Wednesday, December 11, 2013 - Let's Make A Deal

Let's Make A Deal

by Sinclair Noe

DOW – 129 = 15,843
SPX – 20 = 1782
NAS -56 = 4003
10 YR YLD + .05 = 2.84%
OIL -1.09 = 97.42
GOLD – 9.70 = 1253.30
SILV - .13 = 20.40

We have a deal. Bipartisan budget negotiators, led by senator Patty Murray for the Democrats and House Republican Paul Ryan, announced last night that they have reached a deal to settle the federal budget for two years, and avert a possible government shutdown. We have a deal; it's just not a done deal. There is pressure from both the left and right, as Democrats sought to negotiate a further deal on unemployment benefits and Republicans fended off attacks from conservative pressure groups.

House Speaker John Boehner lashed out at right wing groups such as the Heritage Foundation, claiming they were criticizing the compromise deal before they even knew what was in it. Meanwhile, some Democrats lashed out at the $1 trillion deal because it did not include an extension of long term unemployment benefits for some 2.1 million out of work workers.

Republican leaders will likely have to rely on House Minority leader Nancy Pelosi to deliver sufficient Democratic votes to counter any rebellion among their Tea Party wing, which gives the minority leader a rare moment of leverage. So far, Republicans have not ruled out allowing a separate vote to extend long-term unemployment benefits, but signal they too want more concessions from Democrats first. There is also opposition from Republicans in the Senate, who are less able to block the budget's passage, but are under pressure from a renewed wave of primary challenges by Tea Party candidates in the 2014 midterms.

The framework includes $85 billion in spending cuts and non-tax revenue from new fees to replace the mandatory budget cuts and supply a modest amount of deficit reduction. As drafted, the bill would reverse $63 billion in across-the-board spending cuts scheduled to take effect in the current budget year and the next one, easing a crunch on programs as diverse as environmental protection and the Pentagon.

It would offset the higher spending with $85 billion in savings over a decade from higher fees and relatively modest curtailments on government benefit programs.

Nearly a third of the total savings would come nearly a decade from now, in 2022 and 2023, partly from extending a current 2 percent cut in payments to Medicare providers. Also, future federal workers would pay more toward their own retirement, fees would rise on air travelers and corporations would pay more to the government agency that guarantees their pension programs.

With the increased spending to begin immediately and much of the savings delayed, Congressional Budget Office estimates showed the deal would push deficits higher than currently projected in the current year and each of the next two. The CBO said red ink would rise by about $23 billion in this 2014 fiscal year, $18 billion in the next year and about $4 billion in the one after that.

Though congressional negotiators may have reached an agreement over the federal budget, they may not have may not have figured out how they will get it passed. Still, the fallout from the government shutdown in October wasn't difficult to understand. Americans are sick and tired of the dysfunction in Washington, and another shutdown, or even the threat of another shutdown is unacceptable. There could be a vote on the deal as early as tomorrow.

On Wall Street, good news is bad news. The idea that Washington might actually be able to pass a budget raised the expectations that the Federal Reserve might be able to scale back it's quantitative easing stimulus plan. Indeed, the big question is not whether the Fed will taper, but when. The FOMC meets next week, and the Fed policymakers will likely debate how best to communicate their plan. It's still unlikely they will actually start tapering now; that would be a little shocking, but they might indicate they are going to do it in the near future, with the caveat that taper proceeds absent some exogenous catastrophe. So, expect some clarification on the thresholds for taper and interest rates.

Across the globe, central banks have resorted to forward guidance on interest rates in the wake of the financial crisis to convince markets they are serious about supporting recovery in the world's top economies for a long time to come. So, even as the Fed is likely to offer a more solid opinion on taper, they will likely offer a more precise outlook for maintaining Zero Interest Rate Policy. In a Reuters poll conducted this week, 32 economists said they expect the central bank to wait until March, while 22 looked for a move in January. Only 12 expected a move next week.

The "better than expected" figures in the latest employment data were far below the level of job creation needed to put unemployed Americans back to work on any kind of reasonable schedule. It was even below the average monthly job creation during most of the 1990s. The jobs picture is still far worse than many people would have you believe. The current unemployment rate doesn't include the workers who have become discouraged and left the workforce, and workforce participation rates remain at historic lows. The jobs numbers don't include the underemployed who are working part-time and prefer to work full-time. The ratio of job seekers to available jobs remains discouragingly high. There are no jobs for nearly two out of every three job seekers, no matter how hard they look.

The employment picture for the long-term jobless remains dismal. And many of those people were left out in the cold under the budget deal announced last night. They will fall off the roles, and basically become invisible for economic data purposes. Of course, they aren't really invisible; they're still there. But maybe there isn't anything the Fed policymakers can do to achieve maximum employment. Maybe a taper is an admission, a clear and honest communication that Fed policy is impotent in its dual mandate, and maybe the time has come to amend the Fed's tools so that all that money they've been dropping out of helicopters falls somewhere else besides Wall Street, maybe they can toss a little bit over Main Street.

Jamie Dimon, the CEO of JPMorgan was speaking at an investor conference in New York today. Dimon said he was thankful congressional leaders had reached a budget deal and was "less worried" about the impact of an eventual scaling back of the Federal Reserve's market-friendly stimulus measures. Dimon said the budget agreement was good for business confidence and that he would send thank you cards to congressional leaders. That makes me a bit more nervous about the deal.

Dimon said business demand for loans should rise to more normal levels as confidence rises, and demand for investment banking services in 2014 would be stronger than many people expect; and higher interest rates that would come with a Fed tapering would be good for the bank. He also said public attention to investigations of the bank by regulators and law enforcers was "really, really painful." Ahhh, maybe he should stop breaking the law, and then he wouldn't have all that painful attention.

Time magazine named Pope Francis its Person of the Year, crediting him with shifting the message of the Catholic Church while capturing the imagination of millions of people who had become disillusioned with the Vatican. This is the third time the magazine has chosen a pope as its Person of the Year. Time gave that honor to Pope John Paul II in 1994 and to Pope John XXIII in 1963.

Pope Francis, who, as archbishop of Buenos Aires was known as the slum cardinal for his visits to the poor and penchant for subway travel - beat former U.S. National Security Agency contractor Edward Snowden and gay rights activist Edith Windsor for the award.

The new pope's style is characterized by frugality. He shunned the spacious papal apartment in the Vatican's Apostolic Palace to live in a small suite in a Vatican guest house, and he prefers a Ford Focus to the traditional pope's Mercedes. In September, Francis gave a groundbreaking and frank interview, in which he said the Vatican must shake off an obsession with teachings on abortion, contraception and homosexuality, and become more merciful. And in July, Francis told reporters he was not in a position to judge homosexuals who are of good will and in search of God, marking a break from his predecessor, Benedict, who said homosexuality was an intrinsic disorder.

And a couple of weeks ago he published his apostolic exhortation, The Joy of the Gospel, which has gained attention for what some are calling an attack on capitalism, but is more precisely an attack on unbridled financial speculation and runaway greed. Which may actually be an attack on capitalism, but he did it without using the actual word “capitalism”.

Rather he made an impassioned plea for society and government to protect the vulnerable from the predations of the greedy, to include everyone in this prosperity, not by taking from the rich to give to the poor but by making sure they have a role to play. His call to reject the “idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose” are lessons we've heard for a couple of thousand years, and that ancient economic wisdom is as valid today as it was 2014 years ago.

Monday, October 14, 2013 - Canned Goods and Cigarettes

Canned Goods and Cigarettes

by Sinclair Noe

DOW + 64 = 15,301
SPX + 6 = 1710
NAS + 23 = 3815
10 YR YLD + .01 = 2.69%
OIL + .12 = 102.14
GOLD + .10 = 1274.30
SILV - .07 = 21.37

Earlier today President Obama warned that if the standoff is not resolved by Thursday’s deadline to raise the debt ceiling, “we stand a good chance of defaulting.” And then he postponed a scheduled meeting with congressional leaders. That's the good news.

No, seriously, that's the good news; Senate leaders were closing in on a deal to raise the federal debt ceiling and end the 2 week old government shutdown, so the president stepped aside to let the legislators work a deal.

Senate Majority Leader Harry Reid said on the floor that he was “very optimistic” about what he called the “constructive, good-faith negotiations” aimed at avoiding the nation’s first default on its debt. Senate Minority Leader Mitch McConnell said he expected that “we’re going to get a result that will be acceptable to both sides.”

Of course, if they don't reach a deal by tomorrow, you might want to stock up on canned goods and cigarettes; there's a good chance cigarettes will be more valuable than gold in the debt-pocalypse. And the meltdown could start prior to the actual deadline of Thursday; folks will wait it out tomorrow, but before the close of the markets on Wednesday, if there is no deal, it could get ugly. So stock up on the canned goods and cigarettes tomorrow.

If this whole mess seems surreal, it is, but that doesn't mean you know how it works. So, allow me to provide the Readers' Digest version of everything you need to know about the federal deficit.

When the government spends more than it collects in tax revenue it must borrow to finance the difference. The national debt now stands at $16.7 trillion dollars; that's the total amount the federal government has borrowed throughout the years to finance cumulative cash deficits; plus the money it owes to itself, primarily the Social Security Trust Fund. The publicly held debt is owed to a wide variety of investors, including international investors, domestic private investors, the Federal Reserve, and state and local governments. The federal government has carried debt throughout its history. Typically the nation has run up deficits during wars and recessions, but then paid down the deficit when the war ended or the economy recovered. In recent years however, sharp increases in deficits have driven the debt to historic levels even as government spending was poised to explode to care for an aging population.

The debt ceiling sets a legal limit on borrowing by the federal government. Legislation to raise the debt limit usually leads to some partisan political posturing but little real drama. The past few years have been different. The United States hit its 16.7 trillion debt ceiling in mid-May. Treasury Secretary Jack Lew started to borrow from retirement funds from federal workers, a move that has bought a few months before he hits a point where he will be unable to borrow more to continue to pay the nation's bills. If Congress does not vote by Thursday to raise the limit, Secretary Lew says the government will default on its obligations.

House Republicans have demanded a number of concessions in exchange for granting the Treasury an additional year of borrowing authority. Among their concessions demanded for not shutting down the government was the repeal of the Affordable Care Act, also known as Obamacare; they then merged the shutdown concessions into the debt ceiling concessions, only to slowly but surely abandon those concessions as they realized they were running into a brick wall; The next concession to fall was a one year delay in implementation of Obamacare; which they have now abandoned as impossible; then a demand for repeal of the medical device tax which was a part of Obamacare, and nobody quite understands it or care about it unless you happen to sell medical devices. President Obama says he will not negotiate over the debt limit. Congress passed the spending measures that racked up the debt and now they have to pay the bills.

In its effort to extract concessions from Democrats in exchange for opening the government, the GOP has faced a fundamental strategic obstacle: They don't have the votes. A majority of the members of the House have gone on record saying that if they were given the opportunity to vote, they would support what's known as a "clean" continuing resolution to fund the government, in other words a resolution that deals only with the debt ceiling and doesn't have all sorts of concessions tacked on.

But a funny thing happened right as the government was shutting down; on September 30, the House Republicans passed a measure that prevents anyone other than the Speaker of the House from bringing the clean CR to a vote. Which means Speaker John Boehner is the only person who can bring this mess to a vote in the House of Representatives, and Boehner is still holding out for something; nobody knows exactly what, but it might involve cigarettes.

Now, you might think there is no rational reason to shut down the government to preclude what is essentially a Republican-designed health law, first pitched by Newt Gingrich in response to HillaryCare, the original version of ObamaCare was actually created by the Heritage Foundation, and then implemented by a Republican governor in Massachusetts, only to be abandoned in pursuit of a White House run, which ironically resulted in a less than winning 47% of the vote. The conservative health care plan that would create the conditions for finally attaining universal health coverage in the United States, a goal that all the other advanced nations have achieved decades ago. In particular, the alternative to “Obamacare” proposed by the GOP is nonexistent, and basically means leaving millions of Americans without proper medical care.

On top of that, the shutdown, together with the previous sequestration, and the overall contractionary fiscal stance, will most likely make the very slow recovery even slower, maintaining an unnecessarily large portion of the labor force unemployed.

The debt ceiling, which we are still approaching, even if at a slower pace because of the shutdown, will make matters even worse. How much worse? Nobody knows; somewhere between bad and debt-pocalypse.

And then this afternoon, came word of progress, maybe, sort of. Wall Street traders were optimistic that a deal might be reached; there was a quick round of buying that pushed the major indices into positive territory. We may get a deal, maybe not, but again, if nothing is worked out by tomorrow afternoon, it's probably a good idea to load up on canned goods and cigarettes, and maybe some single malt Scotch.

Three Americans were awarded the Nobel prize in economics Monday for work that helped answer this crucial question: What determines the prices of an asset, whether a stock, bond or a house?

The winners of the $1.23 million prize were Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale. Their work has led to everything from low-fee index mutual funds to a deeper understanding of why home prices can become irrationally high, as they did in the last decade.

Fama and Shiller are considered direct opposites in their views of how markets sort out the prices of financial assets. Fama is a father of the "efficient markets hypothesis," the idea that because markets are very good at incorporating all known information about the value of an asset, it can be a fool's errand to try to predict in what direction the price of a stock or bond will go. Shiller is a leading proponent of the idea that markets, driven as they are by human psychology, can create large and sustained mispricings, such as in the late 1990s when excessive optimism drove the stock market into bubble territory. He is a student of "behavioral economics," the study of how quirks in human psychology can create results that traditional economic theory would not predict.

Fama's "efficient markets hypothesis" holds that investors can do just as well or better by investing in stock index funds as they can by trying to time the market and pick individual stocks. Anything they think they know about the future prospect of a company, in other words, is almost certainly already reflected in its share price.

Shiller challenges some key aspects of the efficient markets hypothesis. In a 1981 paper, for example, he demonstrated that stock prices are much more volatile than the underlying trends in the dividends they pay would suggest. He went on to show that periods when stock prices are high relative to corporate earnings tend to be followed by periods of below-par returns, and vice versa.

Hansen built on Shiller's work in important ways by using new statistical methods to test what exactly was driving all that stock price volatility. Hansen's work established more strongly the idea that the mispricings Shiller identified had to do with fluctuations in how much appetite for risk people had. When times are good more investors are willing to pay high prices for assets, and when times are bad, investors become more cautious. Today Shiller said the Federal Reserve's economic stimulus and growing market speculation were creating a “bubbly” property boom.

So, it just seems like a prudent thing to load up on canned goods and cigarettes and Scotch. Better safe than sorry.

Monday, October 07, 2013 - Already Bankrupt

Already Bankrupt

by Sinclair Noe

DOW – 136 = 14, 936

SPX – 14 = 1676
NAS – 37 = 3770
10 YR YLD - .02 = 2.63%
OIL - .67 = 103.17
GOLD + 11.20 = 1323.40
SILV + .61 = 22.45

The markets gave up Friday's gains. The political dysfunction is hurting; right now it's just the economic uncertainty; that's a phrase I hate because businesses always face uncertainty but the shutdown and the looming debt ceiling are significant uncertainties. Let's start with the debt ceiling. Businessweek is describing it as “an economic calamity like none the world has ever seen.”

Here's the not so rosy scenario: “Failure by the world’s largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse. “

Sure, if the US misses a payment it would be much bigger than 2008 because the US government is so much bigger and more interconnected than Lehman Brothers; and after the collapse of Lehman, the government stepped in to clean up the mess. Who cleans up the mess when the mess is the US government?

Warren Buffett says the politicians should not use the debt limit as a weapon in policy debates. From a Fortune magazine article last week, Buffett said: “It should be like nuclear bombs, basically too horrible to use.” Or as Senator Ted Cruz calls them: “Half measures.”

Just a reminder that in 2011, back when there was just a little talk about default without an actual default, just a hint, it wiped out $6 trillion of value from global stocks. Investors, structured vehicles, collateral agreements, derivatives contracts and other trading covenants have ratings-based rules that could force the replacement of Treasuries in a trade or portfolio.

Some people speculate it would push interest rates higher, others guess it might push rates down, but nobody knows for sure. The scarier scenario is that everything just freezes; it wouldn't matter whether rates are up or down because nobody can make a deal. Once the system starts to break down related to settlement and payments, then liquidity disappears.

Treasury Secretary Jack Lew has said the government will have only $30 billion of cash left by Oct. 17 to meet its commitments. Those can run as high as $60 billion a day, which means the Treasury will need to borrow more to meet its liabilities. The Treasury has $120 billion of short-term bonds coming due on Oct. 17.

About half of the US debt is held by foreign governments, central banks and other overseas investors. China is the largest holder of US Treasuries, with about $1.3 trilllion; they are not happy. A new idea is taking hold among House Republicans that perhaps breaching the debt ceiling isn't such a terrible idea after all. One form this takes is the patently absurd remarks of Rep. Ted Yoho (R-Fla.) who muses that "I think, personally, it would bring stability to the world markets." So, that's one politician who just certified he is insane.

A slightly less insane idea is to prioritize payments, but there are some problems with that: Treasury is not authorized to unilaterally decide to pay certain bills and not others. If it were, the constitutional order would completely collapse. Obama could just not cut the checks for farm subsidies or missile defense programs he opposes.  Because payment prioritization is illegal, Treasury's payment system is not designed to allow prioritization to happen. The systems "are designed to make each payment in the order it comes due." Of course systems could always be changed. But they can't just whip up an entirely new computer system in the next two weeks.

A German newspaper summed it up quite nicely: "At the moment, Washington is fighting over the budget and nobody knows if the county will still be solvent in three weeks," the paper concludes. "What is clear, though, is that America is already politically bankrupt."

As for the government shutdown, over the weekend the House voted to retroactively pay the roughly 800,000 furloughed federal workers; the measure still requires a Senate vote. So, the shutdown is no longer about expense because all the workers will be paid eventually; this just means that the government is not going to receive revenue, and that there will still be pain for the furloughed workers and the communities they live in. This has broken down to nothing but stupidity, plain and simple, with a side order of cruelty.

On Sunday, Speaker John Boehner’s talk hardened. He insisted he does not have the votes to get anything through unless the Democrats make concessions to get those measures passed. Obama has refused to do so. More worrisome, Boehner is changing his demands. Earlier, it was to delay implementation of Obamacare a year. Yesterday, there was no mention of Obamacare; the bone of contention was now out of control spending and debt. I’m not sure this is an actual change in position but in messaging, with the fight now moving to the debt ceiling.

And so today, President Obama made an unscheduled visit to the Federal Emergency Management Agency in his latest bid to draw attention to the effects of the government shutdown and to challenge Speaker John Boehner’s claim that he does not have enough votes to pass a measure to finance the government.

“The House should hold that vote today,” Mr. Obama said. “If Republicans and Speaker Boehner are saying there are not enough votes, then they should prove it. Let the bill go to the floor and let’s see what happens. Just vote. Let every member of Congress vote their conscience and they can determine whether or not they want to shut the government down. My suspicion is, my very strong suspicion is, that there are enough votes there.”

Turning up the pressure, Mr. Obama added, “The reason that Speaker Boehner hasn’t called a vote on it is because he doesn’t apparently want to see the government shutdown end at the moment, unless he’s able to extract concessions that don’t have anything to do with the budget.”

Chief Justice John Roberts and the Supremes will take the bench as scheduled today, ignoring the shutdown of much of the rest of the federal government. The Supreme Court has agreed to hear an array of cases of interest to employers and workers, manufacturers and financiers, and anyone else concerned about the intersection of commerce, law, and society.

The court today will hear arguments on whether federal securities law precludes certain class actions filed by investors who invoke state law. The case has added sizzle because it involves investors suing various defendants for losses related to R. Allen Stanford’s $8 billion Ponzi scheme. A lower court said that a federal statute, the Securities Litigation Uniform Standards Act, did not forbid state-law class actions in this context. 

Separately, the justices will resolve whether the corporate target of a state’s consumer-protection lawsuit can get the dispute moved from state court to federal court. The question sounds hyper-technical, but it matters. Defendants in consumer-protection cases prefer to litigate in federal courts, which are widely perceived as less plaintiff-friendly. This case involves Mississippi’s suit challenging alleged price fixing by manufacturers of flat-screen display panels. 

In recent years, the federal appeals court in Washington DC has issued a series of rulings making it difficult for the Environmental Protection Agency to curb power plant pollution that crosses state lines. The EPA is asking the Supreme Court to overturn a 2012 decision by the US Court of Appeals that struck down an agency rule that required upwind states in the East, Midwest, and South to reduce emissions of nitrogen oxides and sulfur dioxide to help downwind states meet national ambient air quality standards.

The Supreme Court refused to hear Argentina’s appeal of a lower court’s decision in favor of hedge funds that held bonds on which the country had defaulted. As is their custom, the justices offered no reasons for turning down the appeal. The appeal was from an interim decision last year from the United States Court of Appeals for the Second Circuit, in New York, and the justices may yet have an opportunity to consider whether to hear a separate appeal from the lower court’s final decision, issued in August. The case was brought by bondholders who were owed more than $1.3 billion and who refused to accept reduced payments after Argentina’s default in 2001. Most of the nation’s other creditors accepted such payments in later debt swaps. The Second Circuit ruled that Argentina had violated a contractual promise to treat all bondholders equally.

This case may actually set a precedent for US. 

Friday, January 18, 2013 - Happy Inauguration Weekend

Happy Inauguration Weekend

by Sinclair Noe

DOW + 53 = 13,649
SPX + 5 = 1485
NAS – 1 = 3134
10 YR YLD -.03 = 1.84%
OIL - .15 = 95.79
GOLD – 2.40 = 1685.70
SILV + .16 = 31.99

The Dow Industrials and the S&P 500 closed at 5 year highs today. We have now seen gains over the first three weeks of the new year. While many Main Street investors remain wary of the the market that bit them in the financial crisis of 2008, they are missing out on historic gains. Since the turnaround that began March 9, 2009, the market has chalked up gains of 118%, putting it in the top nine bull markets in which the S&P 500 gained more than 100%. The current bull, which followed the worst bear market, or market plunge, since the Great Depression, is also 1,407 days old, which ranks eighth and also puts it in the "1,000 Day Club." In cash terms, the stock market has generated $10.5 trillion in paper wealth since the bear market ended.

For much of the last 44 months, most investors, many of them psychologically and financially scarred by the 2008-09 financial crisis, have sworn off the stock market. In the five years ended in 2012, individual investors have yanked an estimated $557 billion out of U.S. stock mutual funds, while $1 trillion has been funneled into bond funds. Once bitten, twice shy. Investors don't really trust the market itself, so they don't trust the rally. Of course, there are other factors. The aging baby boomers are growing increasingly averse to risk. And then there's the concern the gains have been artificially inflated by the stimulus injected into markets by bankers. These drastic and unprecedented measures used by central bankers to reignite the economy, revive risk taking and boost investor confidence are bound to end some time, and when the Fed exits QE, there could easily be another day of reckoning.

 Last week offered a hint, when minutes from the Federal Reserve showed decision makers discussing when to wean the planet from their accommodative bond buying. The sell-off in long-term Treasuries in one week wiped out their entire yield from last year, and demonstrated the peril of crowding into allegedly safe havens.

Real interest rates tick higher when economies improve, but an unruly spike is another thing altogether. The Fed has vowed to keep rates down, as will our looming debt ceiling. But if the 30-year Treasury yield, now just below 3.1%, were to nudge above 3.32%, the return over the next 12 months would be negative

Of course, there is still no shortage of things for jittery investors to worry about. The World Bank warned that the US budget battle is already restraining economic growth around the world and warned the U.S. could fall back into recession if massive budget cuts aren't avoided in coming months.

Moody's, the ratings agency that evaluates the financial health of sovereign nations, including the US, warned this week that it will downgrade the nation's triple-A credit rating if Congress doesn't raise the debt ceiling and defaults on its debts. A similar move by S&P in the summer of 2011 after a similar battle resulted in the Dow tumbling 635 points in a single day.

But, perhaps the scariest thing in the past week was a report from Lippers that stock funds, including mutual funds and exchange traded funds that invest in both U.S. and foreign shares, took in a whopping $18.3 billion in the week ended Jan. 9, the fourth-largest weekly inflow since it began tracking them in January 1992. Investors are finally coming to the realization that the conservative investments they have been in have returned little to nothing over the past several months and years. That has left them in a deep hole. Yeah, that's the ticket, jump back in at the top of a four year cyclical bull market run. Nothing scary about that.

A stock market perched at fresh five-year highs is vulnerable to many excuses for a pullback, but the fourth-quarter results companies are now reporting won't be one of them.

It isn't that corporate profits last quarter were good; they weren't. Profit projections have also been dramatically cut. Analysts now see fourth-quarter earnings for Standard & Poor's 500 companies expanding just 1.9% year-over-year—down from 9.9% hoped for three months ago and 13.7% last summer. Companies likewise desperately need revenue to keep growing, since many have squeezed all they can from profit margins. So it helps that Wall Street is now bracing for stagnant revenue growth last quarter among nonfinancial companies.

The bar isn't uniformly low, however. The two sectors analysts are counting on to deliver the biggest fourth-quarter growth—10.9% for consumer discretionary and 8.9% for financials—have already run up the most in 2012

In contrast, expectations for cyclical companies seem glummer. Three out of the four sectors where analysts expect shrinking profits are all sensitive to capital spending, with the consensus seeing profits decline 5.6% for industrial companies, 2% for energy, and 1% for technology.

Happy Inauguration Weekend. Obama has a chance to make a pointed, ideological speech Monday. Obama can define the November results as a decisive referendum on the proper role for the state. He could cement his speech in history. There have been some good inauguration speeches over the years, and plenty of not so great speeches.

Thomas Jefferson in 1801 – after the nation’s first contested election – declaring, “We are all Federalists, we are all Republicans.” Abraham Lincoln in 1861, pleading for the South to remain in the Union, and vowing to repress rebellion by force until “the better angels of our nature” returned. FDR declaring “the only thing we have to fear is fear itself,” referring to the bank panics that imperiled the nation.

John Kennedy's thrilling Cold War call to arms is remembered for sheer eloquence, rather than the crisis it addressed. Second inaugurals stand out with greater infrequency. FDR memorably proclaimed “I see one-third of a nation ill-housed, ill-clad, ill-nourished.” Lincoln called for a lenient Reconstruction policy “with charity for all.” Most inauguration speeches don't strive for cheap quotability, and this may be the one area where they find success. .

Following this weekend's speech, the President will have another opportunity to make his positions known to the world. He will take to the bully pulpit for the State of the Union Address. He will need to hit a home-run in each speech; one detailing his vision and the other detailing the specifics of how we get there from where we are now. The viability and vigor of his next four years might depend on these two speeches. If he fails to deliver? Well, as JFK said: “Ask not.”

House Republican have come up with a plan to pass a three-month extension of federal borrowing authority next week to buy time - on pain of losing their own paychecks - for the Democratic-controlled Senate to pass a budget plan that shrinks budget deficits. The plan, hatched at a House Republican retreat, marks a new strategy from the party to break a budget deadlock by forcing the Senate to act first. This is strategic can kicking.

The Treasury needs congressional authorization to raise the current $16.4 trillion limit on U.S. debt sometime between mid-February and early March. The Senate has not passed a formal budget resolution in nearly four years, while the House has passed budgets that have died in the Senate. Under the planned legislation, House Majority Leader Eric Cantor said if the Senate or the House fail to pass a budget by April 15, lawmakers' pay would be withheld.

House Speaker John Boehner said there should be no long-term increase in the federal debt limit until the Senate passes a budget, and House Republicans will try to force the Senate into action to cut spending, saying: "We are going to pursue strategies that will obligate the Senate to finally join the House in confronting the government's spending problem. The principle is simple: no budget, no pay."

So, the Republicans came up with a nice soundbite there, and they will try to place blame of a default on the Dems. A spokesman for Senate Majority Leader Harry Reid, said the Senate would consider the increase if it was "clean."

A House Republican leadership aide said it was not currently anticipated that the three-month debt limit increase legislation would include spending cuts. Although Boehner has previously sought at least $1 in long-term spending cuts for every dollar of debt limit increase, the aide said that the reforms associated with requiring budgets from both chambers would meet the speaker's requirements.

Spending cuts would be demanded of any longer term debt limit increase, the aide said, and Congress would still have to continue dealing with two other fiscal deadlines, the March 1 launch of automatic spending cuts, and government funding legislation that is needed by March 27.

For now, it appears the White House strategy of refusing to negotiate on the debt ceiling has worked, sort of. Yes, the GOP could come back on the debt ceiling, and they will almost certainly float a few trial balloons. It could try to make a big deal of the sequester, but that’s a lot more like the fiscal cliff than it is like the debt ceiling: not good, but not potentially catastrophic, and therefore poor terrain for the “we’re crazier than you are” strategy. And while Republicans could shut down the government, my guess is that Democrats would actually be gleeful at that prospect: the PR would be overwhelmingly favorable for Obama, and again, not much risk of blowing up the world.

The Federal Reserve has released transcripts from 2007; the thinking being that a five year lag would lessen the appearance of stupidity. Not so much really. The major figures were pretty much clueless. Timothy Geithner, then president of the New York Federal Reserve Bank, said during an emergency telephone call on August 10 of that year that most of Wall Street was still doing fine.

"We have no indication that the major, more diversified institutions are facing any funding pressure," Geithner said according to the transcripts, which total 1,370 pages. "In fact, some of them report what we classically see in a context like this, which is that money  is flowing to them."

Similarly, Fed Chairman Ben Bernanke underestimated the risks of a looming financial blow-up.

"I do not expect insolvency or near insolvency among major financial institutions," he said in December 2007.

By then, the Fed had already launched emergency liquidity measures and begun cutting interest rates, which by December of 2008 would be brought all the way down to effectively zero.

Eventually, the financial meltdown would come to threaten all of Wall Street's powerhouses, and you know that story.

A soldier's basic pay is figured not only according to rank, but also by how long the soldier has served. The basic yearly pay in 2010 for the rank of an E5 sergeant with less than two years of experience is $24,735. That amount increases to $28,972 with four years of experience and $31,006 upon reaching six years of service.

Goldman Sachs awarded 22 senior executives and board members more than 736,000 restricted shares worth nearly $104 million as part of their 2012 bonuses. Goldman Chief Executive Lloyd Blankfein received 94,320 restricted shares. The shares were worth $13.3 million. I'm sure Blankfein performed heroically.

Friday, November 30, 2012 - We're All Just Muppets Living in a Fairy World

We're All Just Muppets Living in a Fairy World

by Sinclair Noe

DOW + 3 = 13,025
SPX +0.23 = 1416
NAS – 1 = 3010
10 YR YLD - .01 = 1.61%
OIL + .88 = 88.95
GOLD – 10.60 = 1716.20
SILV - .85 – 33.54

October 31 Closing Numbers:      

DOW                                                13096
SPX                                                 1412
NAS                                                 2977
10 YR YLD                                      1.69%

OIL                                                   88.51
GOLD                                              1721.20
SILV                                                 32.36

So for all the talk about the fiscal cliff, the election, Hurricane Sandy, The Euro-Debt Crisis, the unrest in the Middle East; for all that and more, the markets gave a big yawn in the month of November.

So, yesterday afternoon the House Republicans told reporters that the White House plan to avert the fiscal cliff was nothing more than a “joke”, an “insult”, and a “complete break from reality.” Mitch McConnell said he “burst into laughter. John Boehner said: “It was not a serious proposal.”  The plan, or the opening salvo from the White House calls for $1.6 trillion in tax increases spread out over ten years, $50 billion in additional stimulus spending, and $400 billion in spending cuts over ten years, plus an extension of the 2 percentage point payroll tax deduction or something comparable to it, and a permanent extension on the debt ceiling.

Meanwhile, the Republican plan is, well, it's still something of a mystery but we know they want cuts to entitlement programs, and no they're not referring to the corporate welfare programs that allow $1.5 trillion in corporate profits to be booked offshore, or the other corporate welfare loopholes. No, the Republicans are kinda-sorta arguing for the Ryan Budget, with its deep cuts to entitlements and other spending, and with a zero percent chance of getting through the Senate, just as the Obama plan has a zero percent chance of getting through the House. We are still in the initial phase of negotiating; it's all about tactics, not final numbers.

And so President Obama hit the road today to rustle support for his side. He traveled to Pennsylvania to make the case that Congress should immediately extend the Bush-era tax cuts on income under $250,000 per year. He went to a toy manufacturer in Hatfield, PA, the obvious graphic being that his plan will mean a tax break for most, that the companies depend on consumer spending, and that the extension of the tax cut will help keep the company making toys and employing workers; everybody gets a Merry Christmas, and toys under the tree.

Adding to the discussion today, a New York Times article that says most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. The combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.

The analysis shows that the overall burden of taxation declined as a share of income in the 1980s, rose to a new peak in the 1990s and fell again in the 2000s. Tax rates at most income levels were lower in 2010 than at any point during the 1980s.

This week the Euro-Union, and specifically Germany's parliament approved a debt restructuring plan that essentially allowed Greece to hit the pause button on its debt. It didn't resolve the Greeks debt problem and it didn't create a plan for rebuilding the Greek economy, but it kicked the can down the road. The Euro-zone's crisis is far from over. Today, European Central Bank President Mario Draghi said Euro-zone members must tighten budgets and form a banking union to leave behind the “fairy world” that allowed problems to grow.

Draghi's call for reform was echoed by International Monetary Fund chief Christine Lagarde, who said implementing a banking union with powers to supervise all banks in the Euro-zone should be the currency bloc's top priority. The economic data from the EU today was bleak. Another 173,000 people joined the ranks of the jobless in October, and German retail sales and French consumer spending dropped more than expected.

And the Greek deal is looking like it might not hold together, as banks and pension funds balk at fresh losses, raising fears that the package could unravel before a deadline in mid-December.The International Monetary Fund said it would not disburse funds under its part of the EU-IMF package unless the euro-zone delivers on a bond "buy-back" scheme, which is supposed to cut Greece’s burden by 10% of GDP. The dispute comes as Moody’s said the EU-IMF deal to unlock $56 billion in bail-out payments to Athens merely papers over cracks and does little to alleviate Greece’s "extreme economic and social fragility". Moody's says: "We believe that the country’s debt burden remains unsustainable."

Leaked documents have already cast serious doubts on that Greece can reach its debt reduction target, much to the irritation of the IMF, which fears that its own credibility is being damaged by the continued fudge over figures that appear to be extracted out of thin air and have repeatedly proved wide of the mark over the past two years.

There is mounting irritation among the Asian and Latin American members of the IMF Board - as well as the US - at the failure of the Europeans to deploy their full wealth to clean up an internal EMU problem. It is a long way away from the permanent fix that the IMF had been insisting upon. It is just one more big kick of the can down the road. And so, Draghi is calling for a banking union to leave behind the fairy world.

Sometimes this economic stuff makes sense, sometimes it doesn't.

The Chinese government would like to develop Shanghai into a major gold trading center; to that end, beginning Monday, they will allow over-the-counter gold trading between banks for the first time. The introduction of interbank trading is intended to develop China into a liquid market such as London, and demonstrates the government’s readiness to open the market to greater participation by international banks. Chinese banks already play a significant role in determining international gold prices, so the move will have a limited impact on prices.

China offers a massive gold market, albeit one that is tightly controlled. The country is the world’s biggest gold producer and ranked as the No. 2 gold consumer in the third quarter of this year. It has official gold reserves of 1,054 metric tons, the world’s sixth-largest. But gold exports are banned and only a handful of banks hold import licenses.

Until now, member banks have been able to trade physical gold between themselves on the Shanghai Gold Exchange, but the absence of an over-the-counter market restricted them from becoming market makers in gold. In an over-the-counter market, transactions are quoted and conducted between parties on a principal-to-principal basis rather than being traded through a broker on an exchange.

So, you're looking around for a nice place to invest these days. Where do you go? Subprime mortgage indexes have rebounded substantially – one is up 39% already this year. Goldman Sachs is telling its clients to invest in some of the ABX subprime mortgage indexes that it helped create back before the crisis. What could go wrong? Wait a minute, you say, aren't those the same subprime garbage Goldman Sachs bet against? Well, yes, but they paid a $550 million dollar fine for selling toxic collateral debt obligations and then betting against their own clients; and $550 million is a big fine, it's a couple of days work for Goldman. I know what you're thinking; these guys are still the same Muppet milking masters of the universe they used to be; they would sell their own grandmother to Somali pirates if they held credit default swaps on her. And its not like they had to admit wrongdoing, so they can just go back to the same old, same old. Everything is cool now.

Wednesday, November 28, 2012 - If They Don't Jump, I Might Push Them

If They Don't Jump, I Might Push Them

by Sinclair Noe

DOW + 106 = 12,985
SPX + 10 = 1409
NAS + 23 = 2991
10 YR YLD - .03 = 1.62%
OIL - .52 = 86.66
GOLD – 22.00 = 1720.80
SILV - .28 = 33.87

I am getting so sick and tired of this fiscal cliff malarkey* (* a politically acceptable euphemism, according to the debates), that I would like to throw some politicians off a fiscal cliff; maybe we could toss in a few media types as well. Today, I hear that stocks moved higher because John Boehner, the Speaker of the House, said he was optimistic about not going over the cliff. Really? That's all it takes for stocks to post triple digit gains? Maybe tomorrow, Mr. Boehner can tell us he is both optimistic, and confident, and chipper, and slightly perky, and everything in his universe is copacetic; and the markets could celebrate with a monster rally.

I don't think this is the real motivation for market moves but it might be, but I don't think so. On Friday, President Obama will hit the road to promote his version of fiscal cliff avoidance. Business executives and others who’ve met with President Barack Obama in recent days describe a president who’s supremely confident that he’ll come out on top of a fiscal cliff deal; with Republicans bending to his will on tax increases for the wealthy and Democrats sucking up deep spending cuts.

You have to wonder about the austerity advice being offered by the very rich CEOs that have been visiting the White House. There are 9 CEOs, including a few defense contractors, a couple of airlines, a software firm, a telecom company, and a few bankers. They all suck on the government teet; several of the companies paid no corporate taxes despite profits; a few others received multi-billion dollar bailouts to keep their companies afloat when they almost melted down. The CEOs went to the White House with a concerted message: no more government handouts to the moochers; waste must be eliminated; cuts must be made; and by that they mean Social Security, Medicare, and Medicaid. They don't want cuts to their own corporate welfare; they just want to cut yours.

There is only one problem: the vast majority of Americans oppose cuts in Social Security, Medicare and Medicaid. That's a minor problem now, because the election is over; no invites to lunch at the White House.

By the way, Nassim Nicholas Taleb, the author of “The Black Swan”, was speaking at some event in London the other day, and he said bankers who take government bail- outs to stay afloat should be paid no more than the civil servants who saved their business. Individuals in positions of power, including those who work in the financial system, must be held accountable for their decisions and have more “skin in the game.” He also advocated clawing back bonuses of highly paid executives who contribute to the failure of a firm. Actually, it's happening.

The Financial Services Authority, the U.K. industry regulator, told bank executives in a letter last month that bonuses must reflect recent scandals, and that clawbacks should be sought from those involved. The EU is seeking to cut variable pay as part of politicians’ quest to make lenders more like utilities than private money-making machines. The bloc’s 27 member nations plan to implement rules on bank-capital requirements next year that include caps on bonus size relative to salary. Here in the US, we let the bankers keep whatever they can scrounge, and then they lunch with the president and advise him to cut the handouts.

Anyway, back to the cliff. If the GOP line against marginal rate increases somehow holds between now and the end of the year, when the fiscal cliff tax hikes and spending cuts begin to kick in, the president is confident he can use the bully pulpit of the second inaugural address and the State of the Union speech to blast Republicans as holding the American economy hostage to a narrow and outdated ideology.

Of course, the Republicans are finding it more difficult to hold the line; vague plans to limit tax breaks will soon die from lack of definition or from too much clarity. Today, Republican Oklahoma Congressman Tom Cole, said the GOP should agree to a quick deal that keeps the Bush era tax rates for 98 percent of taxpayers while letting the top two rates increase. Cole said doing so would not violate Grover Norquist’s no-new-taxes pledge signed by many Republicans because it would amount to approving a tax cut for most tax payers and simply doing nothing about the other rates, which were scheduled to expire under the legislation first pushed by Bush in 2001.

Of course, the easiest way for Republicans to keep their pledge to Grover is to do nothing; go over the cliff; allow the Bush Era Tax Cuts to expire, and then come back in and vote alongside Democrats for tax cuts on 98% of taxpayers.

The bottom line, for today at least, is that the president believes he will get his marginal rate increase, or at least an acceptable version; and Republicans will get some spending cuts and a commitment to broader entitlement and tax reform. The idea is the cliff is resolved just barely by year end or near enough; toss in a continued phase down of Emergency Unemployment Compensation, temporary extension of tax cuts; assume the payroll tax cut expires and new taxes under the Affordable Care Act are implemented. Total fiscal austerity under this scenario would be about $160 billion; the GDP would take a 1% hit. Don't forget that New York is asking for $40 billion in Hurricane disaster aid; New Jersey wants about $30 billion.

The fiscal cliff is a permanent part of the economy; even with harsh action, the deficit will grow. Widening the deficit is already baked in.

It almost seems a pre-ordained outcome to a manufactured crisis. The pre-election abyss between the two parties has narrowed to a little ditch. The final outcome will include austerity, which has been a horrid failure in Euro-land. Notice we haven't heard any post-election chatter about the necessity of creating more jobs. Austerity is more important than jobs. Got to get our financial ducks in a row and then we'll look at the labor market. Of course, those ducks won't ever line up until people have jobs, and demand increases.

Over in Euro-land, Greece was the recipient of a bailout deal earlier this week; the plan was met with some initial enthusiasm that anything had been accomplished; then people started to look at details.

The eurozone finance ministers and the IMF agreed to unlock loan tranches totaling $56 billion. Most of the funds are expected to be disbursed in December, with further payments in the first quarter of next year on condition that Greece continues to deliver on its austerity pledges under the bailout plan. The bailout comes in the form of fresh loans, extended loan maturities, lower interest rates on loans and allowing sovereign debt buyback on the market at discounted prices, thereby putting an end to speculation about Greece leaving the eurozone or defaulting. The problem was that Greece had too much debt and so they've replaced the old bad debt with new and improved debt.

And by new and improved we mean they buy some of their debt for what the market was paying, in other words, discounted, and then they extend the term without paying more. I know what you're thinking – that is a very clever way to pay down debt without paying down debt. These are all fake numbers both because the data is patchy and because they’re sort of not the point; the point is to return Greece to a sustainable path where it pays off all its debts, its borrowing costs come down, and in 45 years when the balloon payment comes due, well, somebody else can have that job. And because this new bailout package has delayed the reckoning, the Greeks can get back to improving their economy, which has been decimated by austerity, to the point that there are almost no jobs. So that's the deal for Greece. I don't make this stuff up, folks.

The Federal Reserve released its Beige Book today. Economic growth improved in October and early November, helped by a pickup in consumer spending and steady home sales. Hurricane Sandy slowed growth in the Northeast. Hiring increased in more than half of the districts. But manufacturing shrank or slowed in seven regions and was mixed in two others. The information collected by the regional banks and bound in a Beige cover, will be used as the basis for the Fed's policy discussion at the Dec. 11-12 meeting.

I also ran across this strange little bit of news from the Atlanta Fed; it seems banks are under attack, cyberattack. The Atlanta Fed writes:

“A real financial stability concern ... is the potential for malicious disruptions to the payments system in the form of broadly targeted cyberattacks. Just in the last few months, the United States has experienced an escalating incidence of distributed denial of service attacks aimed at our largest banks. The attacks came simultaneously or in rapid succession. They appear to have been executed by sophisticated, well-organized hacking groups who flood bank web servers with junk data, allowing the hackers to target certain web applications and disrupt online services. Nearly all the perpetrators are external to the targeted organizations, and they appear to be operating from all over the globe. Their motives are not always clear.

“Unlike other cybercrime activity, which aims to steal customer data for the purpose of unauthorized transactions, distributed denial of service attacks do not necessarily result in stolen data. Rather, the intent appears to be to disable essential systems of financial institutions and cause them financial loss and reputational damage.”

Almost seems redundant doesn't it?