Tuesday, July 22, 2014 - Curb Your Enthusiasm

Curb Your Enthusiasm

by Sinclair Noe

DOW + 61 = 17,113
SPX + 9 = 1983
NAS + 31 = 4456
10 YR YLD - .01 = 2.46%
OIL - .17 = 104.42
GOLD – 4.70 = 1308.50
SILV + .04 = 21.07

We start with a couple of economic reports. The National Association of Realtors reports existing home sales were up 2.6% in June to a seasonally adjusted rate of 5.04 million, compared to 4.91 million in May. Sales in June were 2.6% higher than last month, but were 2.3% below the June 2013 rate. Total inventory rose 2.2% in June to 2.3 million existing homes for sale; unsold inventory is up 6.5% from a year ago.

At June’s pace of sales, there was a 5.5 month supply of homes for sale. The Realtors’ group considers a 6-month supply to be a balanced market. Higher supplies favor buyers and lower supplies favor sellers. The Federal Housing Finance Agency says home prices in May rose 0.4% from the prior month and were 5.5% above their level of May 2013. Distressed sales accounted for just 11% of sales in June, down from 15% last year, 25% in 2012, and 30% in 2011. Fewer distressed sales probably explains why there were fewer sales than June of last year.

The Consumer Price Index, or CPI, measures inflation at the retail level; the CPI increased 0.3% in June. The core CPI looks at prices excluding food and energy, which is important for people who don’t eat food or drive cars or use electricity; core CPI was up 0.1% in June. On a year over year basis, CPI is up 2.1%, and the core CPI is up 1.9%. The big driver for the increase in June was higher prices for gasoline.

In earnings reports:

Quarterly profit at McDonald's fell more than expected. Second quarter net income fell almost 1% to $1.3 billion, or $1.40 per share. Sales at McDonald’s restaurants in the US dropped for a third straight quarter.

Coca Cola’s 2Q net income dropped to $2.6 billion from $2.68 billion a year earlier.

Verizon reported second quarter earnings nearly doubled, but it was a confusing report because Verizon paid for Vodaphone shareholders in the quarter, plus they sold some of their wireless spectrum to T-Mobile; cutting through the clutter, Verizon added 1.4 million devices; Verizon added three tablets for every new smartphone. Earnings were just a smidge above expectations.

Comcast reported net income of almost $2 billion for the second quarter, with total revenue of $16.8 billion, up 3.5% from the same period last year. The revenue increase came from high speed internet service. Comcast lost cable video customers, as more people bypass cable and satellite subscriptions in favor of cheaper streaming alternatives.

Credit Suisse reported a second quarter loss of $779 million, the largest loss since 2008; reflecting the charge of $2.6 billion related to the settlement with US law enforcement for a guilty plea to conspiring to aid tax evasion in helping American customers hide money in Swiss accounts. Or another way to look at it, they were one criminal conviction away from a $1 billion quarterly profit. Credit Suisse also announced it would exit the commodities trading business.

Meanwhile, it looks like bond traders are exiting the bond trading business. Trading in US government bonds has dropped 25% in the past few weeks compared to the same time period a year ago. Since the end of the second quarter, trading in investment grade bonds has dropped 17% and trading in junk bonds has dropped 8%.

Last week, Fed Chair Janet Yellen talked about overvaluation in the biotech and social media sectors. One of the most common measures of value is the P/E, or price to earnings ratio; there are certainly other measures of value, but PE is common. Generally, a low PE can point toward value, while a high PE might indicate overvaluation, or even an unprofitable company. Currently the S&P 500 trades at 16.1 times forward 12-month consensus earnings per share. So, you might think a PE of 165 would mean a stock was extremely overvalued, ready to crash; or not. In September 2003, Apple had a PE of 165; since then it has gained about 6,000%.

After the close of trade today, Apple posted fiscal third quarter results. Revenue came in at $37.4 billion versus $38 billion expected; EPS was $1.28 versus $1.23 expected; iPhone sales were on track; iPad sales were a little weak; Mac sales were a little better than expected. Apple posted profit of $7.75 billion, up from $6.9 billion in the year-ago period. Apple announced a new iPhone 6, not yet available, but ready to swamp stores before the end of the year; it will have a bigger screen. Curb your enthusiasm.

Also after the close, Microsoft posted profit of $4.6 billion, or 55 cents a share, on revenue of $23.4 billion. During the year-ago period, the world's largest software company earned $4.97 billion, or 59 cents a share, on $19.9 billion in sales. So, sales were up, profit was a slight miss, due to the Nokia acquisition. Bing search ad revenue is up 40%, and Bing now has about 20% of the market share for search engines. Microsoft is big in the cloud, where revenue is up almost 150%, topping 4 billion.

Hedge fund manager Bill Ackman went on CNBC yesterday and promised he would deliver the death blow against Herbalife. Ackman has been shorting the stock for about a year, a $1 billion bet the company will crash. Then he delivered a 3 hour diatribe with 250 slides in his PowerPoint presentation, alleging that Herbalife is not just a multi-level marketing nutritional club, it is a pyramid scheme preying on minorities, and the biggest fraud since Enron. Ackman didn’t present a great deal of evidence. Today the stock was up 15%, for no apparent reason, other than surviving an Ackman death blow.

There were two rulings from two federal appeals court panels on Obamacare today. The question was whether the government could subsidize health insurance premiums for people in states that use the federal insurance exchange; 36 states use the federal exchange, while the other states set up their own state exchanges. This goes back to wording in the original law that says subsidies can be applied to state exchanges.

 The United States Court of Appeals for the District of Columbia Circuit said that the government could not subsidize insurance for people in states that use the federal exchange. That decision could potentially cut off financial assistance for more than 4.5 million people who were found eligible for subsidized insurance in the federal exchange, or marketplace.

A couple of hours later, the United States Court of Appeals for the Fourth Circuit, in Richmond, upheld the subsidies, saying that a rule issued by the Internal Revenue Service was “a permissible exercise of the agency’s discretion.”

For now, nothing changes, with the exception that there will be many more billable hours for the attorneys.

Bloomberg reports that regulators are ready to label Metlife a potential threat to the financial system, subjecting the insurer to oversight by the Federal Reserve. MetLife, the biggest US life insurer, could be subjected to stricter capital, leverage and liquidity requirements as a result of Fed supervision. A decision by the Financial Stability Oversight Council may come as early as July 31, and MetLife would have 30 days to request a hearing before the FSOC to contest the decision.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is now 4 years old, even though it isn’t really in effect; just 52% of the rules mandated under Dodd-Frank have been finalized by regulators; Another 23% have been proposed but they’re still working out details, and regulators haven’t even gotten around to 24% of the rules. A recent report by consumer watchdog Public Citizen called out the Securities and Exchange Commission as a particularly egregious delayer, noting that it had pushed back the deadlines for 13 of the 23 rules it was supposed to finalize this year.

City workers and retired city workers in Detroit have agreed to pension cuts to help bailout the city from bankruptcy. General retirees would get a 4.5% pension cut and lose annual inflation adjustments. They accepted the changes with 73% of ballots in favor. Support for the pension changes triggers an extraordinary $816 million bailout from the state of Michigan, foundations and the Detroit Institute of Arts. The money would prevent the sale of city-owned art and avoid deeper pension cuts.

Most people travel to or from Israel by air, and the major airport, really the only airport is Ben Gurion in Tel Aviv; last year, 14 million people went through Ben Gurion Airport, in a country with a population of 8 million.  Yesterday a rocket from Gaza landed about one mile from the airport; we don’t have further details on that rocket; it didn’t hit the airport; it was a mile away. When news spread, Delta diverted a flight to Paris. United airlines cancelled flights. The Federal Aviation Administration banned all US passenger and cargo flights to and from Tel Aviv for at least the next 24 hours. European airlines cancelled flight to Israel. The possibility of a passenger jet being shot down over a war zone is a very realistic and fresh memory.

US and United Nations diplomats are in Israel, trying to broker a ceasefire of some sort. Israel continues to pound targets across the Gaza Strip. It does not appear a ceasefire is near. If there is any light at the end of the tunnel, the tunnel will be destroyed.

The European Union today threatened Russia with harsher sanctions if Russia doesn’t cooperate in the investigation of the downing of the Malaysian flight 17 and if Russia doesn’t stop sending weapons to Russian backed separatists in Ukraine. But it was just a threat, and they’ll get together later in the week to draft proposals for sanctions.

Thursday, July 17, 2914 - Unleash the Hounds of War

Unleash the Hounds of War
by Sinclair Noe

DOW – 161 = 16,976
SPX – 23 = 1958
NAS – 62 = 4363
10 YR YLD - .06 = 2.47
OIL + 2.55 = 103.75
GOLD + 18.40 = 1319.20
SILV + .37 = 21.26

A Malaysian Airlines passenger jet, Flight 17, a Boeing 777, has crashed near the Ukrainian-Russian border; all 295 passengers are dead. US intelligence officials say the jetliner was shot out of the sky by a surface to air missile; they could not confirm who fired on the plane but it is believed the missile was launched by separatists in Ukraine or by Russian forces positioned across the border from the crash site.

Yes, more than four months ago, another Malaysia Airlines plane, Flight 370 from Kuala Lumpur to Beijing, disappeared with 239 people on board, and that plane remains lost, despite ongoing searches in the Indian Ocean. Flight 17 is believed to have had 280 passengers and 15 crew. Early reports indicate the passengers included 55 Dutch, 23 Americans, and 9 Britons.

The crash today involved a flight from Amsterdam to Kuala Lampur, but the flight went down in the Donetsk region of eastern Ukraine where pro-Russian separatists have been fighting Ukrainian forces for several months. The separatists denied responsibility. The separatists were quoted by the Russian news agency Interfax as saying that they had found the “black box” flight recorder. Other Russian reports said the rebels planned to call a three-day cease-fire to allow for an investigation.

Aviation authorities knew this was a dangerous area prior to today’s crash. Three months ago, the FAA prohibited US airlines and US pilots from flying over parts of Ukraine. Today several airlines re-routed flights. Ukrainian military planes have been shot down in the conflict in eastern Ukraine, including earlier this week, but the crash Thursday was the first downing of a commercial airliner.

Ukraine’s recently elected president, Petro Poroshenko, called it an act of terrorism. Russian president Putin says Ukraine is responsible for the crash, apparently because they have not maintained peace in the area and have not been in control of their airspace. Shooting down a 777 at 33,000 feet would require fairly sophisticated military equipment.

Any sign or Ukrainian, Russian, or separatist involvement in the downing of a civilian airliner could lead to an escalation of tensions in the region. Already, there is a recording of an alleged phone conversation between a leader of the separatist movement in Donetsk and a Russian military intelligence officer, where the Russian officer says they have shot down a plane. No groups are claiming responsibility.

If it turns out that the separatists shot down the passenger jet, the incident almost certainly will become a tipping point in marking them as terrorists and not mere rebels. To the degree he continues to support them, Putin himself risks shifting to dangerous new diplomatic terrain and harsh new sanctions by a West united against him to a degree it has been at no time since the Cold War. He will be seen as backing an indefensible rogue element. This might convince doubters in the EU to move forward with tougher sanctions against Russia and it could lead to tougher US sanctions. Russia’s deniability of direct support for the rebels would be demolished, making Putin’s international position more difficult.

Just yesterday President Obama imposed a new round of sanctions against Russia, targeting some of the largest Russian companies in finance, energy, and the defense industries. The announcement reflected a decision by Obama to take more stringent steps than those taken by the United States’ European allies, which have far deeper economic ties to Russia. Meeting in Brussels, leaders of the European Union refused to match the American measures and instead adopted a more tempered plan that blocks new development loans to Russia and threatens to target more Russian individuals.

Washington imposed sanctions on Russia’s largest oil producer Rosneft, its second largest gas producer Novatek, its third largest bank Gazprombank, and also 8 arms manufacturers, and a few others. Yesterday, Moscow denounced the sanctions as primitive revenge for events in Ukraine and pledged to retaliate. Also yesterday, Ukraine officials accused Russian forces of shooting down a Ukrainian military jet in the Donetsk region. Obama said Wednesday that the new sanctions were largely aimed at punishing Russia for not preventing the flow of weapons into Ukraine to supply pro-Russia rebels seeking independence from Ukraine.

At this point, nobody really knows who did what and for what reason. Civilian planes have been shot down by various militaries in the past and it did not necessarily result in war, however, the conflict in Ukraine has just escalated significantly.

Meanwhile, Israel moved ground troops into Gaza today. The ground offensive includes heavy artillery and naval shelling and helicopter fire and tanks. For the past 10 days Gaza militants and Israel have been firing rockets at each other. The Gaza militants have reportedly fired more than 1,300 rockets into Israel, but Israel has a high tech defense system called the Iron Dome, and so the bombing has only resulted in one Israeli death. The Israeli rocket attack on Gaza has been much more precise, even to the point where the Israelis would phone ahead and tell civilians they had a minute or so to vacate a building before a bombing. Palestinian health officials say more than 230 Palestinians have been killed in Israeli air and naval strikes.

Before dawn on Thursday, about a dozen Palestinian fighters tunneled under the border, emerging near an Israeli community. At least one was killed when Israeli aircraft bombed the group. The United Nations said Thursday that it had discovered 20 rockets hidden in a vacant school in Gaza during a regular inspection on Wednesday. Earlier on Thursday, Palestinian, Egyptian, Israeli and American officials said intense discussions were underway on terms for a cease-fire. Israel had accepted an Egyptian proposal for a cease-fire that was rejected by Hamas, which continued to fire rockets at Israel.

Palestinian residents and journalists in Gaza reported heavy artillery fire from ground troops in the north and from Israeli naval gunboats stationed near Gaza’s port, as well as a continuing air assault. Residents in the northern Gaza Strip said tanks were moving in. The Israeli strikes hit a range of targets, including a rehabilitation hospital and earlier killed four young children as they played on a roof in eastern Gaza City. At the same time, scores of rockets from Gaza continued to stream into cities all over central and southern Israel.

On Wall Street, the geopolitical problems made folks jittery. The VIX was up 3.54 to 14.54, which represents a 32% increase. We saw oil and bonds and gold jump higher in what looks  like a safe haven move.

It is still earnings season, and let’s touch on a few of the big reports today. Google reported a second-quarter profit of $3.4 billion, or $4.99 a share, compared with a profit of $3.2 billion, or $4.77 a share, for the year-earlier period. Revenue was $12.6 billion, up from $11.1 billion in the year-earlier period. Google missed expectations on earnings but beat revenue projections. Shares were down in after-hours trade.

Just the opposite for Big Blue; IBM said its second-quarter earnings climbed 28%, helped by its restructuring moves, while IBM reported its ninth consecutive quarter of lower revenue.

As expected, Microsoft announce massive layoffs today, what was unexpected was just how massive, 18,000 jobs will be cut, 15% of the workforce; 12,500 coming from newly acquired Nokia. Just after Microsoft bought Nokia, Nokia started making Android-based phones. This was a surprise since Microsoft makes its own mobile operating system — Windows Phone. The new Microsoft CEO Satya Nadella had no desire to continue with Android. He wants Microsoft's operating system to be the company's only mobile operating system.

A threatened strike on New York's Long Island Rail Road was averted on Thursday when the transit authority and labor unions reached a tentative contract deal.

Truckers will be back on the job Monday at the ports of Los Angeles and Long Beach, ending a five-day strike that disrupted cargo flow. The truckers voted to end their work stoppage against three companies late Friday after the firms promised no retaliation. The truckers say they have been unfairly classified as independent contractors rather than employees, allowing the companies to avoid labor laws and charge the drivers for fuel, maintenance and other fees. The drivers walked off the job last Monday in the fourth such protest this year and dockworkers refused to cross the picket lines.

Coincident to the plane crash and the story of Russian sanctions, Bloomberg Businessweek reports today on a nearly 4 year old story dealing with a different type of attack by Russia.  Reportedly, the Russians hacked into the Nasdaq in October 2010. And this was not just some silly hackers putting a virus on your computer, this was an attack on the code of a major financial institution, a digitized weapon, orchestrated by the Russian government.

It isn’t the first time a country has launched a cyber-attack against another country. The US was probably the first, with deployment of the Stuxnet worm, which switched off the safety mechanisms at Iran’s uranium processing facility in 2010. The October alert prompted the involvement of the National Security Agency, and just into 2011, the NSA concluded there was a significant danger.

While the Nasdaq hack was successfully disrupted, it revealed how vulnerable financial exchanges are to digital assault; as well as banks, chemical refineries, water plants, and electric utilities. One official who experienced the event firsthand says he thought the attack would change everything, that it would force the US to get serious about preparing for a new era of conflict by computer. He was wrong.

In fact the investigation revealed that Nasdaq networks had been infected for quite some time, by a variety of sources. The rules of cyberwarfare are still being written, and it may be that the deployment of attack code is an act of war as destructive as the disabling of any real infrastructure. Just think of the possibilities if the Nasdaq were to really crash, completely and totally, and if everything run through the exchange was deleted.

Wednesday, July 16, 2014 - The Color of the Day is Beige

The Color of the Day is Beige

by Sinclair Noe

DOW + 77 = 17,138
SPX + 8 = 1981
NAS + 9 = 4425
10 YR YLD - .01 = 2.53%
OIL + 1.38 = 101.34
GOLD + 6.20 = 1300.80
SILV + .07 = 20.89

A record high close for the Dow; the 15^th record high close of the year for the Dow. The S&P 500 did not take out the old high from July 3^rd. We have a few economic reports to cover, plus Fed Chair Yellen continued testimony on Capitol Hill, and lots more.

Industrial production increased 0.2% in June to 103.9. This is 24.1% above the recession low, and 3.1% above the pre-recession peak. For the second quarter, industrial production advanced at an annual rate of 5.5%; so the quarter was good but the month of June was less than expected.

The Commerce Department reports producer prices increased by a seasonally adjusted 0.4% last month, above forecasts for a 0.2% gain, after falling 0.2% in May. Year-over-year, the producer price index rose at an annualized rate of 1.9% in June. The core rate, stripping out food and energy prices, was up 0.2%.

This afternoon, the Federal Reserve released its Beige Book, a collection of reports from the 12 Fed districts. The general consensus is that economic growth was moderate to modest. Most Districts were optimistic about the outlook for growth. Consumer spending increased in every district. Retail sales grew modestly in most districts. Auto sales, which have been on the upswing for more than a year, continued to stand out as particularly brisk support for the economy, but broader retail sales were more subdued. Labor market conditions continue to improve with all districts reporting slight to moderate employment growth. Several districts reported "some difficulty" finding staff for skilled positions, however there doesn’t seem to be any pressure on wages. Here’s a hint, if you can’t find skilled workers, try offering higher wages. The report gave a mixed appraisal of the US housing market. Conditions "varied" across the country, with some regions suffering from weak demand.

Fed Chair Janet Yellen returned to Capitol Hill to deliver her second day of Humphrey Hawkins testimony. The prepared remarks were the same as yesterday, then they open up for a Q&A. Some of the key points from today’s hearing:

Yellen said she is optimistic about the economy, “We had a very surprising negative growth in the first quarter, which is a number that in a way doesn't seem consistent with the underlining momentum in the economy and many indicators of spending and production. And I do think the economy is recovering and that growth is picking up and that we have sufficient growth to support continued improvement in the labor market."

Yellen said threats to financial stability are moderate “and not a very high level.” She again weighed in on valuations, saying: "Some things may be on the high side and there may be some pockets where we see valuations becoming very stretched but not generally. The use of leverage is not broad-based, it hasn't increased, and credit growth is not at alarming levels by any means."

Yellen did not single out specific sectors today. Yesterday she said biotech and social media looked a bit over-valued. That had some talking heads complaining; the funniest rant came from Jim Cramer, who said: “Next time, Fed Chief Yellen, it might pay to point out that there are plenty of cheap stocks out there, too. At least that way you can help us make money, not just lose it.” Maybe someone can tell Cramer the Fed is not in business to help him make stock picks, no matter how much help he needs. The Fed has been incredibly accommodative to Wall Street, and Cramer still complains. The Fed doesn’t issue a price target on Twitter. But if you read between the lines, Yellen was likely saying that there are no plans to raise the margin requirements on brokers.

There were some questions about a bill in the House that would require the Fed to follow a mathematical rule for when to raise or lower interest rates. Yellen didn’t like that idea; she said there is no magic formula for raising rates. Yellen again expressed confidence the Fed can exit when the time comes. The Fed has a variety of tools it can use to raise interest rates. In the distant future, the Fed’s balance sheet will shrink in size.

The best line from the Fed did not come from Yellen; Dallas Fed President Richard Fisher was speaking today at the University of Southern California. Fisher said ending asset purchases this fall isn’t enough; the Fed should start to taper the reinvestment of maturing securities in October. Fisher said: "Monetary policy is a bit like duck hunting. If you want to bag a mallard, you don't aim where the bird is at present, you aim ahead of its flight pattern. To me, the flight pattern of the economy is clearly toward increasing employment and inflation that will sooner than expected pierce through the tolerance level of 2%."

Meanwhile, it’s earnings reporting season. Bank of America said profit declined 43% as it spent $4 billion to cover litigation costs, including a mortgage settlement with AIG. There seems to be a trend developing in banks’ earnings reports; they are making money on investment banking and some other areas, but results are weak for mortgage originations, and they are setting aside big chunks of earnings to pay for legal settlements.

Bank of America and the Department of Justice are reportedly negotiating a mortgage securities settlement, which could cost the bank around $13 billion.

Intel was up more than 9% after a very strong earnings report after the close yesterday. Yahoo fell today following weaker than expected earnings. EBay posted lower than expected 2Q results and even though sales were up this month, EBay cut its outlook for the third quarter.

Merger and acquisition activity has been wild lately. Today’s M&A stories revolved around Rupert Murdoch’s plan to buy Time Warner for $85 a share, or about $75 billion. Time Warner says it isn’t interested in exploring a sale, but if they sell, there are other potential suitors. General Electric is in talks to sell its household appliances business; that’s a part of the company that’s been around since 1905, when they invented the electric toaster. Yesterday, the number 2 tobacco company, Reynolds American agreed to buy the number 3 tobacco company, Lorillard for $25 billion.

One of the motivating factors behind mergers lately has been something called inversion, basically merging with an overseas company to avoid corporate taxes in the US. Members of the House and Senate have made proposals to curb the inversion trend in recent months, and the president included a provision in the budget he presented to Congress this year that would have effectively banned the move. But none of these efforts have yet gained traction. Today, Treasury Secretary Jack Lew called on Congress to enact legislation to halt inversion, effective immediately and retroactive to May.  Making any new legislation retroactive through May could disrupt several megadeals that have already been struck, such as the Medtronics deal.

Global M&A volume in the first half was the highest since 2007. One of the side effects of the M&A frenzy back in 2007-2008 was the frenzy of pink slips that followed. Deals are sold to investors on the basis of “creating value” with terms like “efficiencies” and “synergies”; code words for cost cutting and mass-layoffs. Acquisitions, layoffs, and cost-cutting are the simplest things to do for a CEO, as opposed to inventing things and boosting sales organically, which is hard. Analysts love M&A, investors too, and of course the investment bankers promote it as the best thing since sliced bread, or maybe electric toasters.

Last year, Microsoft acquired Nokia’s mobile phone business and promised $600 million in cost saving and efficiencies and synergies. Now, Microsoft employees are bracing for up to 12,000 layoffs, the biggest ever for Microsoft. The layoff news will come before the company holds its post-earnings conference call after the market closes July 22.

Leaders of the five BRICS nations agreed on the structure of a $50 billion development bank by granting China its headquarters and India its first rotating presidency. The leaders also formalized the creation of a $100 billion currency exchange reserve, which member states can tap in case of balance of payment crises. Both initiatives, which require legislative approval, are designed to provide an alternative to financing from the International Monetary Fund and the World Bank, where BRICS countries have been seeking more say.

Thursday, July 10, 2014 - If It’s Not One Thing…

If It’s Not One Thing…
by Sinclair Noe

DOW – 70 – 16,915
SPX – 8 = 1964
NAS – 22 = 4396
10 YR YLD - .01 = 2.53%
OIL + .59 = 102.88
GOLD + 8.70 = 1336.30
SILV + .32 = 21.52

We start today with the hottest stock in the world: CYNK Technology, ticker CYNK.  It is a one person company, which has something to do with a website, with headquarters in Belize, maybe. There is no indication of revenue, possibly about a million in losses. It had been trading for a couple of pennies, and then for no apparent reason it started trading higher. After closing at 6 cents on May 15 it began its surge with a 3,650% jump to $2.25 on June 17. The stock climbed as much as 49% to $21.95 earlier today in over-the-counter trading on volume of more than 380,000 shares before erasing its gain to close down 5.5% to $13.90, and a market cap of a little more than $4 billion. How and why did this happen? Nobody seems to have an answer, but I think it would be a very, very bad idea to do anything with this stock, just to be clear.

Se nao e uma coisa e outra coisa.

Which is Portuguese for “if it’s not one thing, it’s another thing.”

I’m sure somebody in Lisbon was fully aware of what was going on, and they were waving their arms and screaming about the bank that was ready to implode; and nobody paid any attention because there was so much else happening around the world. Iraq is fractured, bombs are flying in Israel, Germany is expelling a US spy, the Italian economy looks wobbly, Libya, Ukraine, Nigeria, Thailand, China. Pick a global hot spot, pick ten global hotspots, and I bet Portugal is not on the list.

Here’s the story: Espirito Santo International is a big conglomerate in Portugal; they missed a payment on some short-term debt this week. So, a couple of subsidiaries got clobbered, Espirito Santo Financial Group shares down 9%, and Banco Espirito Santo shares down 17%. Trading was halted.  The credit rating agency, Moody’s, cut the corporate credit rating to junk status, which is basically closing the barn gate after the cow gets out.

While I make no claim to any particular knowledge of the Portuguese banking system, the consensus is that this problem should not create a meltdown scenario; however, there has been a singe factor. Borrowing costs for Greece, Spain, and Italy bounced a bit higher. Again, this is not earth shaking, but it did cause a brief flash of realization that the banking problems of the past few years have not been corrected.

A couple of years ago the European Central Bank developed a plan for dealing with sovereign debt crises, the OMT or Outright Monetary Transactions program, but it has never been used and it probably wouldn’t apply even if the situation in Portugal started to create a meltdown scenario. So the fear out of Portugal is something called the “doom loop”; that’s the cycle in which weak banks lean on governments for support, draining public finances, which in turn drags down the banks with them.

A couple of years ago,ECB President Mario Draghi bought some time when he declared the central bank would do “whatever it takes”, and then they did nothing. So it was like a whiff of smoke that reminds you that never bought fire extinguishers, even after that little explosion in 2008, and the Greece fire in 2011.

And so, European stocks took a hit today, and that spread over to Wall Street, where the Dow Industrials started the day with a 180 point dip, until traders remembered – it’s Portugal. And then they decided that a little pullback following a 6 week rally was to be expected and Banco Espirito Santo is nothing to fear, even if you don’t have a fire extinguisher.

So, with the long-term memory of a dog chasing a squirrel, we move on to our next topic. After all, we live in a mobile-first and cloud-first world. So says Satya Nadella, the CEO of Microsoft; no he’s not the guy trying to buy the LA Clippers, he’s the guy who replaced Steve Ballmer. Nadella has sent out a really long email to all Microsoft employees outlining his vision for Microsoft. Over the years, Microsoft made a very large amount of money serving the PC world. Its Windows operating system and Office software generated the vast majority of its sales and profits, but now the personal computer is going the way of the typewriter. Microsoft used to talk about “a computer on every desk and in every home,” a vision it clearly succeeded in delivering. But what do you do when you’ve delivered that vision?

So Nadella writes: “Computing is ubiquitous and experiences span devices and exhibit ambient intelligence. Billions of sensors, screens and devices – in conference rooms, living rooms, cities, cars, phones, PCs – are forming a vast network and streams of data that simply disappear into the background of our lives. This computing power will digitize nearly everything around us and will derive insights from all of the data being generated by interactions among people and between people and machines. We are moving from a world where computing power was scarce to a place where it now is almost limitless, and where the true scarce commodity is increasingly human attention.”

There are a couple of interesting phrases in the mission statement from Nadella; he writes, “computing is ubiquitous” and also “ambient intelligence”. The idea that computers are ubiquitous is fairly easy to understand; just look around you; you probably have a smart phone close at hand; if you are in an office, you still have PCs, and don’t forget the computers in the printers and telephones, and thermostat, and electric meter. If you are driving right now, your car is a computing marvel. And if you are at home, check out the computer in your refrigerator, and dishwasher, and a dozen other gadgets and appliances. Another name for ubiquitous computing is the “internet of things”.

And the idea here is to connect machine to machine, and machine to human, and then human to human. We’ve been talking about that for a long time. The computers would be embedded in almost everything and everything would communicate seamlessly with everything else. We’re not there yet, but if you have questions about the internet of things, just ask Siri or Cortana.

All that computing power means we are surrounded by an ocean of data. The exploration of that data constitutes what Microsoft researchers call the “fourth paradigm”, exploration of data to discover new and interesting results to power a new generation of artificial intelligences. Microsoft Research head Peter Lee recently talked about some of the AI breakthroughs that were powering the new tools. Discussing the concept of “transfer learning,” he revealed that by training a speech recognition neural net on multiple languages, its performance improved with each new language, even on previously trained languages.

There are already apps that can infer context from our emails and documents and then deliver information we need, or might need, when we need it. We’ve already seen this in marketing and advertising; based upon your searches, the data programs can figure out whether you are getting married, pregnant, planning a vacation, or looking for a job; and then they deliver advertising that should grab your fancy and even calculate the probability of a purchase, putting the supply chain in motion, ready to send out drones to deliver your package with same day delivery, or even within the hour. It’s a little like the waiter anticipating when you want a coffee refill; that sounds like a simple task but it is incredibly complex and requires understanding the differences between correlation and causation. Computers are not good at that, but they’re getting better, or maybe they’re getting smarter.

As computing becomes more and more ubiquitous all those little computers, embedded in almost everything, are gathering data; and the neural networks are analyzing the data – watching and learning, and the data eventually becomes information, and the information becomes knowledge. And we end up with collective wisdom. At least that’s the idea.

We’re closer than you think. We already know that computing power grows exponentially. Moore’s Law basically says that technology performance indicators double every 18 months, which leads to incredible innovative applications only slightly bogged down by social acceptance. Not every innovation makes it into common usage because of concerns about privacy, lack of trust, reliability, or just information overload. Somewhere there is a huge scrapyard of abandoned apps.

There is an even larger ocean of smaller and more powerful embedded computers monitoring our actions and data and trying to figure out where we want to go, and then trying to figure out how to help us get stuff done. That’s the benign version. The version will a little less sugar coating involves a complete loss of privacy and subjugation before the robot overlords. Then again, in a world of CYNK Technology and Portuguese doom loops, maybe we deserve robot overlords.

Microsoft will have an earnings call next week, and we’ll likely learn more then. Today’s six page memo was big on building productivity, but that might also mean pink slips for many Microsoft employees; after all there are bound to be some redundancies following the Nokia acquisition. Nadella writes that "We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more." But for all the talk of a brave new mobile first, cloud first world, don’t expect Microsoft to abandon the Xbox game console; it’s a money maker. Still, it is a fairly bold new direction for Microsoft, maybe the biggest vision change since Bill Gates ran the place.

Thursday, November 29,2012 - Place Your Bets

Place Your Bets

by Sinclair Noe

Let's start with the important numbers today: 5, 16, 22, 23, 29, and the Powerball 6. And I did not win.

Somebody in Missouri and somebody in Phoenix are holding the winning tickets. Not me. All I'm holding is a $10 piece of paper which is my donation to the tax fund for the mathematically challenged.

DOW + 36 = 13,021
SPX + 6 = 1415
NAS + 20 = 3012
10 YR YLD un = 1.62%
OIL + 1.23 = 87.72
GOLD + 6.00 = 1726.80
SILV + .50 = 34.27

The U.S. economy grew at a 2.7 percent annual rate from July through September, much faster than first thought. The Commerce Department said growth in the third quarter was significantly better than the 2 percent rate estimated a month ago. And it was more than twice the 1.3 percent rate reported for the April-June quarter. The main reason for the upward revision to the gross domestic product was businesses restocked at a faster pace than previously estimated. That offset weaker consumer spending growth.

The fourth quarter GDP is expected to drop back down below 2 percent because of Hurricane Sandy, which put the brakes on all sorts of business activity along the East Coast. And then the other reason cited for the possible fourth quarter slowdown is the fiscal cliff. (Sorry, we just can't get through the day without talking about it.) So, here is the annotated version of today's fiscal cliff report: a little partisan sniping, a few snarky comments; no substantive progress, but talks are ongoing. Despite all the hype about the fiscal cliff, the markets appear to be treating it more like a fiscal bunny hill. The VIX, the volatility index is scraping along bottom at about 15, indicating a broad based complacency. And if you're actually paying attention to one of those countdown clocks, you really need to be doing something different.

Anyway, back to the GDP report. Consumers and businesses appeared to be more cautious over the summer. Consumer spending grew at a weaker 1.4 percent rate in the third quarter, down from the 2 percent rate estimated a month ago and nearly in line with the 1.5 percent rate in the second quarter. Businesses spending on equipment and software fell at an annual rate of 2.7 percent in the third quarter, the first decline since the depths of the recession in April-June 2009. The report showed continued strength in homebuilding, which rose at an annual rate of 14.2 percent. And government spending expanded at an annual rate 3.5 percent, marking its first positive contribution to overall economic growth in two years. The increase was driven by a big jump in defense spending.

Consumer spending will be a big part of the fourth quarter GDP, and it looks like we are still consuming. The National Retail Federation reports the number of shoppers in stores and on websites rose 9% over the Black Friday weekend to 247 million. Spending per shopper rose 6% to $398 and total spending was up 13% to $59 billion. Retailers were very promotional as we have to come expect during the kickoff of the holiday season. Deals were offered earlier with many stores opening on Thanksgiving and seeing good traffic. Online retailers were at least matching in-store deals and offering many of their own promotions even before Cyber Monday. Black Friday and Cyber Monday promotions appear to be holding for at least an extra week; that's not great for margins but overall it looks like a pretty strong start to the shopping season.

If you've been doing most of your shopping online Microsoft has launched a holiday season offensive against Google, claiming that search results on its rival's shopping site are bought and paid for. Microsoft says: "Google’s new redesigned shopping vertical now decides what to show you -- and how prominently to display what product offers they show -- based partially on how much a merchant selling the product has paid Google.”

This refers to new rules that Google adopted for its shopping site. Google Shopping now charges merchants who participate in its Product Listing Ads program fees on a per-click or cost-per-acquisition basis. Google makes no bones about the program. They say their relationship with merchants results in accurate and timely pricing information. Microsoft begs to differ. Google's pay-to-play program means the results that potential shoppers get will be based more on what merchants are willing to pony up than on query relevancy.

The point here is that if you are shopping online, it might pay to comparison shop by using different search engines, at least that's what Microsoft wants us to believe.

Back to the GDP report. The report reveals a dichotomy between consumers and businesses. Consumers have gone from being cranky and tight-fisted to slightly positive and mildly optimistic. Businesses, meanwhile, appear to be hunkering down in like a gaggle of doomsday preppers.

The most recent Conference Board consumer sentiment survey released earlier this week showed consumer confidence at its highest level since February 2008, while the University of Michigan consumer sentiment index is up 30% from a year earlier as of late November. The Michigan survey revealed more optimism about the employment situation than at any point since 1984. Of course any measure of consumers' feelings is bound to be subjective. And consumers have been beaten like a drum over the past few years. The surge in morale might be nothing more than a pause in the beatings.

So while the surveys show the most positive results in years, it’s possible that they are only positive relative to how negative people were in 2009, 2010 and 2011, and that compared to the 1980s and 1990s, people aren’t actually feeling so confident. The same goes for income: More people than at any point since early 2008 say their finances are improving; that raises the index. But given that most incomes have been stagnant for the past decade or more, improvement does not necessarily translate into objectively good.

On the flip side, business executives can't seem to get past this idea that uncertainty is the boogie man that lurking in the shadows. The big fear is the fiscal cliff, of course. And frankly it is disconcerting to see the captains of industry cowering like an abused dog. There is a real good chance that the CEO who is afraid of the fiscal cliff, doesn't have the stuff of a real entrepreneur. An entrepreneur will put a second mortgage on the house. An entrepreneur will max out the credit cards to keep the business afloat for another week, or another month. (truck full of canaries)

An entrepreneur sees a fiscal cliff and straps on the bungee cord. A CEO sees a fiscal cliff and breaks down in flop sweat.

From 2009 to 2012, the companies of the Standard & Poor’s 500-stock index generated double-digit profits and even healthier revenue gains. Yes, it looks like corporate profits are slowing slightly but corporate coffers are bulging; there seems to be a little resolution to the crisis in Europe, even if it is just kicking the can out a year or two; emerging markets may not be booming but Brazil, and India, and China are still rolling along.

So, who is right, the consumer or the business exec? Income levels tend to be a better predictor of what people will spend, along with the value of their homes and the ease of obtaining credit. Given that incomes are stable and slightly growing, homes values are on the rise and credit is easing, it’s a good bet that people will spend a bit more and the overall economic picture will brighten.

Business execs are lousy economic prognosticators. While spending by companies is a key component of economic vitality, spending plans are much more elastic than they were decades ago and can be adjusted more rapidly. That may not be true for building a manufacturing plant, but it is certainly true for hiring and marketing and inventory. So present concerns and stated intentions to cut back could change quickly to exuberance and plans to spend more freely.

A separate report today showed the number of Americans seeking unemployment benefits fell 23,000 to a seasonally adjusted 393,000 last week, the Labor Department said. It was the second straight drop after Hurricane Sandy had driven applications to 451,000 three weeks ago. Millions of Americans are unemployed and underemployed, but tens of millions more are gainfully employed,and although they might be feeling some anxiety about their job, most of the deepest corporate cost cutting has already been done. If you still have a job, it's probably because you're good at it, and the company you work for is about as lean as it can get. If it could be outsourced, it probably was. When people feel gainfully employed, they tend to spend and demand increases, businesses respond to demand, not to sentiment.

Expectations have undoubtedly come down in recent years, as people reconcile themselves to more modest changes and more realistic horizons. Business sentiment matters, but it is the consumer and the demands of the consumer that push the economy. The smart business execs will be on the lookout for indications of increased demand, and they will be well suited to go out on the far end of the curve and they should be ready to gamble just a little, ready to invest to meet demand. Americans have shown a remarkable and consistent predilection to spend over the years, with only a few notable pullbacks such as during the worst periods of the past few years.

Take it from someone who knows a lousy bet. You shouldn't bet against the American consumer.

Years ago, the late Mexican dictator Porfirio Diaz utter a famous line about his country: “Mexico, so far from God, so close to the United States.”

Next week the leaders of North America’s two most populous countries are due to meet for a neighborly chat in Washington, DC. According to The Economist The re-elected Barack Obama and Mexico’s president-elect, Enrique Peña Nieto, have plenty to talk about: Mexico is changing in ways that will profoundly affect its big northern neighbour, and unless America rethinks its outdated picture of life across the border, both countries risk forgoing the benefits promised by Mexico’s rise.

The White House does not spend much time looking south. During six hours of televised campaign debates this year, neither Mr Obama nor Mr. Biden mentioned Mexico directly. That is extraordinary. One in ten Mexican citizens lives in the United States. Include their American-born descendants and you have about 33m people (or around a tenth of America’s population).

Mexico's GDP ranks higher than South Korea. It's economy is growing faster than the Brazil's. Can you name the largest exporter of flat screen TV's? It's Mexico. And the place where you will likely see signs of the growing Mexican economy is in the shopping malls. In addition to TVs, they are the top exporter of BlackBerrys and fridge-freezers, and is climbing up the rankings in cars, aerospace and more. On present trends, by 2018 America will import more from Mexico than from any other country. “Made in China” is giving way to “Hecho en México”.

The doorway for those imports is a 2,000-mile border, the world’s busiest. Yet some American politicians are doing their best to block it, out of fear of being swamped by immigrants. They could hardly be more wrong. Fewer Mexicans now move to the United States than come back south.

Undervaluing trade and overestimating immigration has led to bad policies. Since September 11th 2001, crossing the border has taken hours where it once took minutes, raising costs for Mexican manufacturers (and thus for American consumers). Daytrips have fallen by almost half. More crossing-points and fewer onerous checks would speed things up on the American side; pre-clearance of containers and passengers could be improved if Mexico were less touchy about having American officers on its soil (something which Canada does not mind). After an election in which 70% of Latinos voted for Mr Obama, even America’s “wetback”-bashing Republicans should now see the need for immigration-law reform.

Mexico is poised to become America’s new workshop. If the neighbors want to make the most of that, it is time for them to take another look over the border.

You know who Rupert Murdoch is? Owns Fox News. The same Rupert Murdoch who scandalized England with phone hacking, influence peddling and bribery. The same Rupert Murdoch who stays up late Saturday nights pondering things on Twitter, like what to do about "the Jewish-owned press".

Murdoch already owns the Wall Street Journal, the New York Post, Fox News Channel, Fox movie studios, 27 local TV stations, and much more. And there are reports that he really wants to buy the Los Angeles Times and the Chicago Tribune - the bankrupt-but-still-dominant newspapers (and websites) in the second- and third-largest media markets, where Murdoch already owns TV stations. Under current media ownership limits, he can't buy them. It's illegal ... unless the Federal Communications Commission changes the rules.

Just by pure coincidence, FCC Chairman Julius Genachowski has been circulating an order at the FCC to lift the longstanding ban on one company owning both daily newspapers and TV stations in any of the 20 largest media markets. And he wants to wrap up this massive giveaway just in time for the holidays.

If these changes go through, Murdoch could own the Los Angeles Times, two TV stations and up to eight radio stations in L.A. alone. And he's not the only potential beneficiary: These changes could mean more channels for Comcast-NBC, more deals for Disney and more stations for Sinclair Broadcasting.

For anyone who actually cares about media diversity and democracy, the gutting of media ownership limits will be a complete disaster. These rules are one of the last barriers to local media monopolies. Without them, we will lose competing voices for local news. We will see the mainstream media get even more monotone, monochrome and monotonous, and more than likely, even more inaccurate.

Genachowski's proposal is essentially indistinguishable from the failed policies that millions rallied against in 2003 and 2007. Ninety-nine percent of the public comments received by the FCC opposed lifting these rules when the Republicans tried to do it. Genachowski's proposal is nearly identical to the one the Senate voted to overturn with a bipartisan "resolution of disapproval" back in 2008. The federal courts have repeatedly - and as recently as 2011 - struck down these same rules, noting the FCC's failure to "consider the effect of its rules on minority and female ownership." The 3rd U.S. Circuit Court of Appeals ordered the FCC to study the impact of any rule changes before changing the rules. The FCC has done nothing of the kind.

Yet if Genachowski gets his way, according to reports, the FCC will vote on this major overhaul "on circulation" - that is, in secret and behind closed doors - with no public participation or accountability.

Wednesday, June 27, 2012 - To Your Health; Spanish Junk; Barclays Bad; Falcone Flunks; Bhopal Veggie Garden; Goodnight Stockton

To Your Health; Spanish Junk; Barclays Bad; Falcone Flunks; Bhopal Veggie Garden; Goodnight Stockton 
– by Sinclair Noe


DOW + 92 = 12,627
SPX + 11 = 1331
NAS + 21 = 2875
10 YR YLD -.01 = 1.62%
OIL +.27 = 80.48
GOLD + 1.60 = 1575.20
SILV - .17 = 27.04
PLAT – 18.00 = 1415.00


According to the Centers for  Medicare and Medicaid Services, health spending accounts for about 18% of the GDP of the United States. So, tomorrow's ruling by the Supreme Court on President Obama's health care plan is pretty important, but so far the economists can't seem to figure out the implications. This is not to say I have any advance info on the Supreme Court decision. 


They might say the Act is fine as it is, they might say they will eliminate the mandate but leave the rest unchanged, they might throw out the whole thing.  If they vote against Obamacare it will be seen as a highly partisan act. What better way to show the Court’s impartiality than to affirm the constitutionality of legislation that may be unpopular? That might be a stretch; I think I'll stick with the idea that we'll have to wait till tomorrow.


The only safe bet is that there will be unintended consequences. For example, what if the Supremes strike down the mandate portion but leave the rest intact? The Obama administration put a mandate in the Affordable Care Act because the law requires insurers to charge the same premium regardless of health status. Without a mandate, it would make sense for the healthy to drop their insurance until they got sick and needed it. But if only the unhealthy bought insurance, premiums could rise sharply to cover insurance companies’ higher costs. At the extreme, this could blow up the insurance market altogether. 




The National Association of Realtors Pending reports home sales climbed 5.9% in May, with an index reaching 101.1. The index was 13.3% above May 2011 levels. Earlier this week, the Commerce Department reported sales of new homes at two-year highs. Also, S&P/Case-Shiller reported that home prices climbed in April. Also today, the Commerce Department reported durable-goods orders rose a seasonally adjusted 1.1% last month.




Spain is poised for a downgrade to junk by Moody’s Investors Service. Moody's cut  28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. Spain remains on review for another cut by Moody’s after they requested a $125 billion international bailout for its banks and on speculation losses from its real estate industry will worsen. A one-notch move to Ba1 will likely see all the country’s banking system in junk territory, with the possible exception of Santander. Spain’s short-term borrowing costs nearly tripled at auction, underlining the country’s precarious finances as it struggles against depression and juggles with a debt crisis among its newly downgraded banks.


So, it's not just the Spanish banks that are begging for a bailout, it is looking like the nation will also be looking for a bailout. To put it another way; Greece has collapsed; the contagion has spread. Spain is on the edge of collapse. Italy is next.


Oh yeah, French bonds look shaky, and Germany was downgraded yesterday. 


No worries, the Euro-big wigs will have another emergency summit in Brussels starting tomorrow. Maybe it was always a choice between orderly, or disorderly breakup. The idea of European countries working together in harmony sounds good; the idea of European countries bailing out Euro-banks is just stupid. The death certificate for the EU will likely read: “Cause of death: procrastination”. The European Union is crumbling. Have a waffle. 


Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank didn’t provide enough stimulus last week and called for new easing including more asset purchases to spur economic growth. Evans said: “We should be doing more accommodation than what was adopted under the Twist.” While the move “has small effects,” Evans said, “its larger effect is that it indicates the Fed is continuing to think more accommodation is important and worthwhile.”


The FOMC expanded Operation Twist, its maturity- extension program, by $267 billion through the end of the year. Chairman Ben S. Bernanke said at a press conference the Fed is prepared to do more. Evans said: “Right off the bat, I’d be willing to do more on the basis of the current data”. He doesn’t vote on policy this year.




Last week Microsoft introduced a new tablet computer, called Surface, it has a kickstand and a cover that folds out to serve as a keyboard. Very clever. It will be available for sale in a couple of months. Today, Google revealed its own tablet and it is priced at a sharp discount compared to Apple's iPad. The new tablet will run on the latest version of Google's operating system Android 4.1, called Jelly Bean. The Nexus 7 will sell for $199 and will be available in mid-July. The line between software and hardware has now been breached in the face of total domination by Apple.  


British bank Barclays says it will pay around $452 million in penalties to US and UK regulators to settle a probe into attempted manipulation and false reporting relating to two global benchmark interest rates that form the basis for hundreds of trillions of dollars of transactions. Libor, or the London Interbank Offered Rate, and Euribor, or the Euro Interbank Offered Rate, are benchmark reference rates that indicate the interest rate that banks charge when lending to each other. Almost all other rates are at least partially based upon the Libor or Euribor as a baseline. The CFTC said that Barclays traders and employees attempted to manipulate and made false reports concerning Libor and Euribor in order to benefit their derivatives trading positions. This misconduct took place on many occasions and sometimes on a daily basis over a period of four years, starting in 2005. What does it take for these people to end up in jail? 


Apparently the trick is to have the backing of a major bank, the individual traders  are easy prey for the regulators, but the traders for the big banks have “Get Out of Jail Free” cards. Phillip Falcone, the founder of hedge fund Harbinger Capital Partners LLC, was sued by the Securities and Exchange Commission. The SEC said in its lawsuit that Falcone misappropriated client assets, favored selected investors and manipulated bond prices. 


Robert Khuzami, the SEC’s enforcement director, said in a statement: “Today’s charges read like the final exam in a graduate course in how to operate a hedge fund unlawfully. Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others and violated trading rules intended to prohibit manipulative short sales.”


The SEC is seeking disgorgement of ill-gotten gains, unspecified financial penalties and a bar prohibiting Falcone, 49, from serving as an officer or director of any public company.




The SEC action is the second blow in less than two months for Falcone, who built a $26 billion hedge fund by 2008 with a successful bet against subprime mortgages. LightSquared Inc., Harbinger Capital’s biggest investment, filed for bankruptcy in May.


Falcone in 2009 took out a $113 million loan from his Special Situations fund to pay personal taxes. The loan was disclosed in the fund’s annual financial statement the following March. At the time he borrowed the money, clients were barred from pulling money from the fund. Falcone subsequently repaid the loan with interest. That same year, with client capital locked up, Harbinger allowed Goldman Sachs Group, which at the end of 2008 had $1 billion invested in two Harbinger funds, to redeem some money from the firm.


Dow Chemical's ’s Union Carbide won dismissal of a lawsuit alleging polluted soil and water produced by its former chemical plant in Bhopal, India, injured area residents, one of at least two pending cases tied to the installation known for the 1984 disaster that killed thousands.


U.S. District Judge John Keenan in Manhattan yesterday ruled Union Carbide and its former chairman, Warren Anderson, weren’t liable for environmental remediation or pollution-related claims made by residents near the plant, which had been owned and operated by a former Union Carbide unit in India. Sure, a chemical spill that killed thousands of people, no need for further cleanup. I'm sure everything is nice and clean. I'm sure that Judge would want his children planting a nice little vegetable garden in the shadows of the Bhopal chemical factory.


Exxon Mobil Chief Executive Officer Rex Tillerson says supplying electricity to the “billions of people living in abject poverty” is a more important goal than curbing greenhouse-gas emissions. Tillerson says electricity will do more to improve the quality of life for people who still cook food by burning animal dung than trying to prevent climate change, which will be “manageable.” And even if global warming destroys the planet, maybe ExxonMobil can get the same judge that ruled in favor of Union Carbide. 


Stockton is broke. They will file for bankruptcy. Talks with bondholders and unions failed. Stockton California will now become the biggest US city to seek court protection from creditors. The City of  Stockton released a statement yesterday after its council voted 6-1 to adopt a spending plan for operating under bankruptcy protection. The statement says: “The city is fiscally insolvent and must seek Chapter 9 bankruptcy protection. In addition to the bankruptcy petition, the city will file a motion with the courts to share information from the confidential mediation.”


In the past three years, Stockton was slammed by the collapse of the housing market and city officials dealt with $90 million in deficits through a series of drastic cuts. They eliminated one-fourth of the city's police officers, one-third of the fire staff, and 40 percent of all other employees. They also cut wages and medical benefits. To plug next year's anticipated $26 million budget shortfall, they couldn't find more cuts, and so they turned to the courts to avoid chaos. The budget for the fiscal year beginning July 1 calls for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits under union contracts that could be voided by the bankruptcy court. Stockton’s bankruptcy might resemble the 2008 case of another California city, Vallejo, which exited court protection last year. It is expected that Stockton City workers who have retired will see a sit to health care benefits, possibly a cut to zero. Bondholders and current employees will probably also have to take less. 


The Stockton bankruptcy is not expected to create a sell-off in the $3.7 trillion dollar muni-bond market. The BK was anticipated. The average cumulative default rate in the past four decades was 0.13 percent for municipal bonds versus 11.2 percent for corporate debt. The overall default rates in municipal bonds are extremely low and Stockton is a small participant in the $3.7 trillion market.


A taxable Stockton pension bond sold in 2007 and due September 2037 traded June 25 as high as 80.68 cents on the dollar, down from when it traded as high as 102.03 cents on the dollar on Feb. 15. 


Bankruptcy would allow the city to break contracts with creditors without the threat of lawsuits, though it won’t assure the city’s recovery. Chapter 9 BK does not wipe out debts but merely allows for restructuring. In February, the city began a process during which it is required by state law to review its finances with help from a “neutral observer” who is picked in cooperation with creditors. That review is similar to a mediation process in which creditors have a right to participate. Stockton was the first city to test a new state mediation law, Assembly Bill 506, which is less than six months old. The results have been called tedious, at best; policy analysts issued a report on the use of the new law, titled “Death by a Thousand Meetings”.


According to a June 5th fiscal report, the city has cut services so much the past two years that “public safety is at a crisis level”. Unemployment, at 15.4 percent in April, was almost double the national average; Stockton ranked third in murders last year among large California cities, behind Los Angeles and Oakland; One in every 195 homes in Stockton’s metropolitan area received a foreclosure filing in May, the fifth-highest rate in the nation.


When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees. Multi-year labor contracts for city workers carrying escalating costs and generous retirement plans added to the burden. In addition, expensive city investments - a promenade, sports arena and hotel - failed to produce an economic boon. There is a state investigation into whether Stockton's financial devastation was entirely due to shortsighted optimism or if there was corruption. The state mediation law requires assigning blame. It will make interesting reading, and I'll lay dimes to donuts, the assignment of blame will be misplaced.