Hamlet Dies

by Sinclair Noe

Record Highs for Dow and S&P.

DOW + 169 = 15,460
SPX + 22 = 1675
NAS + 57 = 3578
10 YR YLD - .10 = 2.57%
OIL – 1.92 = 104.60
GOLD + 22.70 = 1286.60
SILV + .69 = 20.25

To taper or not to taper? That is the question.

Whether 'tis nobler in the mind

to suffer the slings and arrows of outrageous bond market feral hogs

or to feed the savage beasts with unending securities purchases.

Or to tighten against a Sea of non-existent inflationary troubles

And by opposing end them: to die, to sleep,

to slaughter the feral hogs at the Discount Window trough;

and end the thousand Natural shocks that markets are heir to?

Is that all? To taper, to tighten, perchance to Dream;

Aye, there's the rub.

For one is QE and the other is accommodative monetary policy,

while fiscal policy and structural reforms

are nothing more than ephemeral motions,

the stuff of what dreams may come,

When we have shuffled off this mortal coil.

Well, that's enough of our literary mosh pit for today. As I recall, Hamlet died.

The FOMC minutes released by the Fed yesterday, were much ado about nothing... sorry. There was a bunch of talk that boiled down to the basic idea that Quantitative Easing and interest rates are two separate policies. The FOMC bigwigs have no intention of raising the interest rate target; that is off limits. The securities purchases under QE will taper off at some point, but there were more in favor of continuing than quitting. And even when they do quit, it will be slow, or it will be a variation on the theme. For now, it just makes sense that they will continue, if for no other reason it is a way to structurally reform the capital reserves of the big banks; a job the politicians and the courts have been unwilling to undertake.

So, the big theme from the FOMC minutes is we can get the taper without higher rates. But the bond market may have something to say about that. After all, the Fed has been the biggest buyer in the bond market; remove the biggest buyer, and prices drop and rates go up. If or when the Fed tapers that just signals for a flood of money to exit bonds. Indeed we've seen massive redemptions in bond funds at the biggies: Pimco and Vanguard.

Then, if you look over at the Dollar Index you might think there has never been talk of taper. The greenback jumped off a cliff the past two days, although it did firm up in afternoon trading.

And thus the Native hue of Resolution
Is sicklied o'er, with the pale cast of Thought,
And enterprises of great pitch and moment,
With this regard their Currents turn awry,
And lose the name of Action.

The Fed is driving the markets. Make no mistake about it. If you are still inclined to fundamentals, you might be wondering what is driving the valuations. As we begin with the second-quarter earnings season, analyst expectations are calling for companies in the S&P 500 to see earnings growth in the neighborhood of 0.8%. Revenue growth, or lack thereof, will be another point of weakness but operating margins should remain supportive.

Over the past 4 years, improved earnings, and their accompanying stock market rallies, have been driven by cost cuts rather than strong profit growth. That can't last forever. Companies have been keeping the fire stoked by burning the furniture, then the doors, and now they're ripping the roof off the joint to keep the fires burning. There just isn't a lot more cost cutting that remains. Because of this, it is unlikely we will see many surprises in performance results in earnings this season.

So, the next question is whether valuations are enough to drive further rallies. Not really, but that's the wrong question because we know that this market is being driven by the Fed. Of course, valuations could lead to a long grind up even if we don't see a big rally. Some are already saying that today's record high close is nothing more than short covering; that's where traders who were shorting the market, betting it would go down, got caught and now have to buy back in to cover their positions.

Of course we can speculate on what is driving the market at any given moment but if you really want to make money like the pros, the trick is to be fast and early.

You've heard of the Consumer Confidence Index. The highly respected gauge of consumer sentiment is compiled by the University of Michigan and Thomson Reuters and released each month. And you can get it 2 seconds before the rest of the world, if you're willing to pay an extra $6,000 per month. The 2 second advantage really only has value to high frequency traders who can jump in ahead of the rest of the world and scalp a bit of profit. If that sounds like insider trading, it is.

New York Attorney General Eric Schneiderman has opened an investigation, saying: “The securities market should be a level playing field for all investors and the early release of market moving survey data undermines the fair play in the markets.”

The Institute for Supply Management teamed up with Thomson Reuters to also sell a kind of enhanced access to the results to a monthly survey of purchasing managers. For a price, they send out a special version of the report designed to be digested by computers and thus quickly trade-able. The Duetsche Borse sells a 3 minute early version of the Chicago Business Barometer for 2,000 euros a year.

Thomson Reuters says they sell the Consumer Confidence Index 2 seconds early version to help their customers make better informed trading and investment decisions. Seriously, that was their response.

Did you ever see the old Paul Newman and Robert Redford movie, “The Sting”? The basic idea was that they set up a guy to think he was hearing the real-time results of a horse race, when in fact, the results were a few minutes old. The guy bet on the race and lost. There's a sucker born every minute. Thank you Thomson Reuters, for helping make us all better educated suckers, or, I mean …, investors.

And finally, an idea whose time has come, or is actually long overdue, and probably has very little chance of success, but we have to talk about it. A bipartisan group of 4 senators that includes Elizabeth Warren and John McCain introduced an updated version of the Glass-Steagall Act today.

The new bill, which is also cosponsored by Sens. Maria Cantwell (D-Wash.) and Angus King (I-Maine), would require banks that accept federally insured deposits to focus on traditional lending and would bar them from engaging in risky securities trading. The separation between lending and trading was originally imposed in 1933 by the Glass-Steagall Act. The legislation introduced today would also bar banks that accept insured deposits from dealing swaps or operating hedge funds and private equity enterprises.

McCain voted for the 1999 Gramm-Leach-Bliley Act, which repealed Glass-Steagall, but he's come to his senses. Good for him. Even the folks who wrote the 1999 act have come to regret it. Not Phil Gramm, but the folks who wrote it from Citigroup. Quick history; in 1998 Citibank merged with Travelers. The new company combined commercial banking and insurance and investing in a one-stop shop. It was the largest merger in history at the time. One problem – it was illegal under the Glass Steagall Act of 1933. So, the folks at Citigroup lobbied and they lobbied hard, and they re-wrote the rules to suit their pocketbooks.

Last Summer, former CEO Sandy Weill said he had a change of heart about repealing Glass-Steagal.

In 2009, John Reed, the co-founder of Citigroup issued his regrets, saying: “ I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel. So generally speaking you'd have consumer banking separate trading bonds and equity.”

And then, 10 years after his treasonous deal, Reed tried to justify his greed, saying: “When you're running a company, you do what you think is right for stockholders. Right now I'm looking at this as a citizen.”

Apparently Citigroup management was forced to renounce citizenship as a requisite for employment.

Senator McCain issued a written statement today, saying: "Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world. Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits."

He's absolutely correct. Gamble all you want, just don't make me pay for your gambling losses. Unfortunately, the bill introduced today probably doesn't have much chance, because frankly the banks are still running Washington. They control the place.

Friday, July 27, 2012 - Wall Street Finds Pleasure in GDP Pain

Wall Street Finds Pleasure in GDP Pain
-by Sinclair Noe


DOW + 187 = 13,075
SPX + 25 = 1385
NAS + 64 = 2958
10 YR YLD +.13 = 1.56%
OIL + .91 = 91.98
GOLD + 7.50 = 1624.60
SILV +.25 = 27.89
PLAT + 6.00 = 1417.00


All right class; Pop Quiz. Question: What does Wall Street love? Answer: Free money. I know, it's the same pop quiz as yesterday. That was then and this is now. Yesterday, the free money was coming from the ECB, as Mario Draghi promised to do whatever it takes to save the euro. Today came news that was so bad that it should push Federal Reserve Chairman Ben Bernanke out of denial and into action. Economic growth was so stagnant that Bernanke will be forced to pass out free money to his bankster buddies; it's not the solution but it is what Bernanke knows how to do. 


The nation's gross domestic product, the broadest measure of the economy, grew at just 1.5% in the second quarter; that compares to GDP growth of 2% in the first quarter and 4.1% growth in the fourth quarter of 2011. Consumers cut back, local governments cut spending, factories received fewer orders and exports declined because of the global slowdown and a stronger dollar. 


Spending on durable goods, including things like cars and home appliances, fell 1.% in the second quarter. Cuts in government spending, especially at the local level, also held back growth. State and local spending fell 2.1% during the quarter while federal spending declined 0.4%. Non-residential fixed investment, including business spending on structures and equipment, increased 5.3% during the second quarter, down from 7.5% in the previous quarter. The US economy has grown for 12 consecutive quarters, but the gains have been small. It's not economic contraction – you remember that – but it is weak enough to send the Federal Reserve in search of stimulus. 


Next Friday, we'll get the monthly jobs report and if the Fed hasn't acted by then, the report will have to be extremely strong. This is what Wall Street's love of free money has devolved into; a perverse glee when the economy shows weakness simply because it might force the Fed to fire up the printing press. 


Earlier today, German Chancellor Angela Merkel and French President Francois Hollande pledged to do all in their power to protect the euro, backing up ECB president Draghi's comments yesterday. Apparently, the ECB and euro-zone governments are preparing co-ordinated action to cut Spanish and Italian borrowing costs, possibly bond purchases paid for by tapping into the ESM and the EFSF, the European Fubar Slush Fund. 


From the latest issue of the Milken Institute Review, “Trends: Better Living Through Inflation” (co-authored with Jeffry Frieden):


“If the aftermath of the Great Recession doesn’t feel like the recovery from a normal cyclical downturn, that’s because it wasn’t a normal cyclical downturn. We’re living through the consequences of a massive global debt crisis, and debt-driven crises produce an especially malign form of recession. ...


“The politics of debt is, if anything, more daunting than the economics. A debt crisis typically degenerates into bitter political conflict over who will bear the burden of the adjustment. Some of the conflict may be among countries, with creditor nations trying to force debtors to pay off in full and debtor nations rebelling against measures that could conceivably make that possible. Other political battles take place within countries, as taxpayers, bankers, government employees, pensioners and investors jockey to avoid being saddled with the costs of working off the accumulated debts.


“If we simply choose to wait for the world to find acceptable formulas for sharing sacrifice, we may be in for nearly a decade of snail’s pace growth -- a truly global lost decade.”


The US Justice Department is preparing to file charges against traders from several banks in the global probe of interest rate-rigging. Meanwhile, British prosecutors haven’t even decided whether they have a case. The Justice Department investigation of criminal activity related to Libor is moving on a parallel course with civil probes of the banks being conducted by the Commodity Futures Trading Commission, the SEC and British regulators, including the Serious Fraud Office. Barclays, which has been at the center of the rate rigging scandal, today posted first half profit that topped expectations; they also apologized for the Libor mess and tried to move on, even as they revealed they are the target of even more Libor-linked lawsuits. Barclays also sent a 12 minute video around to all its employees. The video explains how it is bad to rig the Libor rates. The video is narrated by the chief of Barclays investment arm a guy named Rich Ricci; seriously, the guys name is Rich Ricci. The sad part is that the criminal investigations are so far just looking at traders, not executives. Apparently, criminal responsibility won't happen until the Earth spin off its axis and we are hurtled through space – wait, that's supposed to happen in December. 


Last week, Capital One settled accusations that vendors used deceptive, high-pressure practices to sell optional products such as credit monitoring and payment protection. Capital One was fined $210 million. It was the first public enforcement case brought by the year-old Consumer Financial Protection Bureau. Now we're getting a few more details. The dispute concerns so-called payment protection, which pays credit-card bills in case of job loss or disability, and monitoring services that alert customers to changes in their credit profiles. Vendor call agents used “high-pressure sales tactics and made materially false, deceptive, or otherwise misleading oral statements relating to the cost, coverage terms, benefits, and other features” to sell products to Capital One customers. And Capital One billed customers for years for services they didn't receive. Customers were wrongly led to believe they needed to buy the extra services to activate cards or that debt protection or credit monitoring was free, and others were left believing that the purchase would improve their credit scores.


The credit monitoring programs were provided by third-party vendors including a couple of companies called Intersections and also, Affion Group. And then Bank of America, Wells Fargo, and Citigroup were listed in securities filings as major customers of one or both of the providers, with Bank of America accounting for more than half of annual revenue at Intersections.  In other words, the accusations against Capital One probably were not isolated. 




Yesterday, we talked about the drought and how it is affecting crops and farmland values. It might alos affect energy prices. According to an article in the NY Time by Dr. Michael Webber at The University of Texas at Austin:


“Our energy system depends on water. About half of the nation’s water withdrawals every day are just for cooling power plants. In addition, the oil and gas industries use tens of millions of gallons a day, injecting water into aging oil fields to improve production, and to free natural gas in shale formations through hydraulic fracturing… All told, we withdraw more water for the energy sector than for agriculture. Unfortunately, this relationship means that water problems become energy problems that are serious enough to warrant high-level attention.”


Cities in Texas are already forbidding the use of municipal water for hydraulic fracturing (fracking). And in the Midwest, power plants are going head-to-head with farmers for limited water supplies.






Earlier this week, Sandy Weill, the former CEO of Citigroup called for the break up of “Too Big To Fail” banks. While I find it extremely difficult to trust Weill, let's take him at his word; maybe we should break up the mega-banks. There are others that are calling for a break up, the list (from Washington’s Blog) including, former Citi CEO John Reed, former Citi Chairman Richard Parsons, former Merrill Lynch CEO David Komansky, Former Morgan Stanley CEO Philip Purcell, former director of Goldman Sachs Nomi Prins, Nobel prize winning economists Joseph Stiglitz, Paul Krugman, and Ed Prescott; current or former Federal Reserve officials: Thomas Hoenig, Richard Fisher, Thomas Bullard, Alan Greenspan, and Paul Volker; former FDIC head Sheila Bair, former head of the Bank of England Mervyn King, and the Bank of International Settlements (the Central Banks' Central Bank). That's just a partial list.

Wednesday, July 25, 2012 -

Sandy Weill, Glass-Steagall, and Banksters on the Wrong Side of History
-by Sinclair Noe


DOW + 58 = 12,676
SPX -0.42 = 1337
NAS – 8 = 2854
10 YR YLD unch = 1.41
OIL +.61 = 90.67
GOLD + 23.70 = 1605.80
SILV +.38 = 27.44
PLAT + 15.00 = 1406.00


One story today. In 1993 Sandy Weill acquired Shearson Lehman; in quick order he also bought up Travelers Corp and Aetna Life and Casualty and then Salomon Brothers. He began calling the conglomerate, Travelers Group. In April 1998, Travelers Group announced an agreement to undertake the $76 billion merger between Travelers and Citicorp. The new company, called Citigroup, combined a commercial bank holding company with an insurance company and investment banking; it was a big one stop shop that included Citibank, Travelers, Smith Barney, Primerica, Citifinancial, Shearson, Aetna, and Salomon. At the time, it was the largest merger in history and created a financial behemoth with operations in 100 countries. It was also illegal based upon the Glass-Steagall Act of 1933.


Let's go back in time to explain Glass-Steagall. At the height of the Great Depression the Congress conducted hearings which showed that the presumed leaders of American enterprise, the bankers and brokers, were guilty of disreputable and dishonest dealings and gross misuses of the public's trust, literally buying control of politicians. The hearings started in 1932 and they uncovered plenty of abuses. JP Morgan maintained a “preferred list” of clients that would get special deals, huge discounts on stock purchases that could then be flipped for a quick profit. The preferred list included: former President Calvin Coolidge, Supreme Court Justice Owen J. Roberts, former head of the Democratic Party John Raskob, and diplomat Norman Davis. The bankers had truly bribed their way into control of government. 


J.P. Morgan, Jr., the son of the founder of the banking empire, testified that he had not paid any income taxes in 1930, 1931, and 1932; and dozens of multi-millionaire partners in JPMorgan had also not paid taxes. The revelation that the wealthiest American were not paying income tax must be juxtaposed against the desperate demands of the Bonus Army, the World War 1 veterans looking for their pensions, only to be turned away at the point of a gun by active troops led by Patton and MacArthur.


The hearings of 1932 ultimately led to reforms: “The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.


The three evils were: 1) banks were investing their own assets in securities with consequent risk to commercial and savings deposits; 2) loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets; 3) and commercial banks' financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own stake in the transaction. 


The Glass-Steagall Act was one of the pillars of banking law since its passage in 1933. Glass-Steagall built a wall between commercial banking and investment banking. The law kept commercial banks that accept deposits from doing business on Wall Street as investment banks that issue and trade securities, and vice versa. Glass-Steagall is actually the Bank Act of 1933, which also included allowing the Truth in Securities Act and the Securities Exchange Act, which created the SEC; and also the FDIC to insure bank clients' deposits. The bankers had so thoroughly abused depositors' confidence that insured accounts were the only way to lure depositors back to banks; even then, millions of Americans would never trust banks again. 


The Bank Act of 1933 worked, all the way up until 1998 when Sandy Weill and John Reed illegally merged Citicorp and Travelers Group in direct violation of Glass-Steagall. So, they decided to change the law. They hired former President Gerald Ford and former Secretary of the Treasury Robert Rubin. Their lobbying efforts cost more than $300 million dollars and produced fast results. Senator Phil Gramm, who received almost $5 million in campaign donations, led the assault. Gramm would eventually become a high paid consultant for the Swiss bank, UBS. Treasury Secretary Robert Rubin, a former partner at Goldman Sachs and soon to be Director at Citigroup, also championed repeal of Glass-Steagall.


The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999 , finally killed Glass-Steagall. The wall between commercial banks and investment banks was torn down. It did not take long for the financial behemoths to start making risky bets with depositors' money. 


The Commodity Futures Modernization Act of 2000 then provided the casino for the big banks to play; the act was written by lobbyists and co-sponsored by Phil Gramm and Richard Lugar. The Act was tacked onto thousands of pages of a budget bill in the final hours before a vote; it is doubtful any legislators read the complete Act before voting. The Act removed regulation on newfangled financial products called swaps and derivatives. According to Senator Gramm, the Act would “protect financial institutions from over-regulation” and “position our financial services industries to be world leaders into the new century.” What it did was to turn banks into a modern version of the bucket shops that caused the Panic of 1907. Banks were now allowed to place private bets, called derivatives, on underlying assets, such as commodities, securities, interest rates, or anything else they wanted to bet on. The bets were private and did not fall under the regulation of public exchanges. If the bets went bad, the banks could and would turn to the taxpayer for bailouts; and when the public grew weary of bailouts, the bankers used excess deposits, insured by the FDIC to place their bets.


The derivatives and swaps market has now grown to more than a quadrillion dollars. The GDP of the US is around $15 trillion; global GDP is about $55 trillion. To say that the banks are out of control is a huge understatement. 


In 2009, John Reed, co-founder of Citigroup came to regret the repeal of Glass-Steagall and his role in bribing politicians for the repeal. Reed said: “I would compartmentalize the banking industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel. So generally speaking you'd have consumer banking separate from trading bonds and equity.” 


Ten years after his treasonous deal, Reed tried to justify his unfettered greed; he said: “When you're running a company, you do what you think is right for the stockholders. Right now I'm looking at this as a citizen.” Apparently Citigroup management must renounce citizenship as a requisite  for employment; or is it just to take their severance pay?


The real catalyst for repeal of Glass-Steagall was Sandy Weill. Weill went on to run Citigroup; where he financed such frauds as Worldcomm and Enron. For years Weill has denied that repeal played any role in the 2008 financial crisis, even as the House of Sandy failed in 2008 and required bailouts. 


Today, he appeared to change his mind. On CNBC this morning, Weill said: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail. I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable,” and "We should have banks do something that is not going to risk the taxpayer's dollars.”


Well, I hope the hypocrite burns in hell. He has done a terrible disservice to his country. We should not have listened to him in 1998. We should not listen to him now. It is unlikely his about face will have any impact. Still, it is an admission that the banking system is broken; an admission from one of the people who built that system. When Sandy Weill says the banks should be broken up, it's hard to make a case for the status quo. Clearly, after you strip away the golden parachutes and the bribery; and in the patina of time, the apologists for the banksters will all be proven to be on the wrong side of history.