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
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.
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.
