Thursday, November 14, 2013 - These are the Days of Milk and Cookies or, If You Prefer, Wine and Neurosis

These are the Days of Milk and Cookies or, If You Prefer, Wine and Neurosis

by Sinclair Noe

DOW + 54 = 15,876
SPX + 8 = 1790
NAS + 7 = 3972
10 YR YLD - .03 = 2.69%
OIL + .08 = 93.96
GOLD + 5.00 = 1288.30
SILV + .13 = 20.85

More record highs for the Dow and the S&P 500. Celebrate with your beverage of choice.

You will likely hear a bunch of stupidity with regard to Janet Yellen as she works her way through the confirmation process. Today, she delivered prepared remarks to a Senate Committee. She did not surprise and she did not disappoint. Yellen is dovish; we knew that. She believes in monetary stimulus; we knew that. She believes in regulations to prevent a repeat of past mistakes; we knew that.

She is probably the most qualified Fed Chair nominee ever. A little bit of background: Economics degree from Brown University; Phd. From Yale; taught at Harvard, the London School of Economics, and UC Berkeley; Fed Governor from 1994 to 97; San Francisco Fed president in 2004; vice chair of the Fed since 2010; a member of multiple economic councils and committees, including the Council of Economic Advisors, CBO, MIT, etc, etc; married to Nobel Prize winning economist George Akerlof, considered more accurate than her Fed peers in foreseeing the housing crisis and the financial downturn.

Indeed, Yellen was “one of the only top Fed policy makers who warned about the housing bubble before the crisis.” - (NYTimes) and “identified the impending threats that both the housing bubble and the shadow banking sector posed to our entire economy.” (WaPo). So, as Fed economists go, she was a very good prognosticator, head and shoulders above her peers. While Bernanke and Greenspan were completely clueless, Yellen was concerned, though somewhat sanguine. She did not scream bloody murder, and some people would rant that she was inaccurate due to her lack of urgency, while a more correct assessment might be that she was calm and considered.

Yellen's appointment seems to be a foregone conclusion. And that means more QE, no rush to taper, possibly some new forms of stimulus, although I wouldn't expect anything overly avante garde. She is a New Keynesian in economic philosophy; we knew that.

And the markets seem to like the idea of more free money from the Fed. The economy is bad and needs fixing and the markets hit record highs. You can celebrate with cookies and milk, or perhaps wine and neurosis would be more appropriate.

President Obama held a press conference today and the overriding topic was Obamacare; he announced new rules that will let insurance companies keep people on health care plans that would not have been allowed under the Affordable Care Act. The changes should allow most people to retain their health care plans for a year despite having received letters saying they could no longer keep their insurance. House Speaker Boehner said that he was skeptical of the president’s plan, and that the new law needed to be overturned. A spokesperson for the insurance industry reaffirmed that they are in the premium collection business, not the claims payment business.

Wikileaks released on Wednesday what it called the draft text of a secretly negotiated international economic treaty that critics warn could limit Internet freedoms.

The document-leaking organization published a draft of the Intellectual Property Rights chapter for the Trans-Pacific Partnership (TPP), a proposed free-trade agreement between the US and 11 Pacific Rim nations that's been under negotiation for nearly three years. However, because the Obama administration has deemed the talks to be classified information, this is the first time the public is seeing the details; specifically the 95 page chapter on intellectual property, patents, copyrights, internet access and usage, pharmaceuticals, software, and the like.

The released chapter shows the United States working to aid drug-makers and medical device manufacturers largely by limiting the opportunities for other countries to ignore those patents in the interest of public health and cheaper medicines. Copyright is a key part of this draft. And the negotiators would further stiffen copyright holders' control while upping the ante on civil and criminal penalties for infringers.

The chapter shows that the United States is seeking to limit the ability of countries to claim “public health” reasons to ignore patent rights by restricting those exceptions to epidemics and disallowing diseases such as cancer. The United States is also pushing to ease drug-makers’ ability to obtain patents overseas and in developing countries and to extend the duration of those patents beyond 20 years.

Regarding the TPP effect on internet operations, the International Bussiness Times summarized: Each Party shall provide that authors, performers, and producers of phonograms have the right to authorize or prohibit all reproductions of their works, performances, and phonograms, in any manner or form, permanent or temporary (including temporary storage in electronic form).

Yeah, good luck with that one. The idea is to obligate internet service providers to act as copyright police. If a website posts material improperly, the site owner and the host are obligated to remove it as soon as the publisher is notified. The idea is that if the publisher does not promptly comply, a sharply worded letter to the webhost will get the entire site taken down. 

ISPs are extremely low margin businesses. Forcing high-cost monitoring on them would lead them to increase their staffing considerably. The resulting hosting increases would force the closure of most small independent sites. The increased oversight of ordinary users (they’d be required to monitor ongoing communications for piracy, which sounds like an NSA wet dream) would also likely lead to higher access charges for consumers.

Wikileaks claims that: “If instituted, the TPP’s IP regime would trample over individual rights and free expression, as well as ride roughshod over the intellectual and creative commons. If you read, write, publish, think, listen, dance, sing or invent; if you farm or consume food; if you’re ill now or might one day be ill, the TPP has you in its crosshairs.”

Right now the TPP is on Fast Track authorization status, meaning Congress and citizens have almost zero input.

US District Judge for Southern New York Jed Rakoff has released a scathing letter condemning the Department of Justice for not holding individuals accountable for Wall Street’s financial wrongdoing. Rakoff is known for sending a couple of settlements back to the SEC and the DOJ and saying essentially, the prosecutors were overly lenient in working out a settlement; grow a spine and try again.Instead, as he noted in his letter released on Tuesday, the Justice Department has shifted in the past several years to prosecute companies instead of individuals for wrongdoing. "The failure of the government to bring to justice those responsible for such a massive fraud speaks greatly to weaknesses in our prosecutorial system that need to be addressed," Rakoff said.

While a few companies have been prosecuted for the 2007-2009 financial crisis, most have resulted in settlements with no admission or denial of wrongdoing, and no top Wall Street executive has been held to account yet. As the statute of limitations for most of the criminal violations is about to pass, nothing can be done to prosecute any suspected executives once it expires.

A word of friendly advice for the holiday shopping season, do not pay full retail for anything. There will be discounts galore; so, pause, take a deep breath and look for a lower price, you will find a lower price. How can we be sure? Well today WalMart posted third quarter earnings that topped estimates by a penny per share, but it was because of an aggressive share buyback program; there were fewer shares outstanding. Revenue and same store sales were down, and guidance for the fourth quarter was cut by 10 cents per share.

Tuesday, August 21, 2012 - A Crash? Your Guess is as Good as the Economists, Maybe Better

A Crash? Your Guess is as Good as the Economists, Maybe Better 
-by Sinclair Noe

DOW – 68 = 13,203
SPX – 4 = 1413
NAS – 8 = 3067
10 YR YLD -.01 = 1.80%
OIL -.30 = 98.16
GOLD + 17.40 = 1639.60
SILV + .52 = 29.43
PLAT + 25.00 = 1516.00

Normally, these are the slow,  sultry, dog days of summer; that's what we've seen lately. Volume has been so light that you wondered if everyone had gone to sleep. And then this morning, people started trading, or maybe the computers started trading. Who can say which? Volume jumped to the highest in 3 weeks and prices flopped. 

David Kostin, Goldman Sachs chief US equity strategist, has sent a note to clients advising them to get out of stocks; Kostin is forecasting a 12 percent drop ahead, down to about 1250, believing that Congress will fail to address the fiscal cliff before the election, and maybe even before the end of the year. Kostin says: "Political realities and last year's precedent suggest the potential that Congress fails to reach agreement in addressing the fiscal cliff is greater than what most investors seem to believe based on our client conversations.”

According to Goldman Sachs economists, the worst case scenario this year is that a lame duck Congress does absolutely nothing after the election - not even kick the can down the road by voting in a short extension of the tax breaks and spending plans. Under that scenario, 2013 GDP would actually contract.

Now normally I would hear a report like this and dismiss it, or because it came from Goldman Sachs, I might take a contrarian stance because we know that Goldman has a history of misleading the investing public. Also, because we know Goldman Sachs is two-faced. Goldman senior investment strategist Abby Joseph Cohen just this morning said she expects equities to outperform bonds for the remainder of the year. So, it appears there is a little bi-polar disorder among Goldman economists. 

Then we see a research report from Nomura strategist Bob Janjuah and he expects the S&P to fall by 20-to-25-percent over the next three months.  Janjuah expects the dollar to be a big beneficiary if the S&P 500 does fall as sharply as he predicts.

He says the  coming major risk-off phase will be dollar bullish and bullish for core government bonds; which means 10-year bonds in the US, Germany and the UK could hit just one percent. He predicts the Federal Reserve will not provide more quantitative easing until December. Those hoping for a big bazooka from the Fed or the European Central Bank before December will be disappointed.

Janjuah says he expects “Mr Bernanke to disappoint markets at Jackson Hole next week, and also because we are confident that markets will soon discover that neither the ECB nor Eurozone politicians will actually be able to deliver on their promises. For now we are happy to risk 30 S&P points against us, in order to potentially pick up 300 S&P points in our favor.”

Sure enough, the Euro-zone seems to be in disarray. The ECB is discouraging  speculation that it might act far more aggressively to contain borrowing costs for countries like Spain. The ECB dismissed a report in Der Spiegel that they would buy up bonds in whatever quantity was necessary. Today, The Daily Telegraph, a British newspaper, supported that Der Spiegel report that the ECB planned to put a hard cap on Spanish and Italian bond yields. So, the European markets are now trading on rumors and speculation that the ECB will make a big bond buying commitment. 

Yields at a Spanish short-term debt auction fell, while Europe's  volatility index  hit a one-month low, signaling a steady rise in investors' appetite for risk. Spanish 10-year bond yields fell 10 basis points to 6.24 percent, with shorter-dated yields down as much 16 basis points. Italian bond yields also dropped.  Portuguese 10-year yields fell 30 basis points on the day to 9.40 percent, the lowest level since April 20. 

Euro financial markets have been running on hopes that the new urgency in Europe will overcome the crisis. Greek Prime Minister Antonis Samaras will meet German Chancellor Angela Merkel, French President Francois Hollande and Eurogroup chief Jean-Claude Juncker in the coming days to try to secure more help from the European Union, International Monetary Fund and ECB, even though Greece has fallen behind on its debt-cut targets. Samaras is hoping the Troika will cut some slack, it probably won't happen but if Greece can hold out hope, then there is hope for the rest of the continent.

The euro climbed 1 percent to $1.24, and the dollar index slipped to 81.92; for now the chart of the US Dollar looks to be rolling over to the downside.  This sparked a bit of a commodity wide rally today as speculators ran to hard assets. Precious metals moved higher. Corn and soybeans posted new record high closes. 

The ECB still refuses to confirm the newspaper reports but it is clear that the ECB damn well better step up big, or there will be massive problems, and the time-line is about  3 weeks. 

Central banks around the world have maintained near-zero short-term interest rates for many years now, trying to save the world. The Federal Reserve has bought up billions of dollars worth of government and mortgage bonds and they hold them on its on balance sheet, in order to hold down long term interest rates.  You can argue the Fed has helped but these actions are not without negative side effects. Central bank intervention can give investors headaches and it also  causes markets to behave in strange ways.

And lately, there has been some strange behavior in the junk bond market. Junk bonds are issued by companies that either have relatively risky business plans, or that already carry a large amount of debt, or they are just generally considered a credit risk. And because of the relative riskiness of loaning money to them, these companies typically have to pay 3% or 4% more in interest than the US government does to borrow for the same amount of time.

With interest rates so low for so long, investors have been increasingly willing to risk their money on junk bonds in order to get that extra yield. And as new money starts pouring into high-yield bonds, some are starting to worry that the junk bond market has reached bubble-like levels. Maybe investors piling into junk bonds for the attractive yields should worry about the fact that the default rate has been creeping up lately. 
High yields are tempting, especially compared to what government bonds are paying, but the yields are supposed to compensate for risk. Investors who are only paying attention to the spread aren’t accounting for the fact that the junk bonds are paying 0.5% less interest than they were five years ago. And, of course, the world hasn’t gotten any less risky over the past 5 years. 

So is this possible junk-bond bubble a threat to the broader economy? Probably not. The bubble might not pop, but it is another indication of the unintended consequences of having the Fed run monetary policy, inducing investors to take bigger than normal risks; maybe the Fed can control any fall-out or maybe when any bubble pops it makes a mess; a mess for junk bond investors, a mess for companies looking for capital. 

Wikileaks and Free Speech NY Times
I don't know where Julian Assange came from; I know he's an Australian citizen, but he seemed to appear on the international scene out of nowhere. His name generates more hits on search engines than the British Prime Minister. The news media in the Untied States does a poor job of informing Americans. Wikileaks, the website created by Assange, has created a unique approach to journalism. The site disseminates raw data, without interpretation or editorial opinion, just raw data in the form of cables, memos, dispatches, videos, and such. Sometimes some information has been redacted to protect people in dangerous situations; the idea was not to expose a US spy or undercover agent; still the data released has proven quite embarrassing for some people in positions of power. 

Julian Assange has been granted asylum by Ecuador and he is now living in the Ecuadorean Embassy in London. Ecuador has acted in accordance with important principles of international human rights. Indeed, nothing could demonstrate the appropriateness of Ecuador's action more than the British government's threat to violate a sacrosanct principle of diplomatic relations and invade the embassy to arrest Mr. Assange.

Since WikiLeaks' founding, it has revealed the "Collateral Murder" video footage that shows the seemingly indiscriminate killing of Baghdad civilians by a US Apache attack helicopter; United States collusion with Yemen's dictatorship to conceal our responsibility for bombing strikes there; the Obama administration's pressure on other nations not to prosecute Bush-era officials for torture; and much more.

Predictably, the response from those who would prefer that Americans remain in the dark has been ferocious. Top elected leaders from both parties have called Mr. Assange a "high-tech terrorist." And thre are demands that he be prosecuted under the Espionage Act. Most Americans, Britons and Swedes are unaware that Sweden has not formally charged Mr. Assange with any crime. Rather, it has issued a warrant for his arrest to question him about allegations of sexual assault in 2010.

All such allegations must be thoroughly investigated before Assange moves to a country that might put him beyond the reach of the Swedish justice system. And if Assange is guilty he deserves no quarter.  But it is the British and Swedish governments that stand in the way of an investigation, not Assange.

Swedish authorities have traveled to other countries to conduct interrogations when needed, and the WikiLeaks founder has made clear his willingness to be questioned in London. The Ecuadorean government made a direct offer to Sweden to allow Assange to be interviewed within Ecuador's embassy. In both instances, Sweden refused.

Mr. Assange has also committed to traveling to Sweden immediately if the Swedish government pledges that it will not extradite him to the United States. Swedish officials have rejected this proposal; so did the Brits.  So, it is obvious that the real agenda is to get Assange to Sweden, where certain treaties would make it easy to extradite him to the US. Mr. Assange has every reason to fear such an outcome. WikiLeaks itself has published e-mails from Stratfor, a private intelligence corporation, which state that a grand jury has already returned a sealed indictment of Mr. Assange. The charge would likely be espionage, a capital offense.

If Mr. Assange is extradited to the United States, the consequences will reverberate for years around the world. Mr. Assange is not an American citizen, and none of his actions have taken place on American soil. If the United States can prosecute a journalist in these circumstances, the governments of Russia or China could, by the same logic, demand that foreign reporters anywhere on earth be extradited for violating their laws. The setting of such a precedent should deeply concern everyone, admirers of WikiLeaks or not. On Sunday, Assange took to a microphone from a balcony of the Ecuadoran embassy and proclaimed the US risks  “dragging us all into a dark, repressive world in which journalists live under fear of prosecution,” 



There is an interesting aside, Wikileaks published more than 250,000 US Embassy cables that highlighted embarrassing back room dealings. Some of this information might have resulted in the Arab Spring, but Wikileaks really ran into trouble when Assange threatened to release hundreds of thousands of documents that he said would expose major banks wrongdoing, and would almost certainly result in the ruin of more than one major US bank. Shortly thereafter, all sources of funding for Wikileaks were shut down, and Assange was arrested. We still haven't seen the bank document dump from Wikileaks. 

Tuesday, June 19, 2012 - There is No Escape for the Fed - by Sinclair Noe

06192012 Script


DOW + 95 = 12,837
SPX + 13 = 1357
NAS + 34 = 2929
10 YR YLD +.04 = 1.62%
OIL - .12 = 84.23
GOLD – 10.80 = 1618.90
SILV - .32 = 28.52
PLAT – 2.00 = 1487.00


The Federal Reserve FOMC is meeting today and tomorrow to determine monetary policy for the next few weeks. Here is what they will probably say tomorrow. They won't lower interest rates; interest rates are at zero; interest rates are actually already negative when you consider the effects of inflation. Operation Twist is scheduled to expire in about two weeks. The idea behind Operation Twist is that the Fed sells shorter-term securities and buys longer-term securities with the goal of reducing long-term interest rates to encourage borrowing and spending. The yield on the 10-year note is 1.62%, so rates are pretty low even though the Twist hasn't been able to encourage a big round of borrowing and spending. Low interest rates alone have not been enough to create demand. Operation Twist is the Fed pushing on a string – which is to say, supply side economics is a crock.


Here's the conundrum for the Fed – how do they exit Operation Twist without creating a problem, possibly unwinding those nice, ultra-low interest rates? The Fed might announce a limited extension of the Twist, maybe to September or they might just offer a soft extension – saying something like: “we will monitor long-term rates and stand ready to maintain stability”. 


As far as QE3 – not likely. Europe hasn't collapsed, not today; but due to the possibility the Euro economy might implode in the not too distant future, the Fed will keep its powder dry. That's not totally accurate. Just like Operation Twist, QE 1&2 never really included an exit plan. The truth is that the Fed has continued to be the biggest buyer of Treasuries, they are propping up the market, they are pushing on a string and again confirming the fallacy of supply side economics. QE never went away, it just hasn't been effective and the Fed let it expire (in name only) while continuing to maintain an accommodative policy and this way they didn't have to answer questions about why QE was so ineffective. 


Another option for the Fed tomorrow is to announce they will maintain the ZIRP even longer than previously announced. It is already scheduled to last until 2014, they might say it should remain in place until 2015 or until such time as an asteroid destroys life on earth as we know it. Here is the bottom line – the Fed can't exit their easy money policy; if they try to exit, it would get ugly; so, tomorrow they will say something which will indicate they are not trying to exit, and the markets will be somewhere between mild disappointment and moderate pleasure. 


The payrolls report shows job growth has averaged 96,000 in the past three months, well below the 252,000 rate in the three months before that.


The payrolls number is the net change between job additions and separations; the difference between hirings and firings. The Job Openings and Labor Turnover Survey (Jolts) provides some details on the labor markets. The April report  shows the spring payroll weakness reflects a very steep drop in hiring, not a rise in job losses.  According to the Jolts report, new hires fell to 4.18 million in April, down from 4.34 million in March and from 4.44 million in February which had been the highest hire number since October 2008.


Companies also cut back on looking for workers. April job openings fell to 3.42 million, the lowest number in five months.  Job separations actually fell in April, to 4.09 million from 4.17 million in March. Separations including layoffs, firings, quits and retirements have stabilized around 4.1 million over the past year.


Any way you look at it, the Federal Reserve has failed miserably in its mandate to achieve maximum employment.


Meanwhile, Greece is trying to form a coalition government and it looks like the 3 major parties are getting closer. The conservative New Democracy party won the election, narrowly, but the reality is that all the political parties want to renegotiate the bailout because a monkey with a calculator could figure out that the Greeks are getting screwed on the deal. And there seems to be some wiggle room. An IMF spokesperson said: “These economic programs are not static. They do get adjusted.” Germany has been inflexible on allowing any compromise. Then, late this afternoon we heard reports from the G-20 meeting in Mexico that Germany was going to end its opposition to the euro zone’s bailout funds buying the sovereign debt of troubled European nations. The stories have not been confirmed, but who knows? Maybe Merkel discovered the great Mexican invention, the margarita, and maybe she's getting a little loose in Los Cabos.


While this was going on, British Prime Minister David Cameron sparked a war of words with French officials by saying he would roll out the red carpet for French firms if new French President Francois Hollande raised taxes as planned on the wealthy. So it isn't total unanimity.


The G-20 is expected to issue a communique stating that the euro-zone will issue a jobs and growth plan and they will take concrete steps toward a more integrated approach to bank supervision, resolution, recapitalization and deposit insurance. The communique appears aimed, in part, at easing market worries about Spain.


If yesterday was all about Greece, today belongs to Spain. The euro strengthened 0.6 percent to $1.2647 while the yield on Spain's ten-year note dropped 11 basis points to 7.05 percent, after topping 7 percent yesterday for the first time in the history of the euro. The 7% threshold is the level that knocked other smaller countries like Greece and Ireland over the edge. Spain will need a lot more than 100 billion-euro to recapitalize its banks. And even though the bailout is too small to be effective it is still a big number, big enough to add to Spain's sovereign debt, pushing real debt to GDP to more than 146%. This means Spain now has a banking problem and a sovereign debt problem. They are not going to grow their way out of this problem. There doesn't appear to be a bailout plan that could pull Spain out of its downward spiral. It is probably just a matter of time. Of course we could be looking at another year of Spanish misery, and a lot can happen in 12 months, if they can last that long, but the situation doesn't look good. Spain is big enough to wipe out the EU.


There is a great photo of the doors of the Bank of Spain; someone has put up multiple stickers and post-it notes that read: “this is not a crisis, it is a scam.”


Let's look at some quotes that tell the Euro story:
"Spain is not Greece." Elena Salgado, Spanish Finance minister, February, 2010.


"Portugal is not Greece." The Economist, April 2010.


"Greece is not Ireland." George Papaconstantinou, Greek Finance minister, November, 2010.


"Spain is neither Ireland nor Portugal." Elena Salgado, Spanish Finance minister, November 2010.


"Ireland is not in ‘Greek Territory.’" Irish Finance Minister Brian Lenihan. November 2010.


"Neither Spain nor Portugal is Ireland." Angel Gurria, Secretary-general OECD, November, 2010.


"Italy is not Spain” – Ed Parker, Fitch MD, 12 June 2012


"Spain is not Uganda" Spanish PM Rajoy. June, 2012


"Uganda does not want to be Spain" (Ugandan foreign minister) June 13th 2012






Google has put out its latest "transparency report." It includes details of all the "takedown requests" the company received from governments around the world; these are basically government requests to pull something off the internet.  Leading the pack: The government of India, but that's a little misleading because China simply blocked Google. Sometimes Google complies with the takedown request, sometimes they don't.


Wikileaks founder Julian Assange is seeking political asylum at Ecuador's London embassy. Last week the UK's Supreme Court dismissed Mr Assange's bid to reopen an appeal against extradition to Sweden over alleged sex crimes he denies. The Supreme Court gave him until 28 June before extradition proceedings can start.


He says the allegations are politically-motivated. Swedish prosecutors want to question him over allegations of rape and sexual assault made by two female former Wikileaks volunteers in mid-2010 but have not filed any charges. Mr Assange, whose Wikileaks website has published a mass of leaked diplomatic cables that embarrassed several governments and international businesses, claims the sex was consensual.


According to a State Department report, more than 42,000 adults and children were found in forced prostitution, labor, slavery or armed conflict in 2011, a US government report has found. Some 9,000 more victims were identified around the world than in 2010.  But the number is just a fraction of the estimated 800,000 people trafficked across borders every year.


Describing the report as a "clear and honest assessment", US Secretary of State Hillary Clinton said: "The end of legal slavery in the United States and around the world has not meant the end of slavery."


Where the trade in persons was once labelled as human trafficking, Mrs Clinton said: "I think labelling this for what it is - slavery - has brought it to another dimension."


The stories of those enslaved "remind us of what kind of inhumane treatment we are still capable of as human beings. They are living, breathing reminders that the war against slavery remains unfinished."


Now, let's put that in perspective; JC Penney shares fell 8.5% to close at $22.25 one day after Michael Francis, the company's CEO announced a very abrupt resignation. The stock is down nearly 37% year to date. Store traffic fell as Penney shifted toward everyday low pricing and away from marked sales days. Francis walks with about $10 million for nine months work.