Monday, June 30, 2014 - Narrow Decisions Leave the Doors Wide Open

Narrow Decisions Leave the Doors Wide Open
by Sinclair Noe

DOW – 25 =  16,826
SPX – 0.73 = 1960
NAS + 10 = 4408
10 YR YLD - .02 = 2.51%
OIL - .23 = 105.51
GOLD + 11.80 = 1327.90
SILV + .09 = 21.06

Today’s session marked the end of trading for June as well as for the second quarter. After a run to record closes, the S&P 500 Index posted a quarterly gain of 4.7%, and the Dow Jones Industrial Average had an increase of 2.2%. The Nasdaq Composite Index had a quarterly gain of 4.9%. It marks the sixth straight quarterly gain for both the S&P and Nasdaq. With six straight quarterly gains, the Nasdaq has had its longest streak of advances since 2000, while the S&P 500 has had its best run since 1998. The Dow, meanwhile, posted its fifth positive quarter of the last six.

For the first half of 2014, the S&P 500 is up 6%, with the Dow industrials up 1.4%, and the Nasdaq up 5.4%. Airline, pharmaceutical, and utilities stocks led advancers during the period, which was marked by the impact of bad weather, and a 2.9% drop in first-quarter gross domestic product. Yields on Ten year Treasury notes started the year at 3.03%, dropped down to 2.71% at the end of the first quarter, then dropped to 2.45% at the start of June. The S&P 500 has scored 22 record closing highs so far this year, which has increased concerns among some investors that the market might be due for a technical pullback. Yet the CBOE volatility index, or VIX, Wall Street’s fear gauge, has held near multiyear lows.

This week will likely see light trading with a holiday shortened week. The markets will close Friday for Independence Day. The monthly jobs report will be issued on Thursday.

Meanwhile, oil prices have advanced steadily from 98.46 a barrel at the start of the year, to 101.58 at the start of April, to 102.87 at the start of June.

The precious metals have also shown some recent signs of life. Spot gold started the year at 1206 an ounce, while silver began the year at 19.54. Since June 1^st, there has been a modest rally from 1252 for gold and 18.91 for silver. This is not a huge rally, and it doesn’t mark a challenge to old highs, but it might signal a bounce off recent lows.

Let’s start with a couple of cases from the Supreme Court. You recall that last week we noted the Supremes had been, uncharacteristically unanimous on several cases; that came to a screeching halt today in the case of Burwell v. Hobby Lobby and Conestoga Wood. In a 5-4 opinion authored by Justice Alito, the court ruled that the Obama administration has failed to show that the contraception mandate contained in the Affordable Care Act is the "least restrictive means of advancing its interest" in providing birth control at no cost to women.

The Affordable Care Act contains a provision requiring most employers to cover the full range of contraception in their health care plans at no cost to their female employees. The Obama administration had granted an exemption for churches and accommodations for religious hospitals, schools and nonprofits, but for-profit companies were required to comply with the coverage rule or pay fines.

Hobby Lobby, a Christian-owned craft supply chain store, and Conestoga Wood Specialties Store, a Pennsylvania wood manufacturer owned by a family of Mennonites, challenged the contraception mandate on the grounds that it violates their religious freedom by requiring them to pay for methods of contraception they find morally objectionable. The Religious Freedom Restoration Act says that the federal government may not put substantial burdens on religious exercise.  The owners of those companies believe certain forms of contraceptives are forms of abortion, in violation of the religious beliefs of the company’s owners.

So, the court was dealing with a couple of issues. First is a company like Hobby Lobby considered a person? This is important because the Religious Freedom Restoration Act protects “persons” but doesn’t mention for-profit corporations. Justice Alito wrote: "Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law."

The other issue was whether the mandate for contraception coverage imposed a substantial burden on Hobby Lobby. Well, it’s a pretty easy argument that anything the government requires a person to do is a substantial burden, so…, strike two.

The case is being billed as a battle between women’s rights and religious rights.

The opinion was written narrowly so as only to apply to the contraception mandate, not to religious employers who object to other medical services, like blood transfusions or vaccines. But there is no certainty the ruling will be interpreted narrowly. What if a company objects to something the government does, outside the realm of health care? Time will tell. Another point came when Justice Ginsburg wrote: “One might ask why the separation [between business and owner] should hold only when it serves the interest of those who control the corporation.”

The opinion applies to small, closely held corporations, but what if a big, publicly traded corporation makes a similar claim? As the majority itself noted, no big, publicly-traded corporation has emerged to make such a claim. The Court doesn’t have to rule on a question it isn’t asked. And a closely held corporation can still be pretty big. Hobby Lobby has 572 stores. “Closely held” refers to a corporation that has more than 50% of the value of its outstanding stock owned by 5 or fewer individuals. These corporations are thought to make up 90% of corporations; these corporations account for about 52% of private employment, or a little more than 60 million people. Hobby Lobby is being described as a narrow ruling but it has the potential to affect tens of millions of workers.

Now that the court has recognized that corporations have religious exercise, the door has been opened. All it takes is for the right plaintiff to walk through it.

The Supremes also issued an opinion in the case of Harris v. Quinn, ruling 5-4 that some government workers are not required to pay union dues. In writing for the majority, Justice Alito concluded that there was a category of government employee, a partial public employee, who can opt out of joining a union and not be required to contribute dues to that labor group. What is a partial public employee? In this case it refers to home-care aides who typically work for an ill or disabled person, with Medicaid paying their wages.

The court declined to strike down a decades-old precedent that required many public-sector workers to pay union fees, so this does not apply to employees such as teachers or police officers who work directly for the government.

The case, Harris v. Quinn, was brought by eight Illinois workers who provided home health care to Medicaid recipients. Several of the original plaintiffs were mothers who, helped by Medicaid, were personal home-care assistants to their disabled children and opposed joining the union and paying any union fees. Justice Alito wrote in the majority opinion: “Agency-fee provisions unquestionably impose a heavy burden on the First Amendment interests of objecting employees.”

The case deals with the “fair share” fees that most unions charge all employees, including nonmembers, to support collective bargaining. These fees prevent free-riding. Unions are required by law to bargain on behalf of members and nonmembers alike, all of whom benefit from collective bargaining. If some employees could simply decline to pay to support collective bargaining, all would have the incentive to similarly opt out, thereby undermining the union and harming all employees. It’s a classic case of the free-rider problem.

Because the case only deals with partial public employees, it is being called a narrow decision, however, by giving a constitutional underpinning to the anti-union “right to work” stance, the court short-circuited that process, retreating from its decades-long practice of giving states broad latitude in making economic policy, including labor policy. In this way, the court became very much involved in economic policy.

So, today the court split on two different cases, and in those splits they have opened up Pandora’s Box. We are likely to see and hear much more on these issues over the next few years.

Another court ruling today, didn’t quite make it to the Supremes, but potentially still important; the New York state Court of Appeals ruled that towns can use zoning ordinances to ban hydraulic fracturing, or fracking. Numerous municipalities across the state have either banned fracking or are considering doing so, and the trend may accelerate because of the court’s ruling. Of course, a state law in New York does not apply in other states, but it may be the start of a trend if not necessarily a precedent.

General Motors recalled more than 8.4 million vehicles worldwide today, bringing its total figures for the year above 28 million cars, more than the 22 million recalled last year by all automakers combined. GM said it was aware of seven crashes, eight injuries and three fatalities in the recalled vehicles, but said that there was no conclusive evidence that a defect had caused them. The death toll is  just from the latest round of recalls; 13 other deaths associated with other GM recalls involving ignition switches will result in payments of at least $1 million per family; at least that is the starting point unveiled today by a compensation expert hired by GM.

In economic data today; the National Association of Realtors (NAR) said its Pending Home Sales Index, based on contracts signed last month, increased 6.1% to 103.9, the highest level since September of last year. Contracts increased in all regions of the country, with the Northeast and West experiencing the largest gains. The Pending Sales Index looks at contracts for existing homes, with the anticipation there will be an actual sale in about 2 months; so it looks like there might be a little boost for home sales. However, signed contracts were down 5.2% from May of last year. Existing home sales are expected to decrease by 2.8 percent this year to 4.95 million, compared to 5.1 million sales in 2013.

There is a magazine called “The Banker” and each year they publish rankings of the profits and capital strength of the 1,000 biggest banks in the world. They estimate that last year the top 1,000 banks posted a record $920 billion in profit. This was the industry’s largest-ever annual haul, comfortably beating the pre-crisis peak of $786 billion in 2007. Last year's global profits were up 23% from the previous year to their highest ever level.

China's banks made $292 billion in aggregate pretax profit last year, or 32% of the industry's global earnings. Last year China Construction Bank shoved aside America's JPMorgan Chase to become second largest in terms of tier-one capital. And the total Tier 1 capital of Chinese banks has also overtaken that of the US for the first time ever, at $1.19 trillion, to make it the largest single banking sector in the world. ICBC (formerly known as Industrial and Commercial Bank of China) kept the top spot; with more than $200 billion, and it is also the world's most profitable bank, with $55 billion last years. Four Chinese banks made the top ten list for profits, including: ICBC, China Construction Bank, Agriculture Bank of China, and Bank of China.

Chinese officials have ramped up investment in real estate through the state controlled banking system to counter weaker than desired growth. They will likely continue this stimulus, even if it means construction of buildings that will sit vacant. Then there is the $5 trillion dollar question of the health of China’s lightly regulated shadow banking system.

The top US banks in terms of Tier-one capital are JPMorgan, Bank of America, Citigroup, and Wells Fargo. Banks in the United States made aggregate profits of $183 billion, or 20% of the global tally, led by Wells Fargo's earnings of $32 billion. The top 10 US banks in the 2014 ranking have an aggregate capital-to-assets ratio of 7.84%. This compares with a ratio of just 4.47% for the top 10 banks in the EU. To some extent, the difference is explained by US Generally Agreed Accounting Principles (GAAP), which allow netting of derivative positions.

Until 2007, Mitsubishi UFJ Financial Group was a banking giant in terms of tier-one capital, now it ranks tenth, and it is the only Japanese bank in the top ten. In the Top 1000 ranking 20 years ago, all the top six positions were held by Japanese banks. With 20/20 hindsight we can see that the Japanese banking boom was unsustainable. And now China’s banking boom seems to be getting ahead of itself. Chinese banks capital-to-asset ratio is 2 percentage points lower than that in the US, which basically means that if loans start to default, they have a smaller cushion.

Over the past 15 years, Chinese banks average profit growth has been more than 50% per year; while assets have risen more than 20% per year and China’s economic growth has been just under 14% per year. And in the past 4 years, the Chinese economy has slowed from those double digit growth levels, even as Chinese bank profits have accelerated. It seems unlikely that this path is sustainable, and more likely that there is some combination of lower growth rates in the banking sector or stronger growth rates in the Chinese economy.

Ten years ago, Europe counted five banks among the world's top ten. Today there is only one, HSBC, in fifth place. Struggling Eurozone banks contributed just 3% overall to global profits, down from 25% before the 2008 crisis, as recovery remains slow or non-existent in many countries. There are no French or Spanish or German banks in the top ten. Italian banks lost $35 billion last year, and occupy four of the top five spots in terms of the biggest annual losses. And European banks accounted for 24 of the top 25 losses.

Meanwhile, BNP Paribas is in hot water. Today, BNP pleaded guilty in New York state court, admitting to transferring billions of dollars to blacklisted countries under US sanctions. The plea to one count of falsifying business records and one count of conspiracy is part of a broader settlement deal with state and federal authorities. As part of that deal, BNP agreed to plead guilty to criminal charges and pay about $8.9 billion.

BNP is the seventh bank to settle a criminal sanctions violation case but the first to plead guilty; prosecutors consider BNP to be the worst offender. Like other banks, BNP hid the names of Sudanese and Iranian clients when sending transactions coursing through its New York operations and the broader American financial system, but the wrongdoing was more pervasive at BNP, stretching from at least 2002 into 2012, after the investigation was already in full swing.

The BNP investigation centered on its commodity-trade finance business in Paris and Geneva. About 30 executives who worked there have resigned, gone on leave, been fired or relocated since 2012. Unauthorized dollar payments were made on behalf of oil companies to Sudanese or Iranian entities. Prosecutors also reviewed metals and agriculture commodity deals, as well as non-commodity transactions. In total, the bank is suspected of hiding about $30 billion in transactions.

BNP will prevent certain units within BNP’s headquarters in Paris, as well as offices in Geneva, from processing payments in dollar denominations, also known as dollar clearing, for one year beginning in 2015. The deal also requires BNP dismiss 13 employees. The deal comes six weeks after Credit Suisse pleaded guilty to helping American clients evade taxes. Both banks could have faced the loss of their bank charter in the US, which is considered to be the Wall Street equivalent of a death penalty for a bank. That did not happen. Prosecutors have managed to extract a criminal guilty plea but only a civil penalty, a slap on the wrist, even if it is a nearly $9 billion slap.

In the months ahead, prosecutors will shift their focus to several big banks suspected of manipulating foreign currencies; they are expected to use the Credit Suisse, BNP cases as a template for pulling down criminal guilty pleas without harsh punishment, proving what we’ve known for a very long time – the big banks are too big to jail.

Thursday, June 19, 2014 - Market Hits Record Highs and Supreme Court Hands Down More Decisions

Market Hits Record Highs and Supreme Court Hands Down More Decisions

By Sinclair Noe

DOW + 14 = 16,921
SPX + 2 = 1959
NAS – 3 = 4359
10 YR YLD + .01 = 2.62%
OIL + .48 = 106.07
GOLD + 42.80 = 1321.30
SILV + .86 = 20.86

Taking a look at economic data, weekly claims for jobless benefits fell 6,000 to 312,000; the labor market still has plenty of slack but still shows signs of modest improvement. The Philly Fed manufacturing index was up to its highest reading since last September. And the Conference Board's index of leading economic indicators rose 0.5% to 101.7 in May.

President Obama said today that the United States would deploy up to 300 military advisers to Iraq to help its Iraqi government forces fend off Sunni militants. Obama emphasized again that he would not send combat troops to Iraq, although there seems to be a fine line between combat troops and advisers; he said the United States would help the Iraqis “take the fight” to the militants, who he said pose a threat to Iraq’s stability and to American interests, because Iraq could become a sanctuary for terrorists who could strike the United States or its allies.

Secretary of State John Kerry will go to Europe and the Middle East this weekend to build support among Iraq’s Arab neighbors for a multisectarian government in Baghdad.

Markets were in negative territory most of the day, nothing big, then we recovered near the end of the session, nothing big; the S&P 500 hit its 21^st record high close of the year. This market is just slowly scratching and clawing its way higher, and that’s a good thing. When the markets go on a sharp move higher, sometimes called a parabolic run, it usually ends with a nasty fall. For now, the markets are moving higher but staying within the channels of standard deviation.

There are plenty of geopolitical hotspots, and a boatload of economic uncertainty, but the US equity markets are as constant as you could want. The past 44 consecutive sessions of the Standard & Poor's 500 index have fluctuated upward or downward by less than 1 percent. To put that streak in context, the S&P 500 hasn't seen this little movement since 1995, when the index didn't change by a full percentage point for 95 days. All the while, stocks have been steadily ticking up. The S&P 500 is up 6% year-to-date.

There always seems to be a crisis somewhere and maybe investors and Wall Street traders are just crisis weary, even if it is a little dangerous to wait for the next hotspot to implode. Ukraine hasn’t resulted in disaster, at least not for the US. We’ve been dealing with a mess in Iraq for more than 10 years, so there’s no reason to freak out now. The full impact of recent world events is still unclear, so just keep trading. Compared with past conflicts in the Middle East, America has reduced its dependence on oil in the region and thus may not be feeling the effects of the current crisis as strongly.

The Federal Reserve’s QE policy has been a tremendous success for Wall Street, even if it hasn’t trickled down to Main Street. Impressive corporate earnings growth may be outweighing any effects that world events are having on the markets. Earnings of companies in the S&P 500 are expected to growth by a rate of 5.4% in Q2 2014, with nine of the ten sectors in the index projecting higher growth than last year.

Yesterday, Fed Chairwoman Janet Yellen dismissed inflation as nothing more than noisy. Wall Street traders loved the dismissal of rising prices as an indication that the Fed would not be swayed from their ongoing accommodative policy. Still, you have to wonder where the Fed is going as they try to oversee an uneven recovery and a benign exit from QE.

Like the Fed, the Bank of England has kept interest rates in the near zero range for the past 5 years. Last week, BOE Governor Mark Carney indicated that economic liftoff might come sooner than the markets think. Unemployment in Britain has been falling faster than expected, even though there is still considerable slack in the labor market. British GDP has steadily risen over the past year and is now just 0.6% below its pre-crisis peak. The improving picture could nudge the BOE toward a rate increase sooner rather than later. And so the BOE has its own form of forward guidance, stressing that the timing of the first rate increase is less important than the idea that once rates increase, the degree and pace of increases will be gradual and limited; in other words, a soft and gentle slope.

The Supreme Court is handing down decisions this week. Today they issued a unanimous ruling on Alice Corp v. CLS Bank International, a case that deals with patents. Alice Corporation, an Australian company developed a method for mitigating settlement risks among multiple parties. In its Supreme Court brief, the company said the method was eligible to be patented largely because it involved shadow records updated in real time that “require a substantial and meaningful role for the computer.”

The patents were challenged by CLS Bank International, which says it clears $5 trillion in foreign exchange transactions a day using methods to ensure that both sides performed. The bank said that Alice Corporation’s patents merely recited “the fundamental economic concept of intermediated settlement of escrow.”

A trial court invalidated Alice’s patents and then a court of Appeals affirmed the lower court ruling. Writing for the Supremes, Justice Clarence Thomas said that was “a patent-ineligible abstract idea,” and “Merely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention.”

The case had been closely watched by the software industry. Patent claims over the way ideas are incorporated into computers, cellphones and other devices have become a challenge for many high-tech companies. Justice Thomas indicated that the decision posed no threat to the concept of software patents, writing: “There is no dispute that many computer-implemented claims are formally addressed to patent-eligible subject matter.”

The Supremes were also unanimous in ruling on United States v. Clarke; in this case the Court held that a taxpayer may conduct an examination of IRS officials in response to a summons for information and records if the taxpayer can point to facts or circumstances that could raise an inference of bad faith on the part of the IRS.

Another unanimous ruling says the First Amendment protected an Alabama whistleblower. In Lane v. Franks, the high court ruled that Edward Lane's First Amendment rights protected him from job retaliation when he testified in the public corruption trial of then state Rep. Sue Schmitz in 2010, who was accused of being on the payroll at the college but failed to actually show up for work. Schmitz’ bogus job was uncovered and detailed, along with many other cases of corruption in the state's two-year college system as part of a two-year investigation of the system by The Birmingham News in 2006-07.

 Lane was fired by the two-year college he worked after his testimony. Lower courts had ruled against Lane, finding that he was testifying as a college employee, not as a citizen. Writing for the court, Justice Sonia Sotomayor said Lane's testimony was constitutionally protected because he was speaking as a citizen on a matter of public concern, even if it covered facts he learned at work. The decision is a win for whistleblower advocates, who said it could encourage more government workers to cooperate with prosecutors in public fraud cases without fear of losing their livelihoods.

Meanwhile, there is still some fallout, and uncertainty surrounding a Supreme Court decision earlier this week involving sovereign debt of Argentina. Argentina defaulted on nearly $100 billion of debt in 2002. Because some of the debt was sold under New York law, it faced a court challenge after it settled with only some creditors in 2005 and 2010. A few “hold out” creditors sought better repayment terms, specifically, some hedge funds bought the debt after the 2002 default for pennies on the dollar and then demanded full payment. The president of Argentina has called the hedge funds, “vultures” The Supreme Court has given the vultures a victory.

In the next 10 days, we’ll see if Argentina will succeed in defying the United States courts. On June 30, there is a scheduled interest payment on a set of Argentine bonds that its government wants to pay. But the courts say that interest may not be paid unless the country pays all it owes on bonds it defaulted on years ago, something Argentina says it cannot and will not do.

Argentina’s plan is to convert the bonds on which it wants to make payment into new bonds that would not be subject to New York law. Several banks and other financial institutions were willing to accept a partial payment but now that might risk the ire of American courts.

There is no equivalent to bankruptcy law for sovereign debtors. There is no legal procedure to resolve debts of destitute countries. There is no court to approve a restructuring plan that will wipe out some debts and convert others to equity, as there is for companies. Instead, troubled countries negotiate with lenders to restructure the debts. That restructuring could involve reducing the amount owed, lowering the interest rate, extending the maturity of the debt or some combination of the three.

The IMF would typically work with poor countries by offering emergency money contingent on financial reforms for the country; the IMF money was understood to rank above the old debts. Bondholders could, and did, hold out for full payment, but they faced the risk that the restructuring would go through and those who agreed would get partial payouts, while the holdouts got none. Now it has changed, at least for countries that issue bonds under New York law. The hand of holdouts has been strengthened immensely. Financial market service providers are now sovereign debt enforcement agents.

What would happen then? In a brief submitted to the Supreme Court, Joseph Stiglitz, the Columbia University professor who was formerly chief economist of the World Bank, offered a warning: “Unable to restructure, governments that default would be permanently shut out from the debt market, with consequential adverse effects on development and economic growth prospects.” In other words, a modern day debtors’ prison for countries with oppressive debt.

We’ll see how this one unfolds.

Friday, June 13th, 2014 - Infallible Source Predicts Economic Collapse!

Infallible Source Predicts Economic Collapse!
by Sinclair Noe

DOW + 41 = 16,775
SPX + 6 = 1936
NAS + 13 = 4310
10 YRYLD + .02 = 2.60%
OIL + .38 = 106.91
GOLD + 2.80 = 1276.90
SILV + .15 = 19.77

For the week, the Dow was down 0.9%, the S&P fell 0.7 percent and the Nasdaq was down 0.25%. The week's decline was the first after three weeks of consecutive gains on the S&P 500. For the year, the broad market index is up about 4.8%. So, it was a rough week, but a good Friday the 13^th.

The Producer Price Index measures prices at the wholesale level; the PPI was down 0.2% in May. The decline was driven lower by cheaper food and gas, and follows two months of strong gains. In the past 12 months, producer prices have risen 2%, matching the Federal Reserve's inflation target. That's down from an annual gain of 2.1% in April. Excluding the volatile food, energy and profit margin categories, (for all you people who don’t eat food or drive in cars) core producer prices were unchanged in May. Inflation, as measured by the consumer price index, has been mostly below 2% for the past two years.

Of course, that might change, at least for people who eat and drive cars. The price of oil has jumped the past few days, now standing at $106.91 a barrel, mainly on fears of a civil war in Iraq. The International Energy Agency played down fears over the possible loss of oil exports from Iraq in its monthly Oil Market Report, writing: "Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk." Oil futures in New York rose 4.1% this week.

A very nasty group of rebels known as ISIS is closing in on Baghdad. ISIS stands for the Islamic State of Iraq and Syria, or the Islamic State of Iraq and Levant, and they are made of Sunnis. The government of Iraq is controlled by Shi’ites. ISIS has taken over the second largest city of Mosul; they have surrounded the largest oil refinery in the country, and they are moving to the capitol of Baghdad. So far, the Iraqi soldiers have been running away, but today a message from the Grand Ayatollah Ali al-Sistani, who is the highest religious authority for Shi'ites in Iraq, said people should unite to fight back.

In an interesting twist, before ISIS started ramping up the fight in Iraq, they were fighting in Syria, against the government of Bashar al Assad.

President Obama told reporters at the White House he would not send US troops back into combat in Iraq but had asked his national security team to prepare "a range of other options" to help Iraqi security forces. He specifically did not rule out the use of military action, which might include the possibility of air attacks to slow the rebel advance.

Pope Francis says the global economic system is near collapse. In an interview with la Vanguardia, the Pope said he was especially concerned about youth unemployment, and he denounced the influence of war and the military on the global economy, saying: “We discard a whole generation to maintain an economic system that no longer endures, a system that to survive has to make war, as the big empires have always done. Since we cannot wage the Third World War, we make regional wars. And what does that mean? That we make and sell arms. And with that the balance sheets of the idolatrous economies -- the big world economies that sacrifice man at the feet of the idol of money -- are obviously cleaned up."

The pope said there was enough food to feed all the world's hungry, and people’s needs should be at the heart of the economic system.

Following the elections in the European Union, France issued a report on debt, which contained several key findings, including the idea that the rise in the state’s debt in the past decades cannot be explained by an increase in public spending. The report also says that no one actually knows who holds the French debt. And the big conclusion of the report is that some 60% of the French public debt is illegitimate. An illegitimate debt is one that grew in the service of private interests, and not the wellbeing of the people. Therefore the French people have a right to demand a moratorium on the payment of the debt, and the cancellation of at least part of it.

Goldman Sachs and Bain Capital have agreed to pay a combined $121 million to settle a lawsuit that accused them and other firms of colluding to drive down the prices of takeovers before the financial crisis, according to a court filing on Wednesday. The deal, if approved by the court, would bring closure for Goldman and Bain of a seven-year-old lawsuit filed by former shareholders of the acquired companies, who claimed that private equity firms teaming up to do deals were partners in an illegal conspiracy to reduce competition.

The settlement deal also raises the stakes for the remaining defendants, which include some of private equity’s biggest firms. The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital, Silver Lake and the Carlyle Group are scheduled to head to trial in November. Now the $121 million dollar settlement is fairly small, but now that Goldman and Bains have broken ranks with the other defendants, the lawyers for the plaintiffs may gain additional bargaining power. The plaintiffs are seeking billions of dollars in damages, but because of the mechanics of antitrust law, the defendants could be liable for a multiple of that amount if they lose at trial.

The Justice Department has asked Citigroup for more than $10 billion to settle a probe into the bank’s sale of mortgage-backed bonds before the 2008 financial crisis. Prosecutors broke off talks with Citigroup earlier this week and are preparing to sue the bank after it offered less than $4 billion ($1 billion cash and the rest in consumer relief) to resolve the matter. The Justice Department could file a lawsuit as early as next week.

The department is taking a similar approach with Bank of America. Prosecutors also halted talks with the bank June 9 after it offered to pay more than $12 billion, short of the department’s $17 billion request. And then there is the outstanding case against BNP Paribas, where prosecutors are believed to be calling for more than $10 billion in fines for money laundering and sanctions violations. And this all follows on the heels of the Credit Suisse $2.6 billion fine and criminal guilty plea in a tax evasion case. No word whether prosecutors are looking at criminal charges against BofA or Citigroup. What we are seeing is that the fines are getting larger, but somehow with billions of dollars of penalties and multiple billions of dollars of wrongdoing, nobody ever goes to jail.

If you wonder why the prisons aren't filled with banksters, just follow the money from Wall Street to Capitol Hill. Earlier this week we saw one of Wall Street's favorite politicians of the decade, Eric Cantor, destroyed by a random teabagger who railed against him endlessly for pushing through Bush's TARP bailout of the big banks. Just this cycle, the financial sector had contributed $1,396,450 to Cantor's campaign coffers. And Cantor was just one of the politicians getting their wallets fluffed by Wall Street, a quick list of Wall Street favorites includes John Boehner, Spencer Bachus, Jeb Hensarling, and Democrats including Charlie Rangel, and Heny Stoyer. We have finally found one thing in Washington that is bipartisan – bribery, or should I say campaign finance…no, it’s bribery.

Elon Musk has announced that Tesla will let other companies use its inventions under an open-source-inspired agenda at the company. Here’s how Musk put it in a blog post:”Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”

Tesla has hundreds of approved patents, and many pending applications, for all manner of inventions tied to electric-vehicle technology. Tesla pioneered innovations that lowered the cost and increased the safety of battery packs. Its cars recharge much faster than others on the market, thanks to connector, software, and power-management advances. Now this public company will offer these smarts up to its rivals and ask nothing but goodwill in return.

And while it sounds like a radical idea, it might be a very smart business move. One thing that is required for electric cars is charging stations, as ubiquitous as gas stations. And even though Tesla has patents on battery technology, and they have some of the best batteries around with longer range and faster recharging, they still need to improve the technology. And Musk apparently isn’t concerned with the competition, saying: “You want to be innovating so fast that you invalidate your prior patents, in terms of what really matters. It’s the velocity of innovation that matters.”

Here’s an amazing statistic, compliments of a Tweet from Bill Gates. From 1901 to 2000, the United States built millions of miles of roads and interstate highways, plus Hoover Dam, plus many other damns, plus an incredible number of building; and during that 100 year period, we used 4.5 gigatons of concrete. In the past 3 ½ years, China has been on a building boom that has consumed 6.6 gigatons of concrete.

Tuesday, June 03, 2014 - Always Look on the Bright Side

Always Look on the Bright Side
by Sinclair Noe

DOW – 21 = 16,722
SPX – 0.73 = 1924
NAS – 3 = 4234
10 YR YLD + .06 = 2.59%
OIL + .37 = 102.84
GOLD + 1.40 = 1245.90
SILV + .05 = 18.91

Automakers reported strong sales of new cars in May, the strongest annual sales rate since before the 2008 financial crisis. Industry sales rose 11.3%. Chrysler and GM had their best month of May in 7 years. A record number of recalls at GM since the first of the year did not crimp demand for the automaker's new vehicles. Average transaction price for a new vehicle in May was $32,307, according to research firm Kelley Blue Book, which said average new-car prices were up $653 from a year ago, but down slightly from April.

The city council of Seattle Washington has voted to raise the city’s minimum wage to $15 an hour, the highest level of any major US city. Wages would begin to rise next year, ultimately reaching $15 from Washington state's minimum of $9.32 over three to seven years, depending on the business. Under the plan, firms with more than 500 employees nationally will be given at least three years to phase in the increase, those who provide health insurance subsidies would get four years and smaller businesses would be given seven years. US minimum wage is $7.25, although 38 states have set higher levels. The states of California, Connecticut and Maryland have recently passed laws increasing their respective wages to $10 or more in coming years.

Yesterday we heard the EPA proposal to cut power plant carbon emissions by 30% over the next 15 years. Even before the announcement we heard concerns about how that might affect jobs, most of it conjecture. In 2010 when the country was debating a clean energy bill aimed at cutting carbon emissions by 17%, the Congressional Budget Office predicted how destructive the law would be for American jobs. The CBO report concluded it wouldn’t be destructive at all, rather it would probably add more jobs than it killed.

The report found that overall, unemployment would probably increase in the short term. Workers may lose jobs by the thousands across industries that include coal mining, oil and gas extraction and transportation, the report said. And, it added, people who found new jobs by relocating or by learning new skills would probably be earning lower wages than before.

But the CBO report also said that, as polluting industries like coal mining shrink, industries with fewer carbon emissions would expand by as many as a half-million new jobs by 2025. States that are heavily coal-dependent will have to shift to some degree away from coal and to other, new resources; but the electricity has to come from somewhere, so there will be new facilities built to produce it.

In general, the debate about how environmental regulation will affect the economy is so polarized that studies end up with contradictory conclusions. In a 2012 review of more than two dozen such studies, a team of researchers at a New York University think tank found that studies commissioned by big energy companies usually found that regulations increase unemployment, while those by environmental groups found the opposite.

You’ve probably heard about the controversy surrounding the book Capital in the 21^st Century by Thomas Pikkety. A reporter from the Financial Times says some of Pikkety’s statistics are flawed. Pikkety responded by saying his research is solid. Now we have a new source to support Pikkety. According to a new report by stock market strategists at Bank of America Merrill Lynch, the rich are going to keep getting richer all over the world, pretty much just as French economist Thomas Piketty describes in his bestselling book.

And according to the folks at Merrill Lynch, this represents an opportunity for Merrill Lynch. They write: "We are aware of the controversy over Piketty’s math (see the FT Money Supply blog), but are generally comfortable with the thrust of his analysis, having read his 577-pager, looked at his (problematic) spreadsheets, and cross-checked his data with alternative, credible sources. His questionable assumptions do not detract from the power of his thesis."

Merrill pointed out that it has been predicting the rise of "plutonomies -- economies where economic growth is powered by and largely consumed by the wealthy few" -- for the past decade. While this might sound like a nightmare world for some of us, it is also a chance to make a bunch of money, for those mostly rich people with the means to invest in companies that most profit from the wealthy elite. This includes luxury goods makers, money managers and private banks.

Always look on the bright side.

For the past two years, European Central Bank President Mario Draghi has been saying “whatever it takes”, giving the impression the ECB was ready to take on a stimulus program, jawboning the markets with the hint of bold monetary action, right around the corner. Today, a report showed Eurozone inflation at just 0.5% in May. A separate report showed the Eurozone jobless rate at 11.7% in April, ticking down from 11.8% in March, but still more than 25% in Spain and Greece. For 2 years Draghi said “whatever it takes” and for 2 years he has done nothing. On Thursday, the ECB meets to determine monetary policy and Draghi is expected to do something, and it better be something worth the wait.

It is widely anticipated the ECB will cut its target on loans from one-quarter percent to 0.1%, maybe down to a flat zero; and they are expected to eliminate paying banks on their deposits, cutting that into negative territory, essentially charging the banks to park cash at the central bank. And if that’s all the ECB does, it will probably be considered a huge disappointment; cutting rates won’t change borrowing conditions materially for most companies and it won’t be enough to lift the Eurozone out of the deflationary cycle.

It’s time for another edition of banks behaving badly. This is really an ongoing saga but sometimes we turn our gaze away and focus on other important issues; you might think that means the banksters haven’t been misbehaving, but the truth is their transgressions are never-ending.

Last month, Credit Suisse agreed to plead guilty to criminal charges of helping tax cheats avoid paying US taxes. Credit Suisse was fined $2.6 billion, which is a hefty fine but the bank basically got off with punishment fitting a civil suit. Still, it sent a message.

The Treasury Department announced that more than 77,000 foreign banks from 70 countries have agreed to share information about US account holders as part of a crackdown on offshore tax evasion. Participating countries include all the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas. Under the law, foreign banks that do not agree to share information with the IRS face steep penalties when doing business in the US. The law requires American banks to withhold 30% of certain payments to foreign banks that don't participate in the program. And if the US banks fail to withhold the tax, they would be liable for it themselves.

Next on the list is BNP Paribas; the Justice Department is looking into claims the French bank broke trade sanctions against Sudan, Iran, and Cuba between 2002 and 2009; essentially, international money laundering. BNP Paribas is facing possible criminal charges and possible penalties of $10 billion. In December 2012, HSBC faced similar charges that it breached US sanctions and laws against money laundering; HSBC agreed to pay $1.9 billion in civil penalties.

 Now, US authorities are seeking criminal charges and a stiffer fine, the equivalent of a year’s profit for the French bank. The precise amount of the fines and the conditions attached to them is still a matter of speculation and probably negotiation. The crimes of BNP are probably no more egregious than the wrongdoing of HSBC, but for a long time BNP refused to admit wrongdoing. If you’ve ever watched a cop show on TV, you know how that works; cooperate and the punishment will be more lenient.

President Obama is traveling to France on Thursday to commemorate the 70^th anniversary of D-Day, the landing at Normandy. And while the visit is supposed to be a celebration of the liberation of France by its allies, relations between France and the US are a bit rocky. Many in France are concerned that America lets its own banks off rather lightly and cracks down on foreign banks instead to appease voters’ hatred of the banksters. American rules sometimes differ from European rules, and criminalize behavior that might be legal in the banks’ home country. And two more French banks, Societe Generale and Credit Agricole, are also thought to be in the crosshairs of American authorities for allegedly breaking sanctions and money laundering.

The French are getting nervous. The French foreign minister says the fine against BNP would be unfair and it would hit BNP Paribas' funds and result in fewer loans for French businesses. They claim the US is using its position as the leading global financial market to bully their banks. So on Thursday, Presidents Obama and Hollande will get together for D-Day festivities and dinner and conversation. The banking fines will be a major topic, but there are other acrimonious subjects; France seems determined to continue military hardware sales to Russia, which might not violate the recently imposed sanctions but certainly violates the spirit of the sanctions.

The US has embarked on a new way of fighting, and it involves sanctions and economic weapons; it is certainly preferable to the battles waged 70 years ago in Europe, but it won’t work if the banksters put their greed ahead of other priorities. The French politicians might whine about the hardships, but they need to get their banks in order, and for that matter so does the US.

Friday, May 09, 2014 - Happy Mothers' Day

Happy Mothers’ Day
by Sinclair Noe

DOW + 32 = 16,583
SPX + 2 = 1878
NAS + 20 = 4071
10 YR YLD + .02 = 2.62%
OIL - .23 – 100.03
GOLD + .30 = 1291.10
SILV un = 19.26

Another up and down session on Wall Street but at the close it was a record high for the Dow Industrial Average. Whenever the Dow hits a record high close, we have a celebration with milk and cookies.

For the week, the Dow rose 0.4%, while the S&P 500 fell 0.1% and the Nasdaq lost 1.3%, for its worst weekly loss in a month. Small cap stocks moved higher today, but were still down on the week. The Russell 200 Index managed to close the week just a smidge above the 200-day moving average, and still well below the 50-day. According to SentimenTrader, Tuesday was only the third time in 35 years of market history that the NYSE Composite was sitting at a 52-week high one day before the Russell 2000 dropped below both its 50- and 200-day moving averages the next day. The last two occurrences were March 1999 and November 2007.

Fed Chairwoman Janet Yellen delivered testimony on Capitol Hill this week followed by questions from the lawmakers; she was even asked about the possible overvaluation in small caps. We covered Yellen’s testimony pretty extensively, but there were a few tidbits that didn’t make most newscasts, so we’ll put a wrap on this story with a couple of questions from lawmakers.

First, Joint Economic Committee Chairman Representative Kevin Brady(R-Texas) pushed Yellen for more clarity on when the FOMC would raise interest rates but Yellen would not pinpoint a date. Brady also displayed a slide showing the change in the S&P 500 total return since the end of the recession compared to the change in real disposable income per capita. Since the official end of the recession Main Street families have seen income increase 4.2% compared to Wall Street gains of 108.2%.

The other really interesting question came from Senator Bernie Sanders (I-Vermont). The senator began with the facts: “In the US today, the top 1 percent own about 38 percent of the financial wealth of America. The bottom 60 percent own 2.3 percent. One family, the Walton family, is worth over $140 billion; that’s more wealth than the bottom 40 percent of the American people. In recent years, we have seen a huge increase in the number of millionaires and billionaires, while we continue to have the highest rate of childhood poverty in the industrialized world. Despite, as many of my Republican friends talk about ‘the oppressive Obama economic policies,’ in the last year Charles and David Koch struggled under these policies and their wealth increased by $12 billion in one year. In terms of income, 95 percent of new income generated in this country in the last year went to the top 1 percent. “

Sanders then introduced an academic study that concludes, “The central point that emerges from our research is that economic elites and organized groups representing business interests have substantial independent impacts on US government policy, while mass-based interest groups and average citizens have little or no independent influence.”

That sounds like an oligarchy. So Sanders asked Yellen: “In your judgment, given the enormous power held by the billionaire class and their political representatives, are we still a capitalist democracy or have we gone over to an oligarchic form of society in which incredible enormous economic and political power now rests with the billionaire class?”

Yellen did not answer “yes.” But she did say, “There’s no question that we’ve had a trend toward growing inequality and I personally find it a very worrisome trend that deserves the attention of policy makers.” She also expressed concern that trends toward growing inequality “can shape [and] determine the ability of different groups to participate equally in a democracy and have grave effects on social stability over time.”

Also this week we had the White House released a report on climate change, the National Climate Assessment. The report basically says we need to make big changes. Today, speaking in California, President Obama said that he had ordered $2 billion in upgrades to federal buildings to increase their energy efficiency, adding that the Department of Energy would also be adopting new standards that would be the equivalent of taking 80 million cars off the road. Obama was speaking at a Wal-Mart, and it may be the first time a sitting president has visited a Wal-Mart; this after a multi-stop fundraising lalapalooza through the Golden State, and with a deaf ear to his own efforts to get a minimum wage deal past Congress. Meanwhile, the White House installed solar panels today.

There will undoubtedly be massive investments to combat climate change, but it isn’t always easy to spot the opportunities. According to a Bloomberg article, Wall Street’s idea of investing in climate change is to load up on natural gas, because it’s less dirty than other forms of fossil fuels. On the day the National Climate Assessment report was issued, the 44-company Standard & Poor’s Energy Index reached a record, and $322 million of cash flowed into exchange-traded funds that specialize in energy.

Here’s how Wall Street deals with climate change. The potential for hotter summers and colder winters will raise energy demand, and that suggests higher gas prices. Weather extremes are good for the energy business. More energy use, better for the earnings.

I can’t make this stuff up.

Next week’s economic calendar includes a Tuesday report on retail sales. Tuesday also brings a Commerce Department report on inventories, which was a major drag on first quarter GDP estimates. Also the CPI, or Consumer Price Index, which is expected to show tame inflation at the retail level with the possible exception of food prices. Next Friday we’ll get the April housing report and a chance to see if homebuilders are coming out of winter hibernation; an interesting subset will be whether starts on apartments are outpacing starts on single family residential; that reflects the shift toward renting rather than owning one’s home.

Over the weekend, we’ll follow the vote in Ukraine. There will be a referendum, I’m not sure what it will mean but it seems like a tipping point – maybe. The economic fallout from Ukraine moves at a slower pace but it apparently is having an effect as the slump in Russia's economy is taking its toll on sales and profits at businesses in the rest of Europe. The International Monetary Fund says Russia has already been dragged into a recession as investors flee the emerging market for fear of being caught up in the escalating conflict in eastern Ukraine. Trade and investment between Russia and Europe is worth about $500 billion a year. French bank Societe Generale cut first quarter net profit as they wrote down the value of their Russian banking activities. German factory orders in March fell by 2.8% compared to February, although it’s tough to say how much of that was related to tensions with Russia.

Meanwhile, Gazprom is threatening to cut off gas supplies to Ukraine. High quality global journalism requires investment. Russia’s energy minister said the state-controlled enterprise would move to a system of pre-payment for supplies to Ukraine from next month, bringing the simmering gas dispute between the countries a step closer to crisis.

One more thing this weekend. It’s Mothers’ Day. Don’t forget, and maybe take a little time to show your respect; respect for the work moms do, which is extremely undervalued, whether in the workplace or in the home. Acknowledge that the work moms do is what really makes everything else in the economy function. Admit it, society would collapse without the hard work of moms. I’m not saying you should forget the chocolates and flowers this weekend, which would be a mistake; just be sure they’re delivered with a heartfelt “thank you” and love.

Tuesday, December 10, 2013 - Impossible Until It Is Done

Impossible Until It Is Done

by Sinclair Noe

DOW – 52 = 15,973
SPX – 5 = 1802
NAS – 8 = 4060

10 YR YLD - .06 = 2.79%
OIL + 1.17 = 98.51
GOLD + 21.60 = 1263.00
SILV + .59 = 20.53

Today federal regulators voted to implement the Volcker Rule. It won't actually be implemented until 2015, but the vote was today. The Volker Rule will lay out specific activities that banks can and can't do.

The final rules would prohibit proprietary trading by banking entities. As required by the Dodd-Frank Act, the final rules would include exemptions for: Underwriting - this exemption would require that a bank act as an underwriter for a distribution of securities (including both public and private offerings) and that the trading desk’s underwriting position be related to that distribution. Market making-related activities - a market-making desk may hedge the risks of its market-making activity under this exemption. Risk-mitigating hedging - this exemption would require that hedging activity is identified specifically. Trading in certain government obligations banks could still trade in Treasuries and muni's, and what the heck, foreign sovereign debt or its political subdivisions.

The final Volker Rule would also clarify which activities are not considered proprietary trading, and it is looking like nothing is considered a proprietary trade with the possible exception of when a bank trader places a bet on the Yankees with his local bookie. You may recall that Jamie Dimon tried to claim that the London Whale was not involved in proprietary trading, rather hedging; of course this was after he claimed he didn't know what the London Whale was doing

The final rules would become effective (appropriately) April 1, 2014. The Federal Reserve Board has extended the conformance period until July 21, 2015. Turning the Volker Rule into regulations has been slowed by a lobbying onslaught. And it looks like the banking lobby has won. The banks met with regulators on a regular and constant basis, and basically rewrote the rules. There was a token appearance from bank reformers, but the odds were against them by about 99 to 1.

The Volker Rule won't be totally worthless. Already many banks have shut down or spun off the desks they used for trading that was clearly solely for their own account, what’s known as proprietary trading. Banks do other kinds of trading that can also make them money, or loses it. Figuring out which trades fall into which category isn’t always easy, and deciding how much risk is too much for which kind of transaction may be even harder. On these issues, how regulators decide to enforce the rules may be as important as the rules themselves. Some regulators may be concerned only with seeing that the markets operate smoothly, other regulators may actually try to prevent banks from trading that would blow up the bank and possibly the global financial system.

The banks say there is no way to distinguish between proprietary trading and hedging and market making. Paul Volker, the former Chairman of the Federal Reserve, the guy the rule was named for; Volker says the distinctions aren't tough: “It's like pornography, you know it when you see it.”

Bottom line is that the banks are going to try to skirt the rules, and whittle them down a bit more before implementation, but if this fails, the logical next step is to make it real simple and reinstate the Glass-Steagall Act.

And here is why it will likely fail: the banks wrote the rules, it's all way too complicated, too big to fail is still a problem – only bigger, and nobody cares. Admit it, your eyes are starting to glaze over. Your concern is whether the ATM will spit out cash, will the bank process your payment to the electric utility, and maybe they can pass out a few mortgages from time to time. So, nobody will say much until the next credit freeze, or the next international crisis when everything goes to hell in a handbasket and the banks come begging for bailouts. When that happens, we can all shout bloody murder.

Don't worry. What could go wrong?

Right now, politicians are gathering in Washington to craft and pass a budget deal and avert another government shutdown, which could happen January 15, unless they can put together a deal. And it looks like they might be close to a deal to de-fuse this fiscal time bomb they set themselves.

Any tentative budget deal might allow spending to rise from the scheduled $967 billion for fiscal 2014 to around $1 trillion. While that increase in outlays would be offset by raising some government fees and possibly cutting federal workers' retirement benefits. The plan does not purport to be any "grand bargain" that would slash the federal deficit. They may have a deal in the next few days, but for right now, there is no deal.

GM is once again General Motors, and no longer Government Motors. The US Treasury sold its last shares yesterday. Bailouts from the Bush and Obama administrations helped GM avoid liquidation and instead reorganized in 2009 bankruptcy. In return, the Treasury became a shareholder in GM. The US said it lost about $10.5 billion on its investment of $49.5 billion, but that's not the entire story.

GM was returned to investment-grade status by Moody’s Investors Service in September after losing it eight years ago; it's back in the S&P 500 index (it had been kicked out back when it was facing bankruptcy). Share price is up over 40% year to date. They're making good cars that are winning awards. And they have a new CEO, Mary Barra, the first female CEO of an automotive company.

According to a study by the Center for Automotive Research, a total automobile-industry shutdown from a liquidation of GM and Chrysler would have cut 2.63 million jobs from the US economy in 2009.  The bailout saved or avoided the loss of $105 billion in transfer payments and the loss of personal and social insurance tax collection in 2009 and 2010.

Eight major technology companies have joined forces to call for tighter controls on government surveillance, issuing an open letter to President Obama arguing for reforms in the way the US snoops on people.

The companies said that while they sympathize with national security concerns, recent revelations make it clear that laws should be carefully tailored to balance them against individual rights. The letter reads in part: "The balance in many countries has tipped too far in favor of the state and away from the rights of the individual — rights that are enshrined in our Constitution... This undermines the freedoms we all cherish. It's time for a change."

The companies signing off on the letter include: AOL, Apple, Facebook, Google, LinkedIn, Microsoft, Twitter, and Yahoo. It sure would have been nice if the tech companies had been loudly supporting intelligence reform before Snowden's disclosures.

And today, more than 500 authors delivered a petition urging the United Nations to create an international bill of digital rights that would enshrine the protection of civil rights in the internet age. The signatories say the capacity of intelligence agencies to spy on millions of people's digital communications is turning everyone into potential suspects, with worrying implications for the way societies work.

The petition says the extent of surveillance revealed by Snowden has challenged and undermined the right of all humans to "remain unobserved and unmolested" in their thoughts, personal environments and communications. "This fundamental human right has been rendered null and void through abuse of technological developments by states and corporations for mass surveillance purposes."

The statement adds: "A person under surveillance is no longer free; a society under surveillance is no longer a democracy. To maintain any validity, our democratic rights must apply in virtual as in real space."

Demanding the right "for all people to determine to what extent their personal data may be legally collected, stored and processed", the writers call for a digital rights convention that states will sign up to and adhere to. "Surveillance is theft. This data is not public property, it belongs to us. When it is used to predict our behaviour, we are robbed of something else – the principle of free will crucial to democratic liberty."

Have you heard about the Doomsday File. Edward Snowden claims he didn't bring a single NSA document into Russia, but as journalist Glenn Greenwald has hinted, he may have access to a trove of pilfered documents stored on a data cloud. British and US intelligence officials tell Reuters they think he may have a "doomsday" cache containing highly classified material to ensure he won't be arrested or physically harmed. He's believed to have enough data to keep the bombshell reports coming for the next two years. It's unclear if intelligence agencies know where the data is stored, but somehow they're aware that at least three people have the passwords, which are only valid at certain times each day.

Of course today also the memorial service for Nelson Mandela. More than 100 current and former heads of state plus tens of thousands of others, attended the service at a soccer stadium in Soweto. Jacob Zuma, the current president of South Africa was booed. President Obama shook hands with Cuban President Raul Castro. It was a peculiar service, rambling and punctuated by high winds and a harsh rain. I think the best quote of the day goes to President Obama, who said: "Nelson Mandela reminds us that it always seems impossible until it is done." And while there were many dignitaries, it was a day for the people, not the powerful.

Tuesday, October 08, 2013 - Low Probability High Consequence

10082013 Script

Low Probability High Consequence

by Sinclair Noe

DOW – 159 = 14,776
SPX – 20 = 1655
NAS – 75 = 3694
10 YR YLD un = 2.63%
OIL + .53 = 103.56
GOLD – 3.50 – 1319.90
SILV - .06 = 22.39

The Dow Industrials are down for 11 of the past 14 sessions, posting a loss of nearly 900 points. It's not exactly a crash; Wall Street is still expecting a resolution to the debt ceiling and the shutdown. The debt ceiling will likely be resolved with some short-term band-aid, but there is a chance that the idiots will mess it up and there will be a default. There is a low probability of default but a high consequence; that's a nasty mix and the reason I don't play Russian Roulette.

Most financial markets are only slowly getting worried about the possibility of a debt default, but in one tiny corner of the bond market things are starting to look a little panicky.

Today, investors dumped one-month Treasury bills due for payment after October 17, the date the Treasury Department has warned it will no longer have the cash to pay all of its obligations unless Congress raises its borrowing limit, known as the debt ceiling. Every day that passes after that date raises the risk the government will default on some of its debt. These short-term bills will probably be the first to go unpaid. Interest rates and bond prices move in opposite directions; so as prices dropped today, rates spiked, which means the government is paying more to borrow for one month than it does to pay for one year, a freak occurrence. Yep, everything is going exactly according to plan.

President Obama held a news conference today, calling on Republicans to both fund and reopen the government and to raise the nation’s borrowing limit as the federal shutdown entered a second week. President Obama phoned Speaker Boehner earlier this morning to urge him to allow a House vote on a budget bill without conditions, as Mr. Boehner called on the president to come to the negotiating table to resolve a spending standoff that has shuttered the government for eight days.

So far this whole shutdown hasn't been working out. What has been accomplished? Damage the livelihood of millions of Americans? Check. Government secretaries, food-truck operators, cleaners who work in motels near national parks: They’re all hurting. Waste billions of taxpayer dollars? Check. It costs a lot to shut agencies, Web sites and parks, and it will cost a lot to reopen them. Meanwhile, the House has voted to pay the salaries, eventually, of hundreds of thousands of employees whom it has ordered not to work.

And the lack of accomplishment just reinforces intransigence. In private, it appears Speaker Boehner has told his allies that he won’t bring up a clean CR, and he’s hopeful that as the deadline nears, President Obama will deal. It'd be nice to read that in private, there was some more conciliatory language, but at the moment, all of the private rhetoric is about hardening people's positions and convincing the team that the other side will cave.

In 1860, Abraham Lincoln had some choice words for Southerners who charged that he, not they, would be to blame for secession if Lincoln refused to compromise on the extension of slavery. Lincoln said: “A highwayman holds a pistol to my ear, and mutters through his teeth, ‘Stand and deliver, or I shall kill you, and then you will be a murderer!’ ”

So, while there may be a low probability of default, you still have to consider who's got a finger on the trigger. The debt ceiling is considered leverage, not a bullet to the skull.

And even if there is a stop-gap resolution to the debt ceiling and the shutdown, we still have other issues to deal with. The international Monetary Fund today issued a warning to central banks to move with extreme caution as they wind down emergency stimulus, warning that a botched exits risk setting off an asset crash in emerging markets and worldwide contagion.

The report said a witches’ brew of sliding currencies and excess credit could spin out of control. “Thin markets could amplify price movements and kick off sale spirals. Contagion effects could both amplify and broaden asset price movements and capital outflows as investors flock out of emerging market economies.”

Oh yeah, the taper!

The Supreme Court is in session again. I'm not sure how that works in a government shutdown. Maybe they pay the stenographer with an IOU, or a gift card to Wal-Mart. Today they heard arguments in a very important case,  McCutcheon v. Federal Election Commission, a case that maybe you could call Citizens United 2.0. 

 Here's the background. During the 2012 election season, Shaun McCutcheon, an electrical engineer who lives in Alabama, started making donations to all the candidates he supported. He made many donations, always staying under the donation limit of $2,500. Eventually, though, McCutcheon went over a different limit: the cap on the overall amount of money a single donor can dole out. Political donors can give no more than $123,200 during the two-year election cycle—$48,600 to federal candidates and $74,600 to political parties and related committees. McCutcheon believed the aggregate limit was unreasonable and unconstitutional, and so, with the backing of the Republican National Committee, a coplaintiff in his case, he sued his way to the Supreme Court.

At stake in McCutcheon is whether it's constitutional for the government to cap overall donations made by a single political donor. McCutcheon, his lawyers, and their conservative allies say the limit curbs First Amendment rights and does little to guard against corruption or the appearance of corruption, the court's justification for placing limits on political giving and spending. On the other side, campaign finance watchdogs and their lawyers say ending the aggregate limit would create a system in which wealthy donors could cut multimillion-dollar checks to candidates and parties, making Republicans and Democrats alike even more beholden to wealthy contributors.

The Supreme Court's landmark 1976 case Buckley v. Valeo upheld the overall contribution limit, at the time set at $25,000 for every two-year cycle. The court held that limiting the amount of contributions imposed only a marginal restriction on speech since the important thing was the act of contributing, not the amount). And the court said the government's interest in preventing corruption and the appearance of corruption justified that marginal restriction.

Fast forward to Citizens United, which overturned a couple of previous decisions that argued that some donation limits are constitutional. What happens if the overall cap is eliminated? A single donor could give nearly $3.7 million by maxing out his or her donations to every candidate of a preferred party, plus the state committee, the national party and its affiliated committees. With the overall limit scrapped party operatives could create mega-fundraising committees that can solicit seven-figure checks and then spread the money far and wide within their party at the federal and state level.

But wait, there's more! The Supreme Court has agreed to let a lawyer for the Kentucky Republican Seantor Mitch McConnell argue before the court. McConnell, the Senate minority leader is a vehement foe of campaign finance regulations; he led the fight to overturn the 2002 McCain-Feingold law with his suit, McConnell v. FEC, which he lost, and he has repeatedly filibustered Senate bills to beef up disclosure of dark money spending in our elections.

This time, McConnell wants to go even farther than McCutcheon;today the attorney for McConnell argued that the court should revisit the underlying legal principle that justifies whether there should be any limits on contributions to candidates. The aggregate contribution limits, he said, force candidates and political parties to compete for an "artificially limited pool of money." That seems a strange argument in light of Citizens United which allows an individual, like Mr. McCutcheon, to say whatever he wants and spend as much as he wants on independent, campaign related messages.

The FEC will have a tough row to hoe before the Roberts Court. The FEC seems to be arguing against an overall cap, but if an individual can give a few thousand to 23 different candidates, why not give the same amount to a 24^th candidate? Based upon today's arguments, that is probably what will decide the issue, but it misses the point. This is not a case about freedom of speech. One thing the Court has not truly explained is how spending a boatload of money is considered free speech. Of course, one should be free to speak about the government and politics, but I don't think that should include the ability to buy politicians and then bribe them to look after one's special interests.

James Madison wrote that government should be dependent on the great body of the people and not an inconsiderable proportion, or a favored class of it. There was a time, in the late 19th Century I believe, when business moguls actually put bags of cash on the desks of politicians to buy favors. Money has always been involved in this country's electoral politics, but many of the most blatently corrupt practices were reigned in during the 20th Century. Now, we seem to have returned to the age of the robber barons and to politicians who are for sale to the highest bidder. At every level, bottom to top, campaign contributions are a bribe. And what the Supreme Court is deciding is the difference between a democracy and an oligarchy; unfortunately that is not what they will consider, and that is part of the shame.

The justices will issue their opinion in McCutcheon before the end of June.