Thursday, February 06, 2014 - Waiting on the Friday Jobs Report

Waiting on the Friday Jobs Report

by Sinclair Noe

DOW + 188 = 15,628
SPX + 21 = 1773
NAS + 45 = 4057
10 YR YLD + .04 = 2.70%
OIL + .57 = 97.95
GOLD + .20 = 1258.80
SILV + .05 = 20.05

The number of Americans filing new claims for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits declined 20,000 last week to a seasonally adjusted 331,000. There have been some interesting reports this past week on jobs, including the controversial research from the CBO and the other from the New York Fed.

Competition for jobs is still fierce. Although it varies with the company and the job, on average 250 resumes are received for each corporate job opening. In addition, out of every 1000 people who view an online job posting, 100 people will apply, 4 – 6 will be selected for an interview, 1 – 3 will be invited for a final interview, 1 will be offered the job, and 80% of those who get a job offer accept it.

The Wall Street Journal shows how the very backbone of the labor market, men in their prime (for measurement purposes, 25 to 54), are out of work to an unprecedented degree. More than one in six men ages 25 to 54, prime working years, don’t have jobs—a total of 10.4 million. Some are looking for jobs; many aren’t. Some had jobs that went overseas or were lost to technology. Some refuse to uproot for work because they are tied down by family needs or tethered to homes worth less than the mortgage. Some rely on government benefits. Others depend on working spouses.

The trend has been building for decades, according to government data. In the early 1970s, just 6% of American men ages 25 to 54 were without jobs. By late 2007, it was 13%. In 2009, during the worst of the downturn, nearly 20% didn’t have jobs. Although the economy is improving and the unemployment rate is falling, 17% of working-age men weren’t working in December. More than two-thirds said they weren’t looking for work, so the government doesn’t label them unemployed

The monthly jobs report comes out tomorrow morning. We’ll wait and see.

The largest decline in exports since October 2012 helped widen the trade deficit by 12% in December to $38 billion. When adjusted for inflation, the trade gap rose to $49 billion. In its first estimate of fourth-quarter GDP last week, the government said trade accounted for 1.33 percentage points of the economy's 3.2% annual growth pace during the period. However, the deficit in December was bigger than the government had assumed, and that means fourth-quarter GDP growth will likely be lowered when a revision is published later this month.

A separate report showed US productivity rose at a strong 3.2% rate in the fourth quarter, that follwos a 3.6% increase in the third quarter productivity as businesses managed to step up output sharply while keeping a lid on hiring and hours worked.  For all of 2013, productivity rose just 0.6%, the smallest gain since 2011.

The rise in fourth-quarter productivity helped keep down unit labor costs, which is a measure of the labor-related cost for any given unit of output. They fell at a 1.6% rate, showing no wage inflation pressures in the economy. For the year as a whole, unit labor costs were up just 1.0 percent, the weakest reading since 2010.

A Manhattan jury convicted former SAC Capital Advisors portfolio manager Mathew Martoma of what prosecutors described as the most lucrative insider-trading scheme ever. After more than two days of deliberation, the jury found Martoma guilty of getting secret tips from a neurologist about the results of a clinical trial involving an Alzheimer’s drug, enabling SAC to make about $275 million in profits or avoided losses.

In recent years, US Attorney Preet Bharara has exacted guilty pleas or convictions from seven former portfolio managers or research analysts accused of illegal trading while at SAC. Six of the hedge fund’s former employees have pled guilty to insider trading charges for activities that took place from 1999 through at least 2010. Michael Steinberg, another SAC executive fought similar charges in court and he was also convicted last November. And so this raises the question of why Steven Cohen, the founder of SAC, hasn’t been criminally charged; there is an unbroken string of convictions or guilty pleas against everyone except the big target. There was some question going into the trial about whether Martoma would turn on Cohen, but Martoma did not point a finger at his old boss.

Cohen has not been accused of criminal wrongdoing, but the Securities and Exchange Commission brought a civil case against him in July, alleging that he failed to supervise Steinberg and Martoma. That case is pending. In November, SAC agreed to pay $1.2 billion to settle charges of insider trading, but Bharara indicated he might still pursue Cohen and the agreement does not provide criminal protection or immunity for any individuals.

Last week a judge in New York approved most of an $8.5 billion settlement between Bank of America and a group of mortgage securities investors. At issue in this case are 530 mortgage-backed securities involving troubled loans issued by Countrywide Financial. A group of the largest investors in the bonds agreed to settle their claims with Bank of America, which bought Countrywide in 2008.

But another big investor in the bonds, including and led by AIG (the insurance company), refused to sign the pact, arguing that the settlement was a fraction of the overall losses. AIG also argued that the trustee for the bonds, Bank of New York Mellon, shirked its responsibility to push for more money in the settlement. One of the Countrywide bond investors, Triaxx, has argued that the claims could potentially affect $31 billion of loans. Now, a new judge in the case, has put the settlement on hold and will hold another hearing on the case in a couple of weeks.

New York state's top financial regulator has demanded documents from more than a dozen banks including Barclays, Deutsche, Goldman Sachs and RBS as part of a probe of trading practices in the $5.5 trillion a day forex, or global foreign currency exchange markets. Regulators are stepping up their investigation following the banks' decision to fire or suspend at least 20 traders following reports that employees at some firms had shared information about their currency positions with counterparts at other companies.

Standard & Poor’s lowered Puerto Rico’s credit rating to junk status on Tuesday; maybe you didn’t notice. Puerto Rico’s bonds traded lower, but there was nothing close to the kind of mass sell-off that might indicate a panic. The Governor of Puerto Rico says they will try to renegotiate almost $1 billion in debt deals; they might even issue a couple of billion in new bonds. Bankruptcy is not an option because Puerto Rico is not considered a state or a municipality; it is a territory and as such it falls in a kind of legal limbo. Hedge funds are smelling blood in the water but waiting for more carnage before stepping in; bond prices have dropped to 65 cents on the dollar; the hedge fund sharks are waiting for prices to drop under 50 cents.

The Senate failed to move forward on a three-month extension of assistance for the long-term unemployed that would allow people who have exhausted their unemployment insurance to continue receiving benefits as long as the government offset the $6 billion cost. The vote was 55-to-42, falling short of the 60-vote threshold to break a Republican filibuster effort. Ultimately, how to pay for the program proved too big a hurdle for senators to overcome.

It appears that immigration reform is dead. House Speaker John Boehner cited executive actions by the Obama administration that have changed or delayed implementation of the president’s health care law, saying: “The American people, including many of my members, don’t trust that the reform that we’re talking about will be implemented as it was intended to be. There’s widespread doubt about whether this administration can be trusted to enforce our laws, and it’s going to be difficult to move any immigration legislation until that changes.” So, if we’re waiting on the GOP to trust Obama before they’ll pass immigration reform.., well it’s just dead as a doornail.

Apparently trust was not an issue in passing a farm bill this week. The Senate signed off on the Federal Agriculture Reform and Risk Management Act of 2013 and has sent it to the President for his signature. The “reform and risk” part of the legislation refers to a change in direct cash payments to farmers under a subsidy system, which is being replaced by crop insurance. Time will tell whether that is risky or prudent.

For the past 2 years, European Central Bank President Mario Draghi has been saying he’ll do “whatever it takes” to get the Eurozone back on a growth path; just not today. The European Central Bank today left its benchmark interest rate unchanged, choosing to wait for additional data before deciding whether to address evidence that the euro zone is sliding into deflation. For the past 4 months, consumer prices in the EU have been below 1% and in January prices slipped to 0.7%. Draghi insisted there is no deflation. 

Monday, November 04, 2013 - SAC Chairs Avoid Hard Time

SAC Chairs Avoid Hard Time

by Sinclair Noe

DOW + 23 = 15,639
SPX + 6 = 1767
NAS + 14 = 3936
10 YR YLD - .02 = 2.62%
OIL - .12 = 94.49
GOLD – 1.20 = 1315.60
SILV - .21 = 21.76

Stock markets finished October in fine fashion. Remember there was a brief rally in September when the Fed did not taper QE; then there was a rough patch as the government shutdown and tiptoed to the edge of not paying its bills, but that's all behind us now, at least for a month or so. December is now the next foreseeable turning point in the Washington budget battles. That's when a report is due from a joint congressional budget conference. Corporate earnings have been generally positive, even as guidance has been less than exuberant, but that's the game of earnings expectations: under-promise and out-perform. The S&P 500, the Dow industrials, and the small cap Russell 2000 saw new all-time highs last month; absent a big collapse, the Russell is on track for one of its best years of performance ever. The Nasdaq Comp, is still a long way from records but the petal is to the metal.

Since the start of the year through the end of October, the Russell and the Nasdaq are up more than 29%; the S&P 500 is up over 23%, and the Dow has added 18%. Looking forward to this week, a slew of economic data will be released, including: factory orders, the ISM non-manufacturing index, jobless claims, GDP data and personal income and outlays. Earnings season continues. Meanwhile, the soon-to-be former chairman of the Federal Reserve Ben Bernanke will speak on a panel in DC about “Policy Responses” to Crises. The correct answer according to Bernanke is to crank up the digital printing press and shower Wall Street with money.

Today, St. Louis Fed President James Bullard said inflation is too low and he'd like to see tangible evidence that inflation is moving closer to the Fed's target of 2%; that's an argument against tapering in the near term. Bullard thinks the Fed should ignore the “bickering in Washington” largely because it won't go away any time soon. Bullard thinks there will be too many distortions in the Friday jobs report to use the data in a definitive manner. So, all in all, it is a very low probability the Fed will taper in December. We would likely need to see inflation make a very big jump and see the next two jobs reports with net new jobs over 200,000. Doubtful. But we could see taper; it is still in the realm of possibilities. Or maybe we'll see the Fed double down and start buying $170 billion a month in treasuries and MBS. Also doubtful. The only certainty right now is that the Fed is providing fuel to the markets and for now the markets are moving higher.

If history is any indication, the market should see a fourth quarter rally. Shares have climbed in the final two months 82 percent of the time since 1928 when the benchmark gauge advanced at least 10 percent through October. So, the pump is primed. And if the averages hold, the S&P 500 could see a 6% increase in the final two months of the year, which would put the S&P at about 1850 by year's end. But that doesn't guarantee an end of year rally; a weak holiday shopping season could slow down the train, and Fed taper could slam on the brakes and send sparks flying. But for the moment, Wall Street is happy and traders are counting their bonus.

The bear market case is supported by rapidly rising price to earnings ratios, bullish sentiment on Wall Street, margin debt at 5 year highs, and the market has gone almost a year and a half without a real correction, so you have to figure we'll get one at some time. But if you're really counting on a correction, a serious, bring you to your knees correction, then you would look at the Fed hiking rates or tapering from QE combined with higher energy prices. Right now, the price of oil is back under $95 a barrel. No worries.

There will be no bonuses at SAC Capital; might not be a SAC Capital. SAC Capital Advisors has agreed to plead guilty to insider trading violations and pay a record $1.2 billion penalty, becoming the first large Wall Street firm to confess to criminal conduct since the days of Drexel and Michael Milken. The guilty plea and fine paid by SAC, which is owned by the billionaire investor Steven A. Cohen, are part of a broader plea deal. It also will impose a five-year probation on the fund and require SAC to terminate its business of managing money for outside investors, though the firm will probably continue to manage Cohen’s multi-billion dollar fortune. Cohen has not been charged criminally.

SAC’s admission that several of its employees traded stocks based on secret information also sours Cohen’s investment track record. Since 1992, the fund posted average annual returns of nearly 30 percent. The $1.2 billion penalty adds to the $616 million in insider trading fines that SAC agreed to pay to federal regulators earlier this year. Cohen, who owns 100 percent of the firm, will pay those penalties.

The plea deal does not incorporate a separate civil action by the SEC against Cohen. Also, authorities continue to view Cohen and other SAC employees as targets of a continuing criminal insider trading investigation. The plea agreement expressly states that it “provides no immunity from prosecution for any individual.” The firm will not trade about $6 billion in outside investors accounts but Cohen still has a personal fortune around $9 billion, and the firm will likely stay open to accommodate his personal wealth.

This was probably not a difficult deal for Cohen to make. He still keeps a big chunk of money, no matter how much was ill gotten. It’s far easier for SAC Capital as a corporate entity to plead guilty and settle with the government because it doesn’t have to worry about being incarcerated. The government is not going to incarcerate the chairs and desks. For now, SAC appears to be intact; prosecutors did not freeze assets. The corporate entity does not go to jail; just one more reason why corporations are not people.

Even before the deal could be done, it's coming under fire. The lawyer for a class-action suit over SAC’s trading in drug company Elan has asked a federal judge to reject the potential settlement. Federal judges have started to balk at rubber-stamping settlements in which defendants neither admit nor deny wrongdoing; a step in the right direction, but this deal with Steven Cohen seems to confirm that for Cohen at least, crime pays.

Another big settlement today involving big pharma. The Justice Department says Johnson & Johnson will pay more than $2.2 billion in criminal and civil fines for marketing drugs Risperdal, Invega and Natrecor for uses they weren't approved. The settlement also covers charges that the company paid kickbacks to doctors and pharmacies promoting the drugs.

The criminal filings said Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, marketed Risperdal for unapproved uses. The drug, approved to treat only schizophrenia, was marketed to also treat anxiety, agitation, depression and apparently anything that might feel better by taking a pill, preferably a blue pill.

The Johnson & Johnson subsidiary, Janssen, will pay $400 million for the illegal marketing, while Johnson & Johnson will pay $1.7 billion to settle civil cases with the federal government and 45 states.

You've heard of Blackberry's plans to sell itself. The mobile phone manufacturer never quite caught up with other smart phone makers. Today saw the collapse tentative takeover offer from Blackberry's largest shareholder. Blackberry's CEO resigned. The shareholder, Fairfax Financial Holdings, and an unnamed group of institutional investors will invest $1 billion through debentures that can be converted into common shares at a price of $10 a share.

A scientific panel set up by the United Nations has found that climate change will pose a serious threat to the world's food supply in the coming decades. The findings aren't set to be announced until March and are still undergoing editing, but a copy of the report has leaked online, and ended up on the New York Times. The findings come from the Intergovernmental Panel on Climate Change (IPCC), which has been releasing reports on the matter around every six years. The report paints a decidedly grim picture. Climate change will pose sharp risks to the world’s food supply in coming decades, potentially undermining crop production and driving up prices at a time when the demand for food is expected to soar. And they say they are already seeing the harmful effects in some regions.

On the food supply, the new report finds that benefits from global warming may be seen in some areas, like northern lands that are now marginal for food production. But it adds that over all, global warming could reduce agricultural production by as much as 2 percent each decade for the rest of this century. During that period, demand is expected to rise as much as 14 percent each decade, the report found, as the world population is projected to grow to 9.6 billion in 2050, from 7.2 billion today. The report finds agricultural risks “are greatest for tropical countries, given projected impacts that exceed adaptive capacity and higher poverty rates compared with temperate regions.” And yes, hundreds of billions of dollars are already being spent in an effort to reduce emissions in response to previous findings by the IPCC.