Monday, November 18, 2013 - Activism from Billionaires and Tweeters

Activism from Billionaires and Tweeters
by Sinclair Noe

DOW + 14 = 15.976
SPX – 6 = 1791
NAS – 36 = 3949
10 YR YLD - .04 = 2.66%
OIL - .83 = 93.01
GOLD – 14.40 = 1277.00
SILV - .38 = 20.50

This one didn't feel like a record high celebration, in part because the major indices closed well off the intraday high. The Dow had been trading above 16,000 for much of the afternoon, but a late sell-off saw the Dow finish below that nice round number; still, it was good enough for another record high close. The S&P 500 hit an intraday high of 1802, but closed in negative territory. Still we mark today's gains in the Dow in the “win” column and that means we have now had 39 record high closes on the Dow in 2013.

The trend is in place, firmly. The rise in the Dow Jones industrials continues to be confirmed by an associated rise in the Dow Jones Transportation Average. A look at the S&P 500 also shows a clear breakout at the top multiyear resistance level. The breakout may be false, due to the lack of active participation, as evidenced by light volume. So far, it has held up pretty well, contrary to its overbought condition. Everything is pointing higher as long as the Fed continues to pump money into the economy; and it looks like they will continue until March, although they could start to taper in January or December. Or maybe Bernanke will go out with a gift of extra stimulus.

More than half the gauges Janet Yellen uses to track the labor market are below pre-recession levels, reinforcing the likelihood she will support never ending easy money policy. While payrolls have increased and firings slowed, four measures: unemployment, labor force participation and rates on hiring and voluntary quits are still worse than at the start of the recession in December 2007. Hard to say when we'll see taper, but the party will slow down when the Fed removes the punchbowl. Until then stay alert, don't doze off, stay agile. A trend in place remains in place, until it reverses.

Economist Paul Krugman, in his column in the New York Times, asks us to imagine a world in which depression like economics are the new normal. Krugman writes: “What if depression-like conditions are on track to persist, not for another year or two, but for decades?”

If that’s the case, then those with their hands on the economy’s wheel are going to have to readjust their worldview. Krugman writes: “Central bankers need to stop talking about ‘exit strategies.’ Easy money should, and probably will, be with us for a very long time.”

As a result, deficit hawks will have to wait a long, long while before their warnings about federal debt hold any real value. “We can forget all those scare stories about government debt, which run along the lines of ‘It may not be a problem now, but just wait until interest rates rise.’”

Carl Icahn was speaking today at the Reuters Global Investment Outlook Summit and he said he could see a big drop in the stock market because earnings at many companies are fueled more by low borrowing costs than management's efforts to boost results. Of course this is not news. For several years, we've seen and talked about the tactics of corporate management to boost earnings by cutting expenses without commensurate attention to innovation and growing revenue; we've discussed the advantage of a low interest rate environment; and we've gone into detail about the little trick of stock buybacks to gloss over a lack of creativity.

It makes sense to invest in research and development to create value and grow a business and capture market share; or you could buy back shares and give the false impression of growing earnings per remaining shares. Icahn favors the latter.

Apple, minus the paranoid attention to fine tune design and function under the leadership of Steve Jobs, has reverted to the innovation of adding colors to the iPhone cases. Maybe someone really needs a 41-megapixel camera on a Nokia smartphone. Samsung's new innovation is a bended display; the screen is curved a little and displays information on different parts of the screen; so if you look at it from the side, you can see whether there is a notification. Or you could actually pick up the phone and look at the screen. The way some high tech companies pursue an innovative edge is through the patent courts, although I didn't hear if Icahn had anything to say about that tactic.

The average selling price of smartphones around the globe has been plunging this year and Qualcomm just warned a few weeks ago about a decline in high-end phone demand. The hot new idea is a watch. Dick Tracy had one of those 50 years ago, so it's about time someone got around to actually building one.

The hot new technology seems to be coming in the form of a Sony PlayStation; they sold one million in the first 24 hours of the rollout of a new model. Games, bread and circuses; all controlled by the flick of the opposable thumb. Forget about hunger, clean water, renewable energy. This is how we train the next generation of drone warriors.

Last week we talked about Judge Jed Rakoff's speech dealing with the reasons why bankers haven't gone to jail:

US attorneys and the Federal Bureau of Investigation have other priorities, whether it's antiterror cases, accounting frauds after Enron's bankruptcy, or Ponzi rip-offs after Bernard Madoff's huge scam. Financial frauds are particularly tough to crack, and many of the prosecutors with the requisite knowledge have been moved to other areas.

Law enforcement agencies have had to compete for a shrinking pot of money from Congress, and the best way to do that is by beefing up their statistics with smaller, easier cases and avoiding the years-long financial fraud probes that may turn up nothing.

The federal government's involvement in the mid-2000s bubble, deregulating the financial industry, keeping interest rates low and such, may also have given prosecutors pause.

The US has shifted over the last 30 years from prosecuting high-level individuals to using delayed-prosecution agreements to settle cases against entire companies. That shift “has led to some lax and dubious behavior on the part of prosecutors," Rakoff said, including allowing managers to sweep crimes under the rug.

But the public at large is not happy with the banksters; witness last week's planned Twitter Q&A session planned by none other than JPMorgan. JPM execs thought it would be way cool to have a Twitter session on the topic of “What carreer advice would you ask a leading exec at a global firm? Tweet a Q using #AskJPM.

So people sent their questions and comments. Here's a sampling:

I have Mortgage Fraud, Market Manipulation, Credit Card Abuse, Libor Rigging and Predatory Lending AM I DIVERSIFIED?

Can I have my house back?

Did you always want to be part of a vast, corrupt criminal enterprise or did you "break bad"?

Is the fact that you've paid over half a billion in fines since August a source or pride, or are you embarrassed it's not higher?

What's it like working with Mexican drug cartels? Do they tip?

When Jamie Dimon eats babies are they served rare? I understand anything above medium-rare is considered gauche.

Is it the ability to throw anyone out of their home that drives you, or just the satisfaction that you know you COULD do it?

Is it easier to purchase a congressional representative or a senator?

How much does JPM spend every year buying off members of the SEC, and what is the average rate?

Did you have a specific number of people's lives you needed to ruin before you considered your business model a success?

After about 7 hours, JPM realized they had lost control and the bank pulled the plug on the social media event. 

Wednesday, May 16, 2012 – An All Out Jog to the Finish – by Sinclair Noe

DOW – 33= 12,598
SPX – 5 = 1324
NAS – 19 = 2874
10 YR YLD -.01 = 1.76%
OIL – 1.16 = 92.82
GOLD – 4.00 = 1541.30
SILV -.45 = 27.37
PLAT + 3.00 = 1439.00

A Judge has been appointed to lead Greece until the next round of elections in June; leading Greece is a misnomer. The judge will be the caretaker prime minister, replacing another caretaker prime minister. Yesterday, we told you about the run on the banks. On Monday, Greeks pulled out about $900 million dollars, Euros actually. Makes sense. If you think your country will exit or be kicked out of the Euro-union, and be forced back to the drachma at about half the value, you might want to grab some Euros and hold on. Having the actually paper money in your hands prevents the banks from cutting the value in half; banks will do that sort of thing. Right now, it's not really a bank run, more of a jog. Paul Krugman explained why it is a problem:

“Where are the euros coming from? Basically, banks are borrowing them from the Greek central bank, which in turn must borrow them from the European Central Bank. The question then becomes how far the ECB is willing to go here; is it willing, in effect, to lend enough money to buy up the entire balance sheet of the Greek banking sector, given the likelihood that this sector will be left insolvent by Greek default? Yet if the ECB says no more, Greek banks stop operating — and it’s hard to see how they can be restored to operation except by ditching the euro and using something else.

“And if that happens, surely depositors in other European countries will start their own bank jogs.”

Where are the Euros coming from? Well, they're not. Today, the European Central Bank stopped funding operations for some Greek banks. Is this how it ends? With a bank jog?

What happens if Greece tells the Euro-union to go to hell? What happens if the Greeks do a full-fledged “shove this” default on all their outstanding debt? Well, someone did a study and they conclude that it would cost France around 66-billion-euro, and it would cost Germany about 90-billion-euro. The looses for French banks would run about 20-billion-euro, and the losses for German banks would be around 4.5-billion-euro. That's just from the default; it doesn't include the fallout. The real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between 15-trillion-euro in public and private debt in these countries and the 27-trillion-euro European banking network.

Has the economy slowed enough to cause the Fed to dish out free money? Most of the reports indicate the economy is shuffling along. The stock market is stumbling. Is that enough to motivate the Fed? The Fed's program to "extend the average maturity of its holdings of securities" (aka Operation Twist) is scheduled to end in June. The FOMC meets in June. Today, the Fed released the minutes of the April meeting and we learn that “several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.”

What exactly would be considered momentum lost or a greater downside risk? Two quick thoughts: first, the whole mess in Europe deteriorates; second, Washington screws up. Yesterday, House Speaker John Boehner promised to oppose any increase in the debt ceiling unless there are big spending cuts. It's deja vu all over again. You remember, last year we had the same problem, resulting in the loss of the United States' Triple-A credit rating. Remember, when they appointed the bi-partisan Super Committee? And remember how the Super Committee failed miserably at everything except collecting campaign bribes? And remember how the Super Committee was designed to trigger automatic and simultaneous tax increases at the end of the year? Mutually assured destruction for both political parties and for the economy. And it turned out the politicians on the Super Committee cared more about their campaign donors and their political parties than they cared about the well being of their country. Tax increase and spending cuts could vaporize about $500 billion dollars next year and trillions over the next decade, and result in another credit downgrade. Yea, that might be considered “momentum lost”.

For now, Bernanke is saying it is up to fiscal policymakers to save the economy, but if he's expecting Congress to do anything, he has clearly lost his sanity. The Fed will have an accommodative easing policy, which may or may not be called QE3, and they might wait past the June FOMC meeting if they feel the need to keep their powder dry, but make no mistake – the Fed will have an accommodative monetary policy. Of course, the Fed has tried an accommodative monetary policy two times before and the results were pathetic; well, it was pathetic for the economy but it was pretty sweet for the banksters. Of course, if the Fed decides to do nothing, no Quantitative Easing Part 3, then the money that's been coming out of the stock market will turn into a torrent. Has the economy slowed enough to cause the Fed to dish out free money? Wrong question.

With all the malfeasance associated with JPMorgan this week, this next story hasn't received the attention it deserves. Once again, MattTaibbi has dished some great dirt on Goldman Sachs. There has been an ongoing legal battle between Goldman Sachs, Bank of America/Merrill Lynch and Overstock.com. Last week, the banks filed some paperwork with the courts and they filed an unredacted version, and they inadvertently entered into public record a laundry list of misdeeds.

Specifically, the documents relate to short selling, which is a legal practice, except the way Goldman Sachs did it. Normally, short selling involves borrowing shares from a brokerage account. For example, if I think stock xyz is heading lower, I instruct my broker to borrow shares from your broker. Your broker takes the shares out of your account and gives them to me. I sell the shares, for example 1 million shares for $1 million, or a dollar per share. The price drops, and in a little time, I go out into the market and buy 1 million shares for 50 cents each, and I return those million shares to your broker and your broker puts a million shares into your account. You get nothing. Your broker collects a fee. I pocket $500k. All legal.

Although sometimes, it isn't easy to find 1 million shares to lend to someone. When that happens, I have to pay your broker a premium to borrow the million shares. These hard-to-borrow stocks, stocks that cost money to borrow, are called negative rebate stocks. In some cases, these negative rebate stocks cost so much just to borrow that it doesn't make sense to do the trade. Goldman Sachs figured out a way around that problem. Even if they couldn't find another broker willing to lend shares, they did the trade anyway. Why bother paying the high cost of borrowing “negative rebate” stocks? Instead, Goldman Sachs just sold stock they didn't possess. If you don’t have to actually locate and borrow stock before you short it, you’re creating an artificial supply of stock shares. At one point, 107% of all Overstock shares available for trade were short – a physical impossibility.

Here's what it means – Goldman and Merrill made it cheaper and easier to bet down the value of the stock by adding fake supply, in turn making it easier to make money by destroying value. This is what the banks like Goldman Sachs and Merrill Lynch do when they turn the stock market into a casino – they destroy real, job-creating growth.