Wednesday, October 17, 2012 - It Could All Come Down to Pahrump

It Could All Come Down to Pahrump

-by Sinclair Noe

DOW + 5 = 13,557
SPX + 5 = 1460
NAS + 2 = 3104

10 YR YLD +.09 = 1.81%

OIL - .19 = 91.93

GOLD +1 .60 = 1750.90
SILV + .24 = 33.30
PLAT + 22.00 = 1672.00

Listen live or archived audio at MoneyRadio.com

The best site I've found for election polling data is http://fivethirtyeight.blogs.nytimes.com/

A CBS News/Knowledge networks poll of undecided voters who watched the debate found 37 percent giving an advantage to President Obama, 30 percent favoring Governor Romney and 33 percent calling the debate a tie. That represents a narrower lead for Mr. Obama than Mr. Romney had after the first debate in Denver, when a similar poll gave Mr. Romney a 46-22 edge.

A CNN poll of registered voters who watched the debate — not just undecided voters, as in the CBS News survey — also gave the debate to Mr. Obama by a seven-point margin, 46 percent to 39 percent. Mr. Romney had won by a much larger margin, 67 percent to 25 percent, in CNN’s poll after the first debate.

Meanwhile, 73 percent of voters in the CNN poll said Mr. Obama performed better than they expected, against just 10 percent who said he did worse; chalk that up to diminished expectations.

Two other polls gave Mr. Obama a somewhat clearer advantage. A Battleground poll of likely voters in swing states who watched the debate had him winning 53-38.

A poll by Google Consumer Surveys gave Mr. Obama a 48 percent to 31 percent edge among registered voters.

A Public Policy Polling survey of Colorado voters who watched the debate found 48 percent declaring Mr. Obama the winner, and 44 percent for Mr. Romney. Mr. Obama’s advantage was clearer in the poll among independent voters, who gave him a 58-36 edge. However, the candidates were roughly tied when Public Policy Polling asked them how the debate swayed their vote, with 37 percent saying the debate made them more likely to vote for Mr. Obama, with 36 percent for Mr. Romney.

The most recent odds put Mr. Obama winning a second term at 65%, down slightly in the past few days from 67%; but those odds do not include the results from last nights debate. Those are the odds, not the percentage of votes; that calculation is much closer, right about a 2-percentage point advantage for Mr. Obama in popular vote. The actual vote might be closer still. And of course, the winner is not determined by the popular vote but by the electoral college; so, swing states become key battlegrounds. And that means that an individual John or Jane Public in Pahrump Nevada might actually cast THE decisive vote.

NBC News reports that so far, $807 million has been spent on political ads for radio and television: local and national, cable and broadcast. Team Romney is outspending Team Obama by $455 million to $355 million. I say Team, because you have to factor in outside money that is now part of the campaigns due to the Citizens United Ruling. The actual Romney campaign has spent around $164 million. The actual Obama campaign has spent almost $300 million. The rest of the money has come from outside sources, the SuperPacs.

I find the debates and the election hoopla to be lots of fun and very entertaining. The debates are less expensive than going to a movie, so they seem cheap; but sometimes what's cheap is dear.

Few events have reshaped the nation over the last half-decade as much as the housing crisis—particularly in key battleground states such as Florida, Ohio, and Nevada. But neither the Obama nor the Romney campaign has had very much to say about it.

Housing’s absence from the campaign debate has led to lots of head-scratching among pundits, though there is an obvious explanation for why it has taken a back seat: housing is a political loser.

Mr. Romney faces a delicate balancing act. He has criticized Mr. Obama’s housing-rescue efforts as simply kicking the can down the road and says that he would focus on growing the economy instead. But that leaves an impression that he might recommend doing even less for at-risk homeowners looking to the government for more help. If your opponent is unpopular for promising to fix the problem and then falling short, it could be risky to advertise that you would offer even less.Mr. Obama has learned how difficult the housing problem is to fix, while Mr. Romney has discovered how hard it is to talk about in a sound-byte-driven campaign cycle.

The Commerce Department reported housing starts hit a four-year high. Groundbreaking on new homes jumped 15 percent in September, the quickest pace since July 2008. The surge in housing starts was viewed as evidence that the housing sector's fledgling recovery is bolstering the recovery of the broader economy.

And it makes the Federal Reserve look good. In September, when the Fed FOMC decide to announce an open ended mortgage backed securities bond buying binge, QE to infinity and beyond, they ended up propping up an economic sector that was already trending higher.

What came first, the Fed stimulus or the housing recovery? Many Fed officials reckon that as the housing market’s problems have been a big reason why the recovery has been so tepid, targeting the sector with direct aid can make a big difference for the broader economy. On the flip side, the Fed has the good fortune the housing market is showing signs of life when they are trying to stimulate the housing market. Policymakers hope positive housing momentum will help overall activity rise, which in turn should help boost job growth and lower unemployment. It still remains to be seen if the housing recovery has legs, and then if it has enough legs to lift the broader economy; but there is little doubt the housing market once again has momentum.

So does the housing rebound, joined with improving job market data, change economists’ estimates of how far the Fed eventually takes QE Infinity? There is already a lot of Fed monetary policy easing priced into the market and with the data improving there’s a risk the central bank could stop short of what’s expected, which could unsettle markets. Of course, it might be just a bump in a long term nasty market; even with improvements, the housing market remains far from normal. One of the tells would be an improvement in new home construction, that would demonstrate real demand; this month's report is a step in the right direction but not yet a trend.

So, for now, and with today's data, the old axiom, “Don't fight the Fed,” would certainly apply.

The S&P 500 rose for the third consecutive day. 3Q Earnings Season: IBM said revenue fell short of expectations. The stock dropped almost 5 percent, exerting an 81-point drag on the Dow industrials. IBM has an outsized influence on the Dow, which is a price-weighted index. IBM's stock closed at $200.63. Intel lost 2.5 percent to end at $21.79 a day after giving a weak revenue outlook.

Early in the 3Q reporting season 14% of S&P 500 companies have already reported earnings, and of those companies, 65 percent have beaten analysts' expectations, ahead of the long-term average of 62 percent. However, a majority - 54.3 percent - of the companies in the S&P 500 Index that have reported results so far have missed analysts' revenue forecasts, The top line is shrinking even as the companies are delivering bottom line results.

What gives? Earnings expectations have been lowered so far that it hasn't been hard to beat them. Once revenue starts missing and you can't cut costs anymore, I think this is the crack in the armor. If you then see earnings start to miss already lowered expectations, that's when you have a problem. Part of the answer is that the economy is in better shape today than it has been for some years. It is in a turnaround even if it is not as strong as we'd like it to be.

But that's already old news; we're already well into the fourth quarter. How does next year look? Well, companies are cautious about 2013 earnings targets. You can see how a CEO would want to reign in expectations for next year; it would be difficult to push profit margins higher when revenue growth is slowing. Margins are already considered pretty rich. If you have slowing revenues and you've already cut costs as much as possible; and I think it's safe to say that US businesses are running lean; then there's not a whole lot that can be done to grow earnings. 

Thursday, September 20, 2012 - QE3 to 5.5, Bad Banks, Bad Politicians

QE3 to 5.5, Bad Banks, Bad Politicians

by Sinclair Noe

DOW + 18 = 13,596
SPX – 0.79 = 1460
NAS -6.66 = 3175
10 YR YLD unch = 1.78%
OIL + .51 = 92.93
GOLD – 1.20 – 1769.50
SILV - +.07 = 34.74
PLAT – 16.00 = 1633.00

So, we know the Federal Reserve has committed to buy mortgage-backed securities at the rate of $40 billion a month until the employment picture gets better; that's the plan behind QE3 to infinite and beyond. So, when will they stop? Narayana Kocherlakota, president of the Federal Reserve Bank of Minnesota, gave the answer in a speech today. Kocherlakota says that as long as inflation isn’t a problem the Fed should keep its foot all the way on the gas pedal until unemployment drops from its current 8.1 percent down to 5.5 percent. Koacherlakota is not the ultimate decision maker for the Fed, but now we have a target. Why did it take so long?

An interesting graph today from the Department of Labor showed the fastest growing industries for new jobs over the next 10 year; the top 4 are Services for elderly, Home health care services, offices of mental health, and masonry contractors.

Bank of America has a plan to cut back on expenses by $ 8 billion dollars in annual savings by 2015. How can they possibly find that much in savings? By firing 16,000 by the end of the year, and more than 30,000 total. See how that works? Bank of America keeps the unemployment rate high and they are guaranteed low interest rates and MBS purchases from the Fed.

The Fed released its Flow of Funds report today. Household mortgage debt has declined by almost $1 trillion following the housing bust. Most of the decline is not because people were paying down their mortgages but rather because they were defaulting. Five years ago, a few of the analysts at different banks tried to estimate how bad the losses from the subprime-mortgage meltdown might be. An analyst at Merrill Lynch estimated $500 billion. An analyst at Barclays estimated losses of $700 billion; the newspapers described that as a bloodbath that would top the GDP's of all but 15 nations. We're at $1 trillion in losses and counting.

American households accumulated debt at the fastest rate in the second quarter in more than four years, and total domestic debt grew at the quickest rate in 3 1/2 years. Household debt grew at a seasonally adjusted annual rate of 1.2% in the second quarter, marking only the second increase in 17 quarters. Mortgage debt fell 2.1% in the second quarter and has shrunk in 16 out of the 17 quarters. Consumer credit by contrast grew 6.2%, driven both by student debt (lots of people going back to school to learn masonry contracting) and by auto loans to fund American car purchases.

At the same time, corporate stockpiles of cash fell slightly to $1.73 trillion from $1.75 trillion. State and local government debt rose for the first time since the fourth quarter of 2010. Federal government debt meanwhile shot up 10.9%; which nonetheless was the slowest pace of growth since the second quarter of 2011. Total domestic debt - which includes household, business and government debt - grew 5% to $39.06 trillion, or roughly 2.5 times the size of the U.S. economy.

The Justice Department recently asked several banks to sign “tolling” agreements, in which the companies promise they won’t challenge any enforcement action on the grounds that the alleged wrongdoing occurred beyond the statute of limitations. The requests were sent to all the major banks under investigation, including Citigroup, Deutsche Bank, JPMorgan, RBS, and UBS.

According to a group of international securities regulators, the same lack of oversight that enabled traders to manipulate the London interbank offered rate plagues other benchmarks around the globe. Less than half of the benchmark interest rates surveyed in the US, Europe and Asia were based on actual transactions. Instead, the rates were calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations. In other words, people make them up as it suits them.

Spain and Italy are bracing for downgrades. Debt investors are positioning for potential fallout in the countries' $250 billion corporate debt markets. Even with the prospect of aid from the European Central Bank, Spain and Italy could still face credit downgrades. The main focus is on Spain and Moody’s has said it may cut Spain to junk status, a move that would likely be followed by a cascade of cuts of its banks and several companies to junk. Such a move would likely trigger a wave of selling from investors who can only own bonds with investment-grade ratings. Some ratings-sensitive investors are selling ahead of the move. Others are getting ready to buy.

Ireland has already been down the road that Spain and Italy are now on. Ireland has tried to raise money in the markets to avoid a debt restructuring. Lots of austerity has failed to kick-start the economy. The head of European economics for Citigroup says “Ireland faces an almost impossible task to get back to fiscal balance,” and that visits to the country showed “life is tough, very tough and not getting that much better anytime soon.”

The Federal Energy Regulatory Commission has accused J.P. Morgan Ventures Energy Corp. of misleading regulators and said its authority to sell electricity might be suspended. The agency is investigating JPMorgan’s power trading in California and the Midwest. That investigation came to light when FERC went to court seeking internal e-mails from JPMorgan, saying the bids from the company might have resulted in at least $73 million in improper payments to generators.

The latest Reuters/Ipsos poll shows Obama leads Romney among likely voters by a margin of 48 percent to 43 percent; that is outside the margin of error. Other polls over the past couple of days have indicated similar results. A Pew Research Center poll showed Obama ahead of Romney 51% to 43% among likely voters. That's the biggest margin in a September survey prior to a presidential election since Clinton led Dole in 1996. Obama led Romney by double-digit margins on a range of personal attributes, from likability to whether he will protect American jobs to whether he appears presidential. Romney only led on the question of whether he was a "man of faith," by 43 percent to 34 percent. Obama's lead hasn't changed much over the past week, rather Romney has slipped. Other polling shows Obama with similar leads in key states of Virginia, Florida, and Ohio. It's still a long way to the election.

Senate Republicans prevented a veterans' jobs bill from coming to a vote yesterday by forcing a budget point of order vote. Democrats came up 2 votes short of the 60 needed to defeat the GOP's budget measure.

The Veterans Jobs Corps bill - which is part of President Obama's push to secure jobs for veterans, would have provided $1 billion over five years to hire 20,000 young veterans for public lands jobs and prioritize vets for first responder jobs such as police, firefighter, or EMT. The measure would have also provided young vets access to the infrastructure with which to assist in job searches, such as access to computers, internet and career services advisers.

The Iraq and Afghanistan Veterans of America, a vets group that supported the legislation, called the failure "a huge disappointment," adding, "Today, politics won over helping vets."

While only five Republicans voted with the Democrats to waive the GOP budget point of order measure, Sen. Tom Coburn (R-OK) led the GOP opposition. He said, "When we find ourselves in $16 trillion of debt and we pay for a five-year bill over 10 years, we make the problem worse.” Senator Coburn is an asshole of the first order, willing to put partisan politics ahead of his sacred duty. We have a debt to the men and women of the armed forces, and that debt is far greater than any other debt this country may incur. War costs money but that is the cheapest thing it costs. And it is a national disgrace that these damned rat bastards voted against the veterans.

February, Friday 10, 2012

DOW – 89 = 12, 801
SPX – 9 = 1342
NAS – 23 = 1903
10 YR YLD -.08 = 1.97%
OIL  -  .79 = 99.05
GOLD – 7.00 = 1723.10
SILV -  .31 = 33.69
PLAT – 4.00 =1662.00

We've been talking about the debt situation in Europe because it seems important, and Greece is the linchpin whose failure could send the wheel flying off the axle. Wednesday we told you Greece would have a deal on restructuring part of its debt; that deal was announced yesterday. Thursday we told you there would be social unrest in Greece. The strikes started today.

The Greeks have already been hit with 25% wage cuts; now they're being told they must accept additional 30% wage cuts in order to pay off bondholders who recognized weakness and forced them to roll over their debt at record high rates. The wage cuts are being pushed as a way to forestall bankruptcy, but they will still be deep in debt; even with the wage cuts they will still face debt of 120% of GDP in 2020, and that is the best case scenario; it is based on assumptions of some sort of growth. So the Greek people are being asked to sacrifice their own retirement and their childrens' futures rather than telling the Banksters to take a hike. So far, the Greeks have been volunteering for massive cuts to their retirement programs, their pensions, their healthcare, government services, and wages; they have been docile as their taxes have increased by 30%; they have been compliant as big chunks of Greek landmarks have been privatized; and they were nonplussed when a non-elected technocrat, a former economist for the Federal Reserve, a former VP for the ECB was appointed as Prime Minister; the Greeks didn't put up much fight when democracy was shot down in the birthplace of democracy.

Today, the remaining politicians in Greece are abandoning ship. At least five ministers of the coalition government have resigned.  Mr. Papademos plans to announce a new cabinet on Monday, which put in doubt a parliamentary vote on the new measures scheduled for Sunday. And if the vote does not approve the orderly default, there will be a disorderly default. Or maybe the protesters will give in and voluntarily accept a generation of indentured servitude.

Maybe the idea was to come up with a Greek bailout plan that was so terribly onerous that the Portuguese and the Italians and the Spaniards would not dare to restructure their debt. Either way, the playbook is being written and it calls for state revenues to be used first and foremost for debt service. Whatever money is left over could be used for other purposes, such as paying police salaries and purchasing hospital supplies. But, by all means necessary, the bankers get paid first.

Meanwhile, back in the USSA there is plenty of positive momentum in the economy. There are still a few concerns. Consumer sentiment fell to 72.5 in February down from 75 in January. I guess the credit card bills from December arrived. The federal deficit is not growing as fast as before. The monthly deficit was $27 billion in January, down $50 billion from January a year ago. The 2013 deficit is now projected to be just a little over $900 billion, down from $1.3 trillion. The $25 billion dollar mortgage fraud deal was approved yesterday; it won't add an immediate jolt to the economy but the Federal Reserve will likely step up buying mortgage backed securities, so you have to think somehing will spill into the broader economy. Happy days are here again, or something like that.

I was recently reading Jeff Greenblatt's newsletter and he posed a great question:

Did it occur to anyone that we could be in the early stages of a new secular bull market? That's right. With new highs lately that means the market is now up at least 35 months and if we consider the NDX we are at a grand total of 38.5 months. The Super Bears like to compare this rally to the Herbert Hoover Happy Days Are Here Again rally into 1930. That was a 5 month rally. If you think this comparison is absurd go ask the perma bears about it. Depending on the analogy you like 2009 is either 1932 or 1938. If you use the 32 analogy the market rallied for nearly 57 months. If you look to 1938 and the only reason you would is because the 30's had 2 severe recessions if that's what they should be called and in the 0's we had 2 market crashes. If we look to 1938, there was one retest of the bottom in 1942 which went marginally lower for a brief moment in time and then we were NEVER LOWER AGAIN. But 38 didn't have the calculation of 2008.

There's a reason we are looking back at all of this, just stay with me. But we are up a long time already. Too long to just chalk it up to a bear market rally. Bear market rallies don't last 3 years. They are quick and the reason they are quick is that hope rises slowly but fear drops like a rock. The disaster leg from July 2007 to March 09 was 20 months. The Internet bubble disaster was March 2000 to October 2002 was about 30 months. We are already up longer than both of those bear markets.

So, I throw that question out to you. Could we be in the early stages of a new secular bull market? As you know, I've been bullish since late September, early October, however I've been cautiously bullish. But are we in a new, long-term bull market? Have we turned a corner? Are we crazy or are we clever to imagine that Happy Days are here again?

Is it a bull market in stocks? What about housing? What about bonds? Are they offering risk-free returns or are they price to deliver return-free risk? Is it a new secular bull market? And what are the implications?

It's time for an update on MF Global. Louis Freeh, the trustee for the MF Global Holding company that filled for Chapter 11 bankruptcy protection says investigators have yet to find evidence of fraud. Apparently investigators are having a hard time finding anything. Remember a couple of weeks ago when they were saying the customers money had just vaporized, and the investigators said, no, no, they were hot on the trail of the money. And where is the money today? Well, apparently it just vaporized, again. And maybe you're wondering how it is possible to steal $1.2 billion from customers' accounts and there is no evidence of fraud and nobody gets arrested?

A former MF Global client has filed a motion in Federal Bankruptcy Court that asks the Court to treat MF Global Holdings, Ltd. as a "person" instead of a corporation.

The filing asserts that because the U.S. Supreme Court has ruled that a corporation such as MF Global Holdings is a "person", then MF Global, Inc. -- the subsidiary brokerage whose customers are still missing at least $1.2 billion in segregated funds -- is a "child" of the MF Global Holdings "parent company." The filing then cites specific statutes in the Bankruptcy Code that mandates that a child's support claims shall have super-priority status over all other unsecured creditors.

The Chapter 11 bankruptcy laws apply equally to corporations and individuals. If, instead of a corporation, the MF Global Brokerage is treated as the Child Person of the Parent Company Person, then the statute on priority status for unsecured creditors' claims is unambiguous. It's right there in U.S.C. Title 11, Section 507. Spousal and child support obligations come before all other creditors' claims. If corporations are persons, JP Morgan Chase and all other unsecured creditors will just have to get in line...the Child comes first.

BoE votes for more QE, brings asset purchase program up to 325b pounds. That brings us to our quote of the day: “Lenin is said to have declared that the best way to destroy the Capitalist System was to debaunch the currency. By continuing a process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…while the process impoverishes many, it actually enriches some…Lenin was certainly right…The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”  - John Maynard Keynes

Next up is our most stupid quote of the day; it comes from Governor Mitt Romney in his address to CPAC: “In business, if you’re not fiscally conservative, you’re bankrupt.”

Maybe it requires a conservative fiscal approach to maintain an established business. Nobody is expecting Wal-Mart to start acting wild and crazy. It wouldn't make sense for Coca-Cola to empty the corporate vaults and buy lottery tickets, but if you think a start up business or other small businesses are fiscally conservative, you're smoking something. Let's say you want to start your own business, and let's just imagine your father wasn't the former head of American Motors and the former governor of Michigan. If you aren't that guy, and you want to start a small business then you might expect to borrow heavily; maybe run up debt on your credit cards, maybe take out a second on the house, maybe personal loans from friends and family. You'll start without any customers but plenty of expenses. You'll work insane hours and may have to fore-go certain benefits like health care. And after you pay your rent, your employees, your accountant, your vendors, and your mother-in-law – then and only then do you get a chance to write yourself a check. And if you slip up in any way, you are looking at almost certain bankruptcy or maybe much worse. Maybe you max out the credit cards like the Crown Brothers at Insight Enterprises. Maybe you make  illegal black boxes that circumvent long distance tolls and you sell them out of the back of your car – like Steve Woz and Steve Jobs. Maybe you get your office painted and you pay the guy with stock because you don't have enough cash – you know like that guy Zuckerberg did with the Facebook stock that might be worth about $200 million right now. Yep, that's my definition of being fiscally conservative.  I think what Romney meant to say is that you've got to be crazy to start your own business.

I expect the number of borrowers with negative equity to decline fairly quickly over the next several years. This will be combination of modifications, foreclosures and refinancing programs.

It does appear the number of completed foreclosures will increase following this settlement - especially in some judicial states with large backlogs - so there will probably be more REOs  for sale. Some of the REO might be sold in bulk as rentals (REO-to-rental program), and the Fed will probably issue guidance to allow servicers to rent REO in heavily impacted areas. It isn't clear how many more REOs will be on the market, but I don't expect a flood of REO as happened in late 2008 and early 2009.