banks had sufficient capital on hand to survive another Lehman-like crisis, as well as require that capital be high-quality and liquid. There was a lot of fanfare from regulators when the regulations were first announced in 2010, and then the banks started to chip away at the regulations which might require a little cushion against a downturn. The regulators succumbed to pressure. We're all shocked, shocked I tell you. The new capital rules have been expanded to change the definition of what constitutes safe bank capital to include stocks and AAA rated mortgage backed securities.

Now, you're probably asking yourself, “Self, weren't stocks and mortgage backed securities really dangerous and excessively risky investments that were a big part of the financial crises of the recent past?” And of course the answer is – yes. “Self, didn't those risky gambles lead to a freeze on the credit markets and the near collapse of the global financial system?” And again, the answer is – yes. And then you ask: “Self, does this mean we'll see Hank Paulson getting down on his knees to beg Nancy Pelosi to save him from his errors?” And the answer is no; that's not going to happen again, but clearly we haven't learned our history lessons.

In a world of Too Big to Fail banks that have only gotten bigger, the regulators decided that if the banks were to face a crisis, like the recent crisis, the banks would only have to prepare for a world in which they lose 3 percent of their retail deposits, down from 5 percent originally proposed. Complete amnesia when it comes to Northern Rock or IndyMac. And then the banks have four years to gradually phase in the new, scaled down 3-percent requirements, down from the 2-year requirement originally proposed. The banks argued that if they were forced to provide a 5-percent cushion and do so within two years, it would be too much of a burden and they wouldn't be able to do any lending, which might actually help the global economy.

Meanwhile, federal bank regulators announced an $8.5 billion settlement with 10 large mortgage companies in a deal that will end a near worthless foreclosure review program in favor of a new program that authorities say will distribute aid to homeowners "significantly more quickly."

Under the deal, announced by the Office of the Comptroller of the Currency and the Federal Reserve, the mortgage companies will make $3.3 billion in direct payments to "eligible borrowers" whose foreclosures were handled improperly, and will make $5.2 billion available in other assistance to struggling borrowers, such as loan modifications.

This new deal is separate from the $25 billion mortgage settlement to which five large banks agreed earlier this year, though many of the allegations of misconduct are the same. Homeowners have complained for more than five years that the mortgage companies made widespread errors in the management of their home loans, and that in some cases those errors pushed them into foreclosure.

This new settlement replaces a deal struck in April 2011 that established the Independent Foreclosure Review; that program was supposed to give homeowners an unbiased third-party review before the banks could foreclose, and might even determine if homeowners qualified for a cash payout because of mortgage related bank abuses. So, that program never really happened, and today's announcement is basically saying the Independent Foreclosure Review was a complete failure.

What went wrong? Part of the problem is that the third-party independent reviewers actually worked at the banks' beck and call. So, ten different banks will pay out $8.5 billion to end the foreclosure reviews.

But wait, there's more!

Bank of America announced today that it will spend $10 billion to settle mortgage claims resulting from the housing meltdown. BofA will pay $3.6 billion to Fannie Mae and buy back $6.75 billion in loans that the bank and its Countrywide banking unit sold to the government agency from Jan. 1, 2000 through Dec. 31, 2008. That includes about 30,000 loans.

Bank of America said that the loans involved in the settlement have an aggregate original principal balance of about $1.4 trillion. The outstanding principal balance is about $300 billion. Fannie Mae and Freddie Mac, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses. So, all in all, BofA gets off really cheap.

Fannie Mae issued a statement saying they had “diligently pursued repurchases on loans that did not meet our standards at the time of origination, and we are pleased to have reached an appropriate agreement to collect on these repurchase requests."

And so, there is $8.5 billion for ten banks, and $10 billion in fines for BofA, and you might think that's real money, and it almost is, but keep it in perspective. The six biggest US banks are expected to pay employee bonuses of $38 billion for the past year.

Bank stocks led all other major stock sectors in 2012. The KBW Bank Index rose more than 30% compared to just over 13% for the S&P 500, and Bank of America shares surged 109%--more than doubling in price. And according to a new report from ProPublica, many banks are still trading below book value, despite the gains in share prices, and much of the gain is due to hedge fund speculation.

And so, you're probably asking yourself: “Self, wasn't hedge fund speculation a big part of the near meltdown of the global financial system? Isn't this just part of the multi-trillion dollar derivatives casino? Isn't this the same sort of risky stuff that the London Whale was betting on and which led to $2 billion in trading losses, or $5 billion, or $6 billion in gambling losses?” And the answer is – yes.

A funny thing is happening in the copper markets. The SEC has paved the way for investors to take a direct stake in commodities, rather than through commodities futures. The agency gave the green light to JP Morgan to launch a fund whose shares would be backed by warehoused copper. In practical terms, the SEC handed traders at JP Morgan control over 20 to 30 percent of the copper available for immediate delivery from the London Metals Exchange — the commercial market where companies that use copper go to procure last-minute supplies.

The investors purchasing shares in J.P. Morgan’s fund won’t be buying copper to use, but to store. The intricacies of the fund are complex, but its underlying rationale is straightforward: the more shares investors buy, the more copper is taken off the market. And the more copper that is taken off the market, theoretically the more valuable the copper and the shares become.

Moreover, it’s a no-brainer that this JP Morgan “innovation” will lead to the creation of copycat fund in other markets, most troublingly those for agricultural products.

The SEC asserts that its own study showed that changes in inventory levels at the LME did not have a price impact. If you've ever heard a little theory known as supply and demand, you might reach a different conclusion than the SEC.

The question regarding the LME would be to define what a normal level of inventory would be (a certain level is necessary to handle routine transactions); amounts in excess of this buffer level would be seen by economists as proof that prices were above the true market clearing price unless you had a good explanation as to why not.

Companies that use copper strongly oppose the new fund, and argue that allowing investors to hoard the metal will lead to supply shortages, create substantial price volatility, and distort the market. A group of copper users wrote to the SEC in August, saying: “The implications of this practice would be grave for our companies, our industry, and, indeed, for the U.S. Economy.”

The SEC is undermining provisions in Dodd Frank calling for the CFTC to rein in undue speculation in critical commodities. You might remember that commodities prices moved up in a coordinated manner in 2008. Remember when oil prices jumped up near $150 a barrel? It looked like a speculative bubble, and was, since prices collapsed in the second half of the year. Well, there was similar behavior in other commodities.

Here, you’re allowing investors to intervene with physical supplies. BlackRock has petitioned the agency to launch its own copper fund, one that would be twice as large as JPM’s and will get an answer by February 22. Given that its proposal is identical to JPM’s, it is well nigh certain to be waved through. If the nay sayers are correct, that hoarding by investors will drive prices up, we should see the impact, although the mere announcement of the JPM approval, particularly in light of the pending BlackRock application, may have led speculators to bid up prices in anticipation of the funds’ launch. That too should be measurable, but if the next few months proves the SEC analysis to be wrong, you can bet the agency won’t admit its error and halt the creation of more funds.

Same old, same old. 

Wednesday, July 25, 2012 -

Sandy Weill, Glass-Steagall, and Banksters on the Wrong Side of History
-by Sinclair Noe


DOW + 58 = 12,676
SPX -0.42 = 1337
NAS – 8 = 2854
10 YR YLD unch = 1.41
OIL +.61 = 90.67
GOLD + 23.70 = 1605.80
SILV +.38 = 27.44
PLAT + 15.00 = 1406.00


One story today. In 1993 Sandy Weill acquired Shearson Lehman; in quick order he also bought up Travelers Corp and Aetna Life and Casualty and then Salomon Brothers. He began calling the conglomerate, Travelers Group. In April 1998, Travelers Group announced an agreement to undertake the $76 billion merger between Travelers and Citicorp. The new company, called Citigroup, combined a commercial bank holding company with an insurance company and investment banking; it was a big one stop shop that included Citibank, Travelers, Smith Barney, Primerica, Citifinancial, Shearson, Aetna, and Salomon. At the time, it was the largest merger in history and created a financial behemoth with operations in 100 countries. It was also illegal based upon the Glass-Steagall Act of 1933.


Let's go back in time to explain Glass-Steagall. At the height of the Great Depression the Congress conducted hearings which showed that the presumed leaders of American enterprise, the bankers and brokers, were guilty of disreputable and dishonest dealings and gross misuses of the public's trust, literally buying control of politicians. The hearings started in 1932 and they uncovered plenty of abuses. JP Morgan maintained a “preferred list” of clients that would get special deals, huge discounts on stock purchases that could then be flipped for a quick profit. The preferred list included: former President Calvin Coolidge, Supreme Court Justice Owen J. Roberts, former head of the Democratic Party John Raskob, and diplomat Norman Davis. The bankers had truly bribed their way into control of government. 


J.P. Morgan, Jr., the son of the founder of the banking empire, testified that he had not paid any income taxes in 1930, 1931, and 1932; and dozens of multi-millionaire partners in JPMorgan had also not paid taxes. The revelation that the wealthiest American were not paying income tax must be juxtaposed against the desperate demands of the Bonus Army, the World War 1 veterans looking for their pensions, only to be turned away at the point of a gun by active troops led by Patton and MacArthur.


The hearings of 1932 ultimately led to reforms: “The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.


The three evils were: 1) banks were investing their own assets in securities with consequent risk to commercial and savings deposits; 2) loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets; 3) and commercial banks' financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own stake in the transaction. 


The Glass-Steagall Act was one of the pillars of banking law since its passage in 1933. Glass-Steagall built a wall between commercial banking and investment banking. The law kept commercial banks that accept deposits from doing business on Wall Street as investment banks that issue and trade securities, and vice versa. Glass-Steagall is actually the Bank Act of 1933, which also included allowing the Truth in Securities Act and the Securities Exchange Act, which created the SEC; and also the FDIC to insure bank clients' deposits. The bankers had so thoroughly abused depositors' confidence that insured accounts were the only way to lure depositors back to banks; even then, millions of Americans would never trust banks again. 


The Bank Act of 1933 worked, all the way up until 1998 when Sandy Weill and John Reed illegally merged Citicorp and Travelers Group in direct violation of Glass-Steagall. So, they decided to change the law. They hired former President Gerald Ford and former Secretary of the Treasury Robert Rubin. Their lobbying efforts cost more than $300 million dollars and produced fast results. Senator Phil Gramm, who received almost $5 million in campaign donations, led the assault. Gramm would eventually become a high paid consultant for the Swiss bank, UBS. Treasury Secretary Robert Rubin, a former partner at Goldman Sachs and soon to be Director at Citigroup, also championed repeal of Glass-Steagall.


The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999 , finally killed Glass-Steagall. The wall between commercial banks and investment banks was torn down. It did not take long for the financial behemoths to start making risky bets with depositors' money. 


The Commodity Futures Modernization Act of 2000 then provided the casino for the big banks to play; the act was written by lobbyists and co-sponsored by Phil Gramm and Richard Lugar. The Act was tacked onto thousands of pages of a budget bill in the final hours before a vote; it is doubtful any legislators read the complete Act before voting. The Act removed regulation on newfangled financial products called swaps and derivatives. According to Senator Gramm, the Act would “protect financial institutions from over-regulation” and “position our financial services industries to be world leaders into the new century.” What it did was to turn banks into a modern version of the bucket shops that caused the Panic of 1907. Banks were now allowed to place private bets, called derivatives, on underlying assets, such as commodities, securities, interest rates, or anything else they wanted to bet on. The bets were private and did not fall under the regulation of public exchanges. If the bets went bad, the banks could and would turn to the taxpayer for bailouts; and when the public grew weary of bailouts, the bankers used excess deposits, insured by the FDIC to place their bets.


The derivatives and swaps market has now grown to more than a quadrillion dollars. The GDP of the US is around $15 trillion; global GDP is about $55 trillion. To say that the banks are out of control is a huge understatement. 


In 2009, John Reed, co-founder of Citigroup came to regret the repeal of Glass-Steagall and his role in bribing politicians for the repeal. Reed said: “I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel. So generally speaking you'd have consumer banking separate from trading bonds and equity.” 


Ten years after his treasonous deal, Reed tried to justify his unfettered greed; he said: “When you're running a company, you do what you think is right for the stockholders. Right now I'm looking at this as a citizen.” Apparently Citigroup management must renounce citizenship as a requisite  for employment; or is it just to take their severance pay?


The real catalyst for repeal of Glass-Steagall was Sandy Weill. Weill went on to run Citigroup; where he financed such frauds as Worldcomm and Enron. For years Weill has denied that repeal played any role in the 2008 financial crisis, even as the House of Sandy failed in 2008 and required bailouts. 


Today, he appeared to change his mind. On CNBC this morning, Weill said: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail. I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable,” and "We should have banks do something that is not going to risk the taxpayer's dollars.”


Well, I hope the hypocrite burns in hell. He has done a terrible disservice to his country. We should not have listened to him in 1998. We should not listen to him now. It is unlikely his about face will have any impact. Still, it is an admission that the banking system is broken; an admission from one of the people who built that system. When Sandy Weill says the banks should be broken up, it's hard to make a case for the status quo. Clearly, after you strip away the golden parachutes and the bribery; and in the patina of time, the apologists for the banksters will all be proven to be on the wrong side of history.

Thursday, May 10, 2012 - JP Morgan Chase Goes Boom

DOW +19 = 12,855
SPX + 3 = 1357
NAS – 1 = 2933

10 YR YLD + .05 = 1.88%
OIL - .26 = 96.55
GOLD + 4.00 = 1594.40
SILV -.23 = 29.14
PLAT – 13.00 = 1492.00

So, it was a quiet day in the markets, not much going on; the Dow and the S&P managed to eke out modest gains, and this was welcome following 6 days of losses. Back in early April I told you to start getting out of the market, based in part, on the the idea of “Sell in May and stay away”. Sure, enough, May has been ugly, but not every day is ugly. There will be ups and downs. The past six days have been down; today the markets stopped banging their head against a wall, but the headache hasn't gone away. All in all, an uneventful trading day.

And then after the closing bell – boom!

JP Morgan Chase lost about $2 billion on mark-to-market accounting tied to synthetic credit securities after positions taken by its chief investment office were riskier than expected.

JPMorgan’s chief investment office, or CIO has been transformed in recent years under Chief Executive Officer Jamie Dimon, into a unit that makes bigger and riskier speculative bets with the bank’s money, five former employees of the bank said earlier this year. Some of the bets were so big that the bank probably couldn’t unwind them without losing money or roiling financial markets. Losses in CIO’s synthetic credit portfolio have been partially offset by gains from sales, mostly of credit-related positions, in the ‘‘AFS securities portfolio,’’ according to the filing. It's estimated the net loss is around $800 million for the corporate segment of JP Morgan Chase, however, as of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion.

The bank issued a statement: “This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed.” JPMorgan said net income in its Corporate unit will be more volatile in future periods.

JPMorgan said it’s ``repositioning'' the synthetic credit portfolio, and that the CIO ‘‘may hold certain of its current synthetic credit positions for the longer term.’’ Which sounds like they are stuck with some nasty trades that they can't dump.

On a rapidly-arranged conference call, Dimon called the strategy “flawed.” Its execution was riddled with “errors, sloppiness and bad judgement,” Dimon said, reminding those on the call that the issues had nothing to do with clients, though readily admitting it “puts egg on our face and we deserve any criticism we get.”

Dimon warned that unwinding the “egregious” and “self-inflicted” mistakes will be rectified, during a period that may entail some increased volatility because the firm will be responsible in getting out of the positions. “We’re not going to do something stupid,” he said. “Volatility will be high, and it could cost $1 billion or more.” During a conference call after the news came out, Dimon said the $800 million loss figure could get better or worse during the quarter. Hopefully, by the end of the year the impact will not be significant, he said.

Dealing with the issue will not impact the firm’s plans to return capital to shareholders via dividends and buybacks in 2012, Dimon said. When asked why the firm decided to disclose the information, he said “it’s not going to stop us from building a great company,” but that JPMorgan wanted to be transparent given that the situation arose so soon after the end of the first quarter.

As for whether the strategy may have run afoul of regulators, the JPMorgan chief said that whether or not the trading was above-board under the Volcker Rule, “it violates the Dimon Principle.” Yea, sure. It didn't violate anything a month ago, as news was coming out that Bruno Iksil, the London based manager of the CIO unit was revealed to be making massive bets in credit default swaps. It didn't violate anything until it turned into a loss.

Here is Dimon's description of the CIO prop desk during the conference call: "I did want to talk about the topics in the news around CIO and just take a step back and remind our investors about that activity and performance. We have more liabilities, $1.1 trillion of deposits than we have loans, approximately $720 billion. And we take that differential and we invest it, and that portfolio today is approximately $360 billion. We invest those dollars in high grade, low-risk securities. We have got about $175 billion worth of mortgage securities, we have got government agency securities, high-grade credit and covered bonds, securitized products, municipals, marketable CDs. The vast majority of those are government or government-backed and very high grade in nature. We invest those in order to hedge the interest rate risk of the firm as a function of that liability and asset mismatch."

Well, that's just a load of bull. Dimon can't claim the proprietary trading desk was just hedging; no, they were gambling and they were gambling big. The CIO’s growing size and market power made it an increasingly important customer to Wall Street’s trading desks and a market influence watched by hedge funds and other investors, the former employees said. Iksil’s positions in credit-derivatives have become so large that some market participants dubbed him “Voldemort,” after the villain of the Harry Potter series who’s so powerful he can’t be called by name.

Shares of JPMorgan, frequently held up as an example of a bank that withstood the bursting of the housing bubble and subsequent crisis better than most, plunged 6.9% to $37.94 in uncommonly high volume trading after hours.

What's next? The last time there was a good trading scandal, the Fed cut interest rates by 75 basis points; I don't think that will happen now. A credit rating downgrade is very possible; likely a two notch cut, which in turn would push up borrowing costs. A two notch cut would force JPM to raise an additional $1.7 billion in collateral. Ouch.

From the Conference Call:

Question: was anybody else doing this kind of trade?

Dimon says he doesn't know. "Just because we were stupid doesn't mean everybody else was."

Wanna bet? JP Morgan Chase has generally been considered one of the bright kids in the banking pool. Now we start the fun part; trying to figure out just how many greater fools are out there. And how much toxic garbage does JP Morgan have on the books and just how toxic is it, and can you trust JP Morgan? And if JPM has problems, what about everybody else – there problems may be even worse. Who can you trust? Well, clearly you can’t trust anybody. And if you cant trust anybody, what happens next? Credit spreads widen. What happens if credit spreads soar? It gets really, really ugly. JP Morgan's losses could grow like a cancer, before you turn around, you might see $20 billion in losses. Remember when Bear Stearns collapsed? Allan Schwarz, the Bear CEO went on CNBC and said everything was fine. Bear had a $17 billion dollar liquidity cushion. One day, everything is fine, the next it isn't, and they're taping a dollar bill on your front door.

The difference is that this time there are no more bailouts. The president promised: no more bailouts, never again. 

Friday, April 13, 2012

DOW – 136 = 12,849
SPX – 17 = 1370
NAS – 44 = 3011
10 YR YLD -.05 = 2.00%
OIL - .81 = 102.83
GOLD – 16.80 – 1659.50
SILV - .88 = 31.60
PLAT – 20.00 = 1581.00

The S&P 500 is now down 3.4 percent from this year's closing high, after falling 2.7 percent over the past two weeks.

Wells Fargo and JP Morgan reported first quarter results; both beat expectations. JP Morgan came in with EPS of $1.31 on $26.7b in revenues; topping estimates of EPS $1.18 and revenues of $24.6b. Wells Fargo posted EPS of $0.75 on $21.6b in revenues, beating estimates of $0.73 and $20.4b. JP Morgan made a big chunk of earnings by lowering their reserves for loan losses by $2 billion. In the last 2 years, JP Morgan has generated $12.3 billion in non-earning earnings, even as non-performing loans increased by $600 million in the last quarter. Or as CNBS said, they “blew expectations out of the water.” Blowing smoke is more like it. WFC - 3.4% JPM -3.6% BAC -5.3% GS -4.4% C -3.5%.

Jamie Dimon, the CEO of JP Morgan said he would fight buyback demands or repurchase claims on mortgage securities that turned sour. Bank of America has already lost a few of these multi-billion dollar battles. JP Morgan is in the same business as Bank of America.

Jamie Dimon briefly responded to questions about the Chief Investment Office, or CIO; that's the proprietary trading division. According to JP Morgan the CIO division uses approximately $360 billion in excess deposits to manage risk, not to make bets for its own accounts. There have been recent reports that the prop trading has increased the size and risk of its speculative bets over the past few years. According to one CIO trader, the division recently wrote $100 billion in protection on a single CDS index. If they aren't using deposits to bet, where are they getting the money to write those kinds of contracts.

If I ever hear another nut job talk about the fundamentals for the banks I think I'll puke. What fundamentals? Aren't fundamentals supposed to have some relationship with earnings and revenue and reality?

And then we had Ben Bernanke talking about financial stability, which must be something like an instructional video from the Captain of the Titanic on iceberg avoidance techniques, or a lecture on sobriety from Snoop Dog. Bernanke wrapped up this week's edition of the Federal Reserve Propaganda Tour by explaining how he couldn't figure out how to forecast the financial crisis of 2007-2009 because it's really difficult to forecast that stuff and then he explained how the subprime problem wasn't the trigger and even if it was it didn't make sense to him. And if we want to avoid a problem like that again, we need more regulation from the Fed. Now, here's the problem of the day: Bernanke forgot to talk about handing out free money to the bankers, and before you could clear your throat, the stock market tumbled. Five days down, two days up, one day down. You've got to take sea-sick pills just to buy a mutual fund. And then the CPI report showed inflation picked up last month, a dangerous gain of 0.3%; the core rate, excluding food and energy was up 0.2%. There is no doubt that if all you people would just stop eating and driving cars we wouldn't have a problem with inflation and the Fed would be happy to pass out free money.

Actually Bernanke skirted the issue in his summation as he praised “backstop liquidity provisions”. Of course, not actually speaking the letters Q & E might be the best indicator the money is on the table; the thing that shall not be named. I think it would be a courtesy to investors if the Fed would just post a daily price for every stock, bond and commodity; that way we wouldn't have to guess and we could spend our time doing something productive.

Sheila Bair, the former head of the FDIC, wrote an article in the Washington Post today. Here's what she wrote:

“Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

“For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

“So why not let everyone participate?

“Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

“Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

“Of course, we will have to persuade Congress to pass a law authorizing all this Fed lending, but that shouldn’t be hard. Congress is really good at spending money, so long as lawmakers don’t have to come up with a way to pay for it. Just look at the way the Democrats agreed to extend the Bush tax cuts if the Republicans agreed to cut Social Security taxes and extend unemployment benefits. Who says bipartisanship is dead?

“And while that deal blew bigger holes in the deficit, my proposal won’t cost taxpayers anything because the Fed is just going to print the money. All we need is about $1,200 trillion, or $10 million for 120 million households. We will all cross our hearts and promise to pay the money back in full after 10 years so the Fed won’t lose any dough. It can hold our Portuguese debt as collateral just to make sure.

“Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do. And since we will be earning money through investments, not work, we won’t have to pay Social Security taxes or Medicare premiums. That means no more money will go into these programs, but so what? No one will need them anymore, with all the cash we’ll be raking in thanks to our cheap loans from the Fed.

“Why should hedge funds and big financial institutions get all the goodies? ”

Brilliant.

Spanish CDS hit a new high. This is credit default swaps, or a type of derivative that is a cross between a bet and insurance that Spain will go into default. Now, more than ever before investor/gamblers are betting that Spain will default on its debt. Spanish and Italian bond yields jump again, IBEX and MIB stock indexes both fall more than 5% on the week. I'm trying to figure out this Euro-mess. Spain owes about a trillion dollars, Ireland owes about $900 billion. Italy – more than a trillion. So they need bailouts from the ECB. So they owe the money to the other Euro countries and the other Euro countries are paying the bailouts and then that money can be used to pay off the Euro countries that are..., wait, wait, my brain just turned into a pretzel.

Oil prices appear to have stabilized — and may even be on their way back down. At least, so says the International Energy Agency’s report for April, which notes that Saudi Arabia and other OPEC countries seem to be pumping out enough crude to offset the oil lost by sanctions on Iran.

As a result, gas prices may have peaked last week, at $3.94 per gallon, and will start to decline for the summer. It’s probably too soon to say for sure — a frantic bit of tension in the Middle East could easily jolt prices back upward. But it does raise a question: If oil and gasoline prices dodrop, will that boost the U.S. economy?

(A 5 percent reduction in the price of crude, sustained for a year, would save the average American about $250 from lower gasoline prices, smaller utility bills, and lower inflation. That’s not bad, though it’s only about one-fourth the size of the payroll tax cut passed this year. So, if lower oil prices won't really juice the economy, then why are we hearing so much talk about the necessity to lower oil prices? This is the big political talking point?)

I read an article on Yahoo Finance this morning about Edward Luce. Luce is the chief U.S. columnist for the Financial Times; he is British but has spent many years in the U.S. Luce took some time off to travel around the U.S. for several months. And he's written a new book Time to Start Thinking: America in the Age of Decline. I have not read the book but it got me thinking. Is America in decline?

He saw a middle-class being hollowed out, declines in once-great cities like Detroit, the loss of manufacturing jobs, busted education systems, and a political system paralyzed by bitter partisanship and an inability to get things done. While not predicting America's collapse, Luce is "skeptical about America's ability to sharply reverse her fortunes." And so that raises the question; if America is in decline, is it too late to pull ourselves back up? Is it inevitable? If it is not inevitable, what should we be doing right now?

He says America is losing its pragmatism - and the consequences of this may soon leave the country high and dry. Luce turns his attention to a number of different key issues that are set to affect America's position in the world order: the changing structure of the US economy, the continued polarization of American politics; the debilitating effect of the "permanent election campaign"; the challenges involved in the overhaul of the country's public education system; and the health-or sickliness-of American innovation in technology and business. His conclusion, "An Exceptional Challenge" looks at America's dwindling options in a world where the pace is increasingly being set elsewhere. While many Americans believe that their country can and should retain its status as a global superpower, Luce sees this as an increasingly unlikely scenario, unless Americans themselves can stand up against the country's increasingly plutocratic character. America has bounced back successfully from the shocks of The Great Depression and the Soviet launch of Sputnik, but Luce wonders if the next crisis in American confidence may knock it off the top-dog position for good.

The world’s largest company, Wal-Mart Stores, has revenues higher than the GDP of all but twenty-five of the world’s countries. Its employees outnumber the populations of almost a hundred nations. The world’s largest asset manager, a secretive New York company called Black Rock, controls assets greater than the national reserves of any country on the planet. A private philanthropy, the Bill and Melinda Gates Foundation, spends as much worldwide on health care as the World Health Organization. The rise of private power may be the most important and least understood trend of our time.

Acrimony and hyperpartisanship have seeped into every part of the political process. Congress is deadlocked and its approval ratings are at record lows. America’s two main political parties have given up their traditions of compromise, endangering our very system of constitutional democracy. Are we looking at something more dangerous than a gradual decline? Is the situation worse than it looks?

Until now we have been able to pass the buck to future generations by saying, "We don't need to raise taxes. We can borrow the money today and trust that the economy will grow sufficiently in the future to pay it off." Have we finally reached the plateau of slow economic growth whereby the old theory of "paying off the debt with future growth" will be insufficient to the task? I can tell you that debt is actually a tax on future growth. In fact it was once considered the actual theft of time.

The most immediate problem facing our nation is the high level of unemployment that persists years after the peak of the financial crisis, leaving the economy operating significantly below capacity. But our national debt, and the spending and tax policies that underlie its growth, will be a major challenge for at least the rest of the decade, as we figure out how to adapt our government and our society to do less with less or whether we might be able to do more with more. Do we have a solution? And if you think you have a solution, do you think you could be heard?

Remember the Super Committee? Twelve politicians, split down party lines; bicameral but ultimately not bipartisan; brought together to hammer out a solution to the debt problem; failed like a North Korean rocket launch.

Teddy Roosevelt said it best: “In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing.” Our nation, for the most part, is sadly accepting of the broken nature of our Congress. Nothing is the new norm in Washington.

Is this proof that America is in decline?

What are the consequences? There has been almost no discussion since around Thanksgiving. The Super Committee has been washed through the news cycle and hung out to dry. Maybe we'll remember it when the automatic cuts hit at the start of 2013 – if they hit. Who knows?

What we do know is that our politicians can't do the right thing? Why? Because they sold out.

The politicians on the Super Committee were supposed to do their work without intervention from other politicians. They did their work or lack thereof, without intervention from their constituents; private citizens were not permitted to address the committee; 250 lobbyists were permitted to address the committee but not private citizens. Money buys access and the average increase for SuperCommittee members was more than $2,200 per day in additional fundraising dollars. Donations rolled in from the PACs, more than $100 million dollars from the top ten industry groups alone.

Is America in decline? I would say yes but I don't want to believe it is too late or inevitable.