Thursday, June 27, 2013 - To Not Trade in Principles

To Not Trade in Principles

by Sinclair Noe

DOW + 114 = 15,024
SPX + 9 = 1613
NAS + 25 = 3401
10 YR YLD - .05 = 2.48%
OIL + 1.35 = 96.85
GOLD – 24.40 = 1201.80
SILV - .01 = 18.61

First some economic news, then we'll head to Ecuador.

Consumer spending rose a seasonally adjusted 0.3% in May, reversing a 0.3% decline in April. So, for the past 2 months, it's a wash. Adjusted for inflation, the numbers are slightly lower. Consumers bought more cars and trucks in May and spent a bit more on gasoline, reflecting higher prices at the pump. They also ate outside the home more often and shelled out extra cash for housing, financial advice, insurance and recreational activities. Since incomes rose faster than spending in May, the savings rate of Americans climbed to 3.2% from 3%. That’s the highest level since December and well above the 2013 low of 2.2%.

In a separate report, the Labor Department reported a 9,000 drop in first-time jobless claims for the last week.

The National Association of Realtors reports pending home sales jumped in May to reach a six-year high, The NAR's pending home sales index climbed 6.7% to 112.3 in May, from a downwardly revised 105.2 in April. The index was up 12.1% from May 2012 levels. 

Freddy Mac reports the average rate for the 30-year fixed-rate mortgage rose to 4.46% in the week ending June 27, the highest rate in a couple of years, and up from 3.93% in the prior week. That gain of 53 basis points is the largest weekly change since 1987. A year ago, the 30-year rate averaged 3.66%.

Earlier this week, Dallas Fed President Richard Fisher likened market participants to “feral hogs” for pushing bond yields higher. Today, three more top Federal Reserve officials took issue with the increase in interest rates. William Dudley, the president of the New York Fed, Fed Gov. Jerome Powell and Atlanta Fed President Dennis Lockhart were less colorful but more pointed.

Dudley said expectations of an earlier rate hike were “quite out of sync” with both FOMC statements and the expectations of most FOMC participants,” and he said any rise in short-term rates “is very likely to be a long way off.”

Powell, in a separate appearance, said the spike in bond yields over the past month is “larger” than would be justified by any “reasonable reassessment” of the path of Fed policy. Powell said that if the market is now pricing in an increase in rates in 2014, “that implies a stronger economic performance than forecast either by most FOMC participants or by private forecasters.”

And Lockhart said that some in the markets appeared to mishear what Bernanke said. The three Fed officials were generally upbeat about the economic outlook despite what Lockhart admitted were “weak inflation readings, mixed vital signs, and choppy quarter-to-quarter growth statistics.”

As expected, the Commodity Futures Trading Commission said it is suing Jon Corzine, who was MF Global’s chief executive, and the firm’s former assistant treasurer Edith O’Brien for the unlawful use of about $1 billion in customer funds that “harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale.”

The CFTC, cites internal MF Global phone recordings as evidence in alleging that Corzine knew the company was running out of cash and directed it to keep paying out obligations without asking where the money came from. The CFTC cites one MF Global official’s comment that “we have to tell Jon that enough is enough. We need to take the keys away from him.”

CFTC said Corzine is charged with being more than a passive actor in the downfall of MF Global. The CFTC is seeking financial penalties against Corzine and O’Brien and also to ban them from trading and registering to work in the derivatives markets overseen by the agency. MF Global has agreed to settle with regulators and payback any customers who are still owed money as well as pay a $100 million fine. I still have a hard time understanding how this is not a criminal matter.

The SEC is now investigating the relationship between Thomson Reuters and the Institute for Supply Management. ISM manufacturing data was sent out early on June 3^rd to Thomson Reuters high-speed clients, or high frequency traders, and there were trades based on the early release of data; by some estimates more than $28 million in trades in a matter of 15 milliseconds prior to the official release.

Earlier this week President Obama announced his plans to fight global warming. The GOP response was that it would kill jobs. Today, Christine Lagarde, the managing director of the International Monetary Fund, said that climate change will drive job creation. “Climate change will create jobs. It will create disasters before it creates jobs, but it will create jobs.” Clean up on Aisle 3.

Where in the world is Edward Snowden? Right now, it looks like Snowden is doing his best imitation of Tom Hanks in the movie “The Terminal”; remember that Hanks played a guy who's country was lost while he was on an airplane, and when he landed, his passport was no longer valid; he ended up stuck in a no-man's land in the terminal of an airport. The best guess is that Snowden is in the terminal of the airport in Moscow, not quite admitted into Russia. At some point he will leave the terminal. Where will he go?

Well, he's already been in Hong Kong and Moscow; and in each location the governments of China and Russia have refused extradition; certainly a bit of a slap on the diplomatic wrist, but that's China and Russia. And if Snowden were to stay in China or Russia, at some point the State Department would step up pressure, and he might be extradited. So, where will he go?

The possible candidates for an ultimate landing spot include Iceland and Ecuador. Why would either country accept Snowden? Well, for Iceland the thinking is that they've already kicked out the bankers; they have no real reliance on the US or for that matter, on our European allies. Iceland is reverting back to fishing, and they really just don't care. For Ecuador, it's a little bit different.

The US is Ecuador's largest trade partner. Ecuador now sends about 40 percent of its exports to the United States, including crude oil, seafood, fruit and nuts, cocoa and flowers. The nation’s total exports to the United States tallied up to $9.6 billion in 2011. Right now, Ecuador has two major trade deals with the US; the Andean Trade Practices and Drug Eradication Act, which is scheduled to expire this summer; and the General System of Preferences, which gives Ecuador and about 100 other countries duty free entry for certain products.

Today, Ecuador's Communications Minister announced that Ecuador was renouncing trade benefits with the US because of American pressure not to offer asylum to Snowden. He claims the trade pact has become a “new instrument of blackmail” and says Ecuador “does not accept threats from anybody, and does not trade in principles, or submit to mercantile interests, as important as they may be.”

Meanwhile, the Washington Post has jumped into the fray with an editorial accusing Ecuadorian President Correa of suppressing media while aiding the self-proclaimed whistleblower of another country.

President Correa responded with a tweet saying “The nerve! Do you realize the power of the international press? They have managed to focus on Snowden and the 'evil' in countries that 'support' him, making us forget the terrible things done against the American people and the entire world.”

You may recall that Julian Assange, the founder of Wikileaks has spent the past year in an Ecuadorian embassy in London to avoid extradition. What's the deal with Ecuador?

One thing you probably won't hear in the Washington Post is the back story, which involves a 20-year battle against Chevron, the oil company. Texaco, now owned by Chevron, dumped 16 billion gallons of toxic water into streams from the early 1970s until 1992, harming the environment and the people who used them for drinking water, cooking and cleaning. Texaco never tried to prevent this from happening, never cleaned up the contamination or compensated victims. That is a fact even Chevron does not deny.

An Ecuadorian court has held Chevron liable, to the tune of $19 billion. Chevron refuses to pay because it says the Ecuadorian judiciary and American plaintiffs’ lawyers conspired in a vast racketeering plot to extort from the multinational. And rather than pay the Ecuadorian judgment, Chevron sued the Ecuadorian plaintiffs (the indigenous indians) and the lawyers. Chevron itself stripped almost all of its assets from Ecuador in recent years in anticipation of losing the case. And since Chevron has removed all assets from Ecuador, the Ecuadorians are now forced to seek judgment through third countries. That's not so easy.

Chevron has roughly $15 billion in assets in Canada. In Toronto, in an unusual decision without any precedent in Canadian law, a court found that because Chevron operates only through subsidiaries, the case must be stayed. The vast majority of Chevron's assets lie with its subsidiaries, not in its corporate shell. Chevron also operates via its subsidiaries in dozens of countries around the world that could be targeted. The company does not even own its own building housing its headquarters near San Francisco.

Knowing it cannot win the Ecuador battle on the merits, Chevron also exercised improper political influence over governments and courts. In Argentina, after an order to freeze Chevron's assets in that country, Chevron suddenly decided to "invest" $1.5 billion in a large gas field with the local state-owned oil company, YPF; followed by an advertising and a lobbying campaign – freeze lifted.

The battle between Chevron and Ecuador has more twists and turns than a bag full of pretzels; the same could be said of the strange story of Edward Snowden, Booz Allen Hamilton, and the Carlyle Group. What is becoming more apparent is the growing corporate influence on issues which were once considered the purview of governments. 

Ticking Away

by Sinclair Noe

DOW + 180 = 15,176
SPX + 23 = 1636
NAS + 44 = 3445
10 YR YLD - .06 = 2.17%

OIL + .83 = 96.71
GOLD – 2.70 = 1386.70
SILV + .07 = 21.95

Let's spend the next few minutes together, shall we? It's a strange expression, isn't it? Spending time? Turns out you can buy time. Well, you can if you have enough money. You can't buy much, but you can buy a little, and it turns out that buying a little time can be very profitable. High frequency trading outfits and other traders and investors buy time, just a second or so, or even milliseconds.

And this gives them a profitable advantage. A few milliseconds to look at the latest economic report; maybe the market moving report on consumer confidence; maybe the market moving report on growth in the service sector. And if you have enough money, you can get this information at the same time as the high frequency traders who pay to get early access.

It sounds like a type of insider trading, but it's not. It's legal; routine even. Thomson Reuters buys data points from various sources that compile the consumer confidence numbers and the purchasing managers surveys and such, and then they charge their news-feed customers a fat premium to get that information passed to them, just a smidge faster than everybody else. It's called news feed trading or event jumping, and apparently the SEC and the other regulators don't seem to mind. Of course, it's not like it adds to a fair and orderly market, but that doesn't seem to be a concern.

It's not that the regulators don't do anything. I just read that FINRA is going to look into dark pool trading. FINRA is the self-regulatory which is financed and full of broker-dealers and brokerages that channel your trades from your desktops and through brokers, whom FINRA is responsible for registering and regulating, to various exchanges for execution.

Dark pools are are off-exchange trading venues where stocks are traded “blindly.” That’s supposed to mean buyers and sellers don’t know who’s who. But the truth is, even dark pool customers are blind to how these shadow operators really operate. Three of the biggest operators of dark pools are Goldman Sachs, Credit Suisse, and Barclays. Collectively, as calculated by market research firm Tabb Group, about 13% of daily trading volume happens in dark pools.

FINRA has just recently announced that it is going to look into dark pool trading, because apparently there are some shenanigans going on in the darkness. The Wall Street Journal reported: “In 2011, the SEC fined Pipeline Trading Systems LLC, a now-defunct New York dark-pool operator, $1 million for allegedly failing to disclose that a secretive trading unit interacted with the vast majority of client orders. Pipeline didn’t admit or deny wrongdoing. Last October, a dark pool operated by several large Wall Street banks, LeveL ATS, settled SEC allegations, without admitting or denying wrongdoing, that it improperly shared confidential client trading information with a unit of Citigroup, one of its investors.”

So, FINRA is sending out examination letters to 15 dark pool operators. They are just politely asking what happens in the dark pools; and if FINRA gets lucky, the dark pool operators might even answer a few questions, such as:

Do dark pool customers know how operators may be operating on them, without them knowing?

Are dark pool operators playing their customers by manipulating prices at public exchanges to influence trading orders and execution prices in their dark pools?

Are dark pool operators who act as market-makers – meaning they trade for themselves based on where the orders they are “seeing” are coming from to buy and sell and how big those orders are – using the “order flow” their big customers believe is “blind” to their inside advantage?

Yep, that's what's happening in the dark pools.

Dark pool operators are employing high-frequency trading computer technology to read incoming quotes and orders going to the public exchanges so they can do what high frequency traders do, manipulate quotes and orders, including in their dark pools, where they have captive customers trading blocks. Customers who don’t know that, most of the time, the trader on the other side is going to skim off some profit before they place your trade.

Now, your next question might be, why do these dark pools exist? The most obvious answer is they make money for their operators. They don't seem to provide any value for regular investors; they don't do anything to make a more fair and orderly market.

I could save FINRA some time; it's insider trading 100%. The only real question is why FINRA is the regulator asking questions. The questions should really be coming from the SEC or the Department of Justice, which actually has some authority to do something, if they ever grew a spine. Until then, we'll just see how much the high frequency traders and the dark pools can skim.

When the big banks say their trading desks posted a profit every single trading day for an entire quarter, it seems hard to believe; and yet, JPMorgan Chase and Bank of America recently reported perfect trading records in the first quarter of 2013. Goldman Sachs was right there with only 2 negative trading days, and Morgan Stanley was the slacker, with 8 negative trading days. Such perfection, or near perfection, would seem remarkable from one Big Bank, much less all of them. I mean, how many investors can come out ahead every single day for 60 days or more?

This is not new. Back in 2010, for example, JPMorgan had a perfect trading record in three out of four quarters, losing money on only eight days in the second quarter. A reporter from Bloomberg calculated the odds of posting a net gain 63 days in a row at 5.7 billion to one. That's the odds of a perfect trading quarter (not 3) for one bank (not 2).

So, maybe you're thinking these people running the banks trading desks must be the greatest traders of all time, a trained group of elite economic minds. Not exactly. How do they do it? Will Jamie Dimon reveal his trading secrets in a 5 DVD box set that he sells on late night TV? They do have certain tricks up their sleeves, such as buying time; that split second advantage to jump in front of news and plop down a trade; they do have the advantage of operating dark pools; that edge that comes from jumping in front of a customer's order to skim off a little profit.

And they have another advantage. The big banks don't just have one trading desk; they have multiple desks stretched around the globe. The bottom line is the net of the combined desks, and there are some days when a trading desk may or may not choose to report their bottom line. There is nothing to indicate the traders mark-to-mark their positions.

One of the things we learned from the London Whale was that they don't reveal their trading books. One of the things we learned is that there might be losses that aren't recorded in the way most businesses would report a loss. And this is one more reason why the banks utilize dark pools and why they avoid the sunlight of transparency and why they fight regulation tooth an nail. There's something about the reported profits that just doesn't square with facts. If the banks can turn in perfect, or near perfect trading quarters, then they should be sitting on big stacks of capital reserves. Why would they fight the idea of higher capital reserve requirement? If they always win, why do they need to bet with FDIC insured money? If the banksters were really making all that money, then why do they even need the Fed's Quantitative Easing.

And then there's on more trick the banksters have used to turn in perfect trading records – they had insurance, in the form of the Federal Reserve QE, which buys mortgage bonds and Treasuries; that has driven trading volumes higher, boosted asset values, and provided backup liquidity in the markets. It gives traders a buyer of last resort and confidence that they have an outlet if something goes wrong.

These banks have the advantage of an unlevel playing field. They can borrow money for next to nothing at current rates and lend it for more, simply by buying longer-term Treasuries; any dolt could make money with that kind of deal. They have access to information that their clients lack. They have computer-trading platforms that operate in milliseconds.

The Federal Reserve has been trying to stimulate the economy back to a virtuous circle of economic growth with a targeted unemployment rate of 6.5% and inflation rate not to top 2.5%. The Fed has expanded their balance sheet to nearly $4 trillion. Which is another way of saying that we're paying for their trading profits.That's money that could have been used for things like infrastructure, roads, bridges, electrical grid, education; hell, they could have wiped out $1 trillion in student loan debt with just a snap of their fingers. Of course, if the Fed did that, then they couldn't serve as the safety net for the banks.

The term “animal spirits”  refers to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

When we talk about an economic recovery, when the Federal Reserve talks about ending stimulus, there is one more target that has not yet been reached, and until we get there, we will never fully recover.

And if you have a few more minutes to spend with us today, let's take a look at what else is going on in the world.

A US military proposal for arming Syrian rebels also calls for a limited no-fly zone inside Syria. Military planners have said that creating an area to train and equip rebel forces would require keeping Syrian aircraft well away from the Jordanian border. To do that, the military envisages creating a no-fly zone stretching up to 25 miles into Syria which would be enforced using aircraft flown from Jordanian bases. The limited no-fly zone wouldn't require the destruction of Syrian antiaircraft batteries.

American and European intelligence analysts now believe that President Bashar al-Assad’s troops have used chemical weapons against rebel forces in the civil war in Syria, an assessment that will put added pressure on a deeply divided Obama administration to develop a response to a provocation that the president himself has declared a “red line.” The White House says U.S. intelligence concluded that the Assad regime used chemical weapons, including the nerve agent Sarin, against rebel fighters in the last year.

Applications last week for unemployment benefits fell and retail sales rose 0.6 percent in May from April. The number of Americans seeking unemployment benefits dropped 12,000 last week to a seasonally adjusted 334,000, a decline that suggests steady job gains will endure.

The less volatile four-week average decreased 7,250 to 345,250, the Labor Department said on Thursday. Both figures are roughly 7,000 higher than a month ago, which were the lowest in five years. Separately, the Commerce Department said that retail sales increased 0.6 percent last month, showing that consumers remained resilient despite higher taxes and could drive faster growth later this year.

Chalk up a very dubious distinction for Congress: Americans’ confidence in the institution has fallen to its lowest level ever. That’s according to Gallup on Thursday, in a new poll ranking the combined House and Senate dead last on a list of societal institutions for the fourth year in a row. Confidence in the legislative branch is at just 10%, down three percentage points from last year’s poll. The lowest rankings of 16 institutions included: the criminal justice system, banks, TV news, newspapers, big business, organized labor, HMO's, and in last place – Congress; all at less than 30%. The highest rankings went to the military and small business.

The Supreme Court has ruled that human genes, isolated from the body, can't be patented. The case involved Myriad Genetics which holds patents related to two genes, known as BRCA1 and BRCA2, that can indicate whether a woman has a heightened risk of developing breast cancer or ovarian cancer. Justice Clarence Thomas, writing for the court, said the genes Myriad isolated are products of nature, which aren’t eligible for patents. The high court’s ruling was a win for a coalition of cancer patients, medical groups and geneticists who filed a lawsuit in 2009 challenging Myriad’s patents. Thanks to those patents, the Salt Lake City company has been the exclusive U.S. commercial provider of genetic tests for breast cancer and ovarian cancer.

Last week, the Supremes ruled that police can take a DNA sample from someone who has been arrested and charged but not convicted of a serious crime. They just can't patent it. The Supreme Court did not announce decisions today in hotly anticipated cases on affirmative action, the Voting Rights Act and gay marriage.

We might be hearing more about Syria in the next few days. The next likely declaration of war will come from the G-8 meeting in Northern Ireland. They've been getting ready for the world economic leaders by putting posters over shuttered small businesses to make it look like Northern Ireland is economically robust. The G-8 is expected to declare war on tax cheats. Also on the agenda is a trade deal between the Euro-Union and the US. They might even discuss how the US is clearly spying on all non-US telephone and internet communications. That should make the Europeans feel good about establishing a trade deal.

The census estimates, as of July 2012, show that would-be retirees are opting to stay put in urban areas near jobs. Rural counties are losing population for the first time ever because of waning interest among baby boomers in moving to far-flung locations for retirement and recreation. Long weighed down by dwindling populations in farming and coal communities and the movement of young people to cities, rural America is now being hit by sputtering growth in retirement and recreation areas, once residential hot spots for baby boomers. About 46.2 million people, or 15 percent of the U.S. population, reside in rural counties, which spread across 72 percent of the nation's land area. From 2011 to 2012, those non-metro areas lost more than 40,000 people, a 0.1 percent drop.