Thursday, May 3, 2012 - Jobs More or Less, Europe More or Less, HSBC Mess

DOW – 16 = 13, 206
SPX – 10 = 1391
NAS – 35 = 3024
10 YR YLD unchanged = 1.92%
OIL +.09 = 102.63
GOLD – 17.90 = 1636.80
SILV - .58 = 30.17
PLAT – 28.00 = 1540.00

Tomorrow the government releases the employment report for April. Economists predict the U.S. gained 160k to 175k jobs last month, up from a disappointing 120,000 in March. The preliminary increase in March was the lowest in five months and fell well short of the 246,000 average from December to February.

We've seen several reports on jobs that might give a hint on tomorrow's report:

The four-week average of initial jobless claims was 383,500.Jobless claims declined by 27,000 to a seasonally adjusted 365,000 in the week ended April 28.

The Labor Department said continuing claims decreased by 53,000 to a seasonally adjusted 3.28 million in the week ended April 21. Continuing claims reflect people already receiving benefits. ADP’s report on private-sector payrolls slowed to 119,000 from 201,000 in March. The employment component of the Institute for Supply Management’s manufacturing report rose to 57.3% from 56.1%, on a scale where readings over 50% indicate expansion. The employment component of the Institute for Supply Management’s services report slowed to 54.2% from 56.7%, on a scale where readings over 50% indicate expansion. Planned layoff announcements rose 7% to 40,559, according to Challenger, Gray & Christmas.

What does it mean? It means wait until tomorrow's report and we'll find out. This is not the kind of report that you bet on. This is a report that calls for caution. There is a good chance the report could disappoint the market, no matter what the number. I say that because the market looks like it's ready for a sell-off. We've talked about the seasonality of the market, and for the past month I've been telling you to sell in May and go away. It's May already.

The Labor Department estimated productivity fell at an annual rate of 0.5% in the first quarter, down from a revised gain of 1.2% in the fourth quarter. The fourth-quarter increase was previously reported as 0.9%. All of the decline took place outside the manufacturing sector. Manufacturers, which have led the recovery since the U.S. exited recession in 2009, boosted productivity by 5.9%, as output jumped 10.8% and hours worked increased by 4.6%. Much of the gain likely stemmed from a big pickup in auto sales.

Excluding extraordinary items, GM reported a profit of 93 cents a share. That’s 8 cents more than Wall Street expected. GM’s North American operations made money. The company is relying less on incentives than it did a year ago. That means its unit margins are much healthier. GM saw record first-quarter demand for its cars in China, helping to boost revenue 4% to $37.8 billion. Even though GM posted a profit of more than $1 billion dollars, GM's European operations lost money.

In Europe, ECB President Mario Draghi did not offer any indications that further monetary stimulus is on the horizon. Speaking at a Euro-zone conference, Draghi said the most recent economic indicators “are not enough to change our baseline scenario, which foresees a gradual recovery in the course of the year.” At the same time, Draghi said it remained “premature” to begin discussing “exit strategies” from the central bank’s efforts to shore up liquidity across the euro zone. He said policy makers felt monetary policy remained “accommodative” given historically low nominal interest rates and negative real interest rates—interest rates minus inflation—across much of the euro zone.

The ECB’s Governing Council, meeting today in Barcelona, left the bank’s key lending rate unchanged at 1%, as expected. At least 11 euro-zone countries have seen at least two consecutive quarters of shrinking gross domestic product, meeting the widely-used definition of a recession, and more data in the next few weeks is likely to show the broader Euro-zone is in a recession, even while some countries appear to be in a full blown depression. Unemployment in March topped 10.9% for the Euro-zone, that's up from 9.9% one year ago. Even Germany, could feel the ill-effects.

Draghi stirred the growth-versus-austerity debate himself last week by urging European leaders to adopt a “growth compact” alongside the recently adopted “fiscal pact,” which aims to enshrine tough budget rules. Today, Draghi said he saw “no contradiction” between the pair. We'll see about that.

Francoise Hollande looks to be the next President of France. He leads the incumbent, Sarkozy, by several points in the polls. Sarkozy has been loyal to German Chancellor Merkel, praising the German economy as a model for France and rejecting the possibility that strong countries such as France and Germany would provide guarantees for joint euro bonds.

Hollande pledged to renegotiate the new fiscal pact if he is elected, Merkel wants none of that, saying: “The fiscal pact has been negotiated, it was signed by 25 government heads and is already ratified by Portugal and Greece. It is not renegotiable.”

Hollande responded immediately in a television interview, indicating he was not alone in rejecting the pact as it stands: “It is not for Germany to decide for the rest of Europe. I’m getting lots of signals, direct and indirect, from other governments, even if they are conservative.”

In his debate with Sarkozy, Hollande noted that it is the two countries that have not adopted severe austerity measures — Germany and the United States — that have shown stronger economic growth in the wake of the financial crisis and recession. Who will buy German manufactured goods when nobody else in Europe has any money? You could ask the same question about who will be left to buy US exports.

Germany, which benefited from 10 years of highly favorable terms of trade under the euro, has not needed to run up its debt or cut its government spending. The U.S. under the Obama administration opted for fiscal stimulus to counter the deflationary impact of the crisis. Hollande appears to be on the same page and his election could tip the balance in favor of those who see growth as necessary to save the euro, not unmitigated austerity. Of course, there is still the matter of an election this weekend.

Mortgage rates hit new record lows last week. Now we question the why and wherefore. Are low rates symptomatic of underwhelming growth and economic concerns? Are low rates signaling that we haven't really hit a bottom in the housing market? Or , are the low rates providing the fuel that is indeed lifting the housing market? Freddie Mac said the 30-year mortgage rate fell for a second week, to 3.84%, down from its previous all-time record low of 3.87% on February 9. The 15-year fixed average also fell to a new all-time low of 3.11%.

The Boston Fed has released a research paper on the cause of the housing crisis. They conclude the financial industry did not deceive mortgage borrowers and investors but instead everybody was just overly optimistic about house prices. There was no problem with the mortgages, no problem with the synthetic derivatives, no problem with transparency and disclosure. I think I'll file that one under “self serving bull”.

In 2003, the Federal Reserve Bank of New York and New York state bank regulators ordered HSBC Bank USA to do a better job of policing itself for suspicious money flows. The bank promised to beef up its anti-money laundering division. HSBC told regulators that it would fully address all deficiencies in the bank's anti-money laundering policies and procedures. Now Reuters is reporting that HSBC has fallen short. They reviewed documents from law enforcement officials that show that from 2005, the bank violated the Bank Secrecy Act and other anti-money laundering laws on a massive scale. HSBC did so, they say, by not adequately reviewing hundreds of billions of dollars in transactions for any that might have links to drug trafficking, terrorist financing and other criminal activity.

In some of the documents, prosecutors allege that HSBC intentionally flouted the law. The bank created an operation that was a "systemically flawed sham paper-product designed solely to make it appear that the Bank has complied" with the Bank Secrecy Act and is able to detect money laundering

In the Miami office - an important center for HSBC's private-banking and retail operations - a longtime private banker was fired for alleged sexual harassment after he warned compliance officers that clients were engaged in shady dealings.

In one email exchange submitted as evidence in that case, employees debated whether the bank should help a Miami client get around U.S. sanctions by moving the client's business to HSBC's Hong Kong office. 

The revelations come as HSBC confronts multiple investigations into its internal policing abilities. The Justice Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Manhattan district attorney, the Office of Foreign Assets Control and the Senate Permanent Subcommittee on Investigations are scrutinizing client activities such as cross-border movements of bulk cash, and transactions linked to Iran and other parties under U.S. economic sanctions. HSBC said in its February filing that it was likely to face criminal or civil charges related to the probes.

To date, the only enforcement action detailing any anti-money laundering shortcomings at HSBC was a 2010 consent order from the Office of the Comptroller of the Currency, the Treasury agency that is HSBC's chief regulator. The OCC, calling HSBC's compliance program "ineffective," told the bank to conduct a review to identify suspicious activity. This "look-back" was expected to yield a report to HSBC and regulators. The status of the report isn't known.

Some of the problems uncovered in the investigation: The bank understaffed its anti-money laundering compliance division and hired "gullible, poorly trained, and otherwise incompetent personnel." HSBC failed to review thousands of internal anti-money laundering alerts and generate legally required suspicious activity reports, or SARs, on transactions picked up by the bank's internal monitoring system.   In May 2010, the bank's backlog of alerts was nearly 50,000 and "growing exponentially each month."  Hundreds of billions of dollars moved unchecked each year through various bank operations because of lax due diligence and monitoring of accounts with foreign correspondent banks.

 In some instances, "management intentionally decided" not to review alerts of suspicious activity. An investigation summary also says, "There appear to be instances where Bank employees are misrepresenting" data sent to senior managers, and where management altered risk ratings on certain clients so that suspect transactions didn't set off alarms.

Since 2005, the bank has filed only 19 suspicious activity reports relative to the receipt of bulk cash and banknote activities. People familiar with HSBC and the reports said 19 is a low number given the risk of the clients. Between 2005 and 2010, banks and other depository institutions filed more than 3.8 million SARs, according to the Financial Crimes Enforcement Network, a bureau of the Treasury Department.

HSBC is the fifth-largest bank in the world in terms of market value, HSBC had $2.6 trillion in assets at the end of 2011 and operations in 85 countries and territories. Its North American business, which includes HSBC Bank USA and a consumer finance unit, accounts for about 5 percent of HSBC's profit.

There is a tendency for cases like this to end up in settlement, a possible fine, and no admission of wrongdoing. You have to wonder what it would take for a big bank like HSBC to lose its bank charter. But for now, the banks act as if they are entitled to do whatever they want, and since they have big political influence – they get away with it. What does it take to destroy a bank charter? Money laundering, tax evasion, supporting terrorists, drug trafficking – that's just business as usual. 

Wednesday, May 02, 2012 - Jobs Report, Euro Elections, California Budget, and Watching Paint Dry

DOW – 10 = 13,268
SPX – 3 = 1402
NAS + 9 = 3059
10 YR YLD -.03 = 1.92
OIL +.14 = 105.36
GOLD – 8.50 = 1654.70
SILV - .32 = 30.75
PLAT – 9.00 = 1569.00

This is shaping up to be a wild weekend. Friday we get the jobs report. Then, in Europe there will be elections in France and Greece. On a personal note, I'm going to paint the patio on my house, so I'll be watching paint dry, just to counterbalance the rest of the world.

The monthly jobs report, already the most highly anticipated data of the month, will be getting a little extra attention this Friday after a disappointing report on GDP late last week. A bad jobs report and a weak GDP report might be enough to trigger another round of Quantitative Easing from the Federal Reserve. The economy is adding and will continue to add jobs; that is not in question. It is the rate of job growth.

Expectations are that there were about 160k to 175k new jobs created in April, up from 120,000 in March, and an unemployment rate that remains steady at 8.2%. The lowball guesses are for only about 125k jobs. With the addition of 120,000 jobs, March marked the 15th straight month of jobs growth, but it broke a three-month streak in which the economy had added more than 200,000 jobs.

Now we are only a couple days away from finding out whether March's report was a fluke or the beginning of a new, disappointing trend of declining growth in the labor market. A not-so-promising sign: The private sector added only 119,000 jobs in April, down from a downwardly revised 201,000 in March and well short of expectations. The ADP report is not always a good indicator for the monthly report.

Manufacturing grew in April at the fastest pace in almost a year, propelled by a pickup in orders that signaled factories will remain a source of strength for the US Expansion; that according to a report yesterday from the ISM. Still the numbers seem disappointing and the outlook less than bright. Overseas demand for US made-goods risks fading as global growth slows.

Spain's economy contracted in the first quarter, putting the euro region's fourth-largest economy into its second recession since 2009, and at some point, you have to consider multiple, rolling recessions are in truth, a depression. S&P downgraded Spain last week,and today the Spanish IBEX traded below the March 2009 closing lows and near the lows of 2003. The US markets didn't seem to be bothered by the problems in Europe. You love to see a market move higher on bad news, but sometimes that is just a chance for the smart money to time an exit.

The U.K. economy shrank 0.2 percent in the first quarter after contracting 0.3 percent in the prior three months as Britain slid into its first double dip recession since the 1970s. Defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

In France, the Socialist candidate Mr. Hollande beat out Sarkozy in a runoff a couple of weeks ago and is favored to win this week. Mr. Hollande opposes austerity and will cause more thana few headaches for German chief Angela Merkel. This could be a problem for Merkel or for Mr. Hollande; we'll see.. The bottom line is the market has realized Mr. Sarkozy probably isn't going to win.

The global economy is uneven. The growth has slowed in China and India. And North Americas is a recovering but far from fully recovered economic environment.

There is no recovery. There is a slow grinding improvement, not enough to lift us to that righteous circle of sustainability, but enough to keep us afloat on vast mountains of stimulus, mainly from the Fed. And so we'll watch the results of the jobs report, and we'll see if there is any indication the Fed will move again. Meanwhile, we'll be reminded that the Fed has been acting and not acting on the monetary policy and over on the fiscal policy side, we've seen deadlock for quite some time. Our response has been wrong for quite some time. It isn't just a recession, or the possibility of a double dip. We entered a depression, a small “d” depression, and we failed to recognize it and we failed to respond appropriately; quite a mistake for great student of the Great Depression, Bernanke. We are living in a world of zombie economics, just shuffling along, and very little sign of higher level intellect guiding our path.

Real wages for real workers are not growing and America’s crushing debt is strangling growth, and maybe that means we would be lucky to see 2% GDP growth, maybe we're lucky to see any growth at all. Both political parties can share blame for the trouble; the Republicans want to limit spending and Democrats don’t want to cut programs, and so they are at an impasse. Little is likely to change regardless of this year’s presidential election.

And what we are likely to see in the markets is a slow grinding decline into the summer. Not because the economy is so terrible but because it isn't so great. The Fed has been propping up the markets with monetary policy but that hasn't helped Main Street and it hasn't done much – or rather it hasn't done enough to improve the jobs report. We have the most stimulative fiscal and monetary policy in the history of this country and here we are three years into the recession and it's not ended. Does that mean the policy is a failure or does it mean that we weren't really in a recession but rather in a small “d” depression?

Even in an election year we have to deal with the seasonal nature of the markets. Sell in May and go away. And by the time we come back, we should have a good idea about how this whole austerity issue is working out, and how the 99 percent are fairing against the 1 percent, and how the red and blue are fairing against each other, and how monetary policy is fairing against fiscal policy.

Sometimes, the best choice is to just step aside. Take the summer off. That's about the best investment advice there is, unless your just a high frequency trader with a USB port on the back of your neck. Take some time off, visit the family and friends. Some of you have already started doing this. You've turned off CNBC. Maybe we are finally spitting out the lure.

I heard a great investment analogy this weekend. The idea was that as investors we should act like a trout. The trout tends to take a position in the stream and just hang out waiting for the passing current to deliver a tasty morsel. It's a low energy solution, effective even if it is a little boring - kind of like watching paint dry.

The legislative analyst’s office has a new number for California: $3 billion. That’s the total amount that tax revenue has lagged behind goals set by Gov. Jerry Brown’s administration in the current fiscal year. Much of that gap comes from a disappointing April, the most important month for income taxes. Income taxes were $2 billion short of the $9.4-billion goal, and corporate taxes fell $143 million short of an expected $1.53 billion.

When April's poor results are tacked on to earlier shortfalls, the state has fallen about $3 billion behind tax goals. Yesterday, the ratings agency Standard & Poor's already warned that poor tax revenue was imperiling California's financial recovery. It's unclear exactly how much this year's budget deficit will grow because of the tax shortfall. Brown's administration estimated the gap at $9.2 billion in January, but has since said it will grow. The updated budget proposal that is expected by May 14.

Fitch Ratings, in conjunction with Oxford Economics, issued a new report today and it claims that without the unprecedented stimulus actions by the federal government triggered by the 2008 financial crisis, the Great Recession might still be going on. But those actions came with a price -- soaring budget deficits and rock-bottom interest rates that hurt savers.

The actions by policymakers in Washington -- including the $700-billion bailout fund, the $831-billion stimulus package and the Fed's ZIRP, zero interest rate policy -- continued to boost the nation's total economic output by more than 4% annually two and three years after the end of the Great Recession in mid-2009.

The boost from those policies helped the U.S. gross domestic product increase 3% in 2010 and 1.7% last year, "implying that the U.S. might still be mired in a recession absent this stimulus."

The U.S. economy would have seen little or no growth in the two years after the recession technically ended in June 2009 without the policies. And the stimulus actions appear "to have significantly softened the severity of the decline" in GDP in the year immediately after the recession.

Though the Fed's monetary policy actions were helpful, fiscal stimulus by Congress and the White House "had the strongest positive impact on consumption during the recent recovery.”

The conclusions mirror findings in February by the Congressional Budget Office and a 2010 study on the economic effect of the $831-billion stimulus package known as the American Recovery and Reinvestment Act.

The Fitch analysis looked more broadly at all federal stimulus policies, such as the large-scale asset purchases by the Fed. And although the study said the stimulus policies "appeared to have achieve their intended effect," it warned that the actions have come with negative consequences.

"The very high deficits of the last few years have led to unprecedented levels of government indebtedness, which will weigh on the federal government for years and require contraction in spending. Furthermore, while low rates clearly benefit borrowers, at the same time, they hurt savers."

The deficits, and the inability of the Obama administration and lawmakers to make deep enough cuts in a deal last summer to raise the debt ceiling, led Standard & Poor's to downgrade the U.S. credit rating.

For the past couple of years we've been hearing that the response to a depressed economy is to cut spending and balance budgets. While there is no question that cleaning up indebtedness will take time and effort, the calls for austerity are creating a bigger mess. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment. European leaders spent years in denial, insisting that their policies would start working any day now; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

There seems to be a shift in sentiment. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

What happens next? The push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the crisis. And the only ones that seem to benefit are the speculators and the bond vigilantes. Ultimately, Spain, Greece, Italy, the Netherlands, and others do have an alternative to endless austerity, one that may be forced on them by events: exit the euro, with all the financial and political fallout that follows. And on the current course, that’s what’s coming. For California, the choice is not a possibility.

Tuesday, April 24, 2012 - As the Euro Turns, Counting Protesters at Shareholder Meetings

DOW + 74 = 13,001

SPX + 5 = 1371
NAS – 8 = 2961
10 YR YLD +.03 = 1.96%
OIL +.20 = 103.75
GOLD + 3.20 = 1642.50
SILV -.03 = 30.93
PLAT – 14.00 = 1550.00

Yesterday's edition of “As the Euro Turns” included the collapse of the government in the Netherlands when it could not agree with a key allied party on budget cuts to bring the deficit below the EU-mandated 3 percent. In France, Socialist Francois Hollande led the first round of presidential elections; he has vowed to renegotiate a European treaty tightening rules on debt. All that was absorbed today. After all, the Dutch still have a Triple-A credit rating; they will probably pay their bonds.

It does appear, at least for today, that the Euro has turned; as if a sudden transformation has swept the continent. Austerity is dead. Keynes has been resurrected and placed on a pedestal in Brussels, right next to a chocolate covered waffle. There was a mass awakening that countries cannot cut their way to prosperity. Angela Merkel is fighting back against the austerity backlash; she argues the “credibility” of the Eurozone is at risk without more austerity and continuing cutbacks. But austerity isn't working and its hard to maintain credibility in the face of failed policy.

Here is the problem: If a government (say Greece) has a massive deficit and now they are trying to balance their budget, the government will be making the situation worse by imposing cuts, both because government expenditure is part of the GDP, and because of the multiplier effect of government deficits on the economy. A government trying to cut deficits by reducing government expenditures and raising taxes is bound to make their economy contract, which would then have a negative impact on tax collection, and consequently make the deficit worse. At the same time, because GDP contracts, the government is making the denominator of the debt-to-GDP ratio decrease, making the situation worse in such a metric. Sisyphus never had it this tough.

The Europeans have tried austerity and it hasn't been fun and the overall economy is now probably in a second recession, largely caused by slowing demand, caused by (drum roll please) austerity! And, worst of all, the economy may be entering a negative feedback loop: low demand leads to more unemployment which leads to lower demand ... you get the idea. As for the whole "confidence will return" argument: businesses don't invest in slow-growth environments when there is obviously slack demand.

And Merkel is facing opposition. A criminal lawsuit has been filed against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens. It's thought the bailouts could leave the Germans on the hook for trillions of euros. And the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors; not exactly the original idea behind a European Union. Merkel’s reputation as a hardliner for fiscal reform is wobbly. She’s about to lose her only ally (Sarkozy) in the push for austerity. And this is happening while inflation is rising in Germany, the economy is contracting – possibly heading into recession - and Germans are openly outraged regarding the EU bailouts.

The French still have a couple of weeks to decide if they want to dump the far right conservative Sarkozy in favor of the far left socialist Hollande.. The rhetoric is getting interesting: Francois Hollande, the Socialist presidential front-runner in France, doing his best Andy Jackson imitation: “Let me tell you who my rival is. It does not bear a name or have a face, it’s the finance industry. In the past twenty years, the financial industry has taken control of our societies, of our lives and threatens our states.”

Sarkozy set the standard for France’s approach to bank regulation by passing a 0.1 percent tax on all financial transactions within the country. Sarkozy tried to promote the tax worldwide but his proposal was too far to the left for the.... (wait for it) Obama administration. Hollande, meanwhile wants to go even further, separating retail and investment banking, banning “toxic” financial products, and preventing French banks from operating in tax havens. The third place in the runoff election went to Marine Le Pen, considered very far right. After the vote of Sunday she said: “We have blown apart the monopoly of the two parties of banking, finance and multinationals.” The far right is running against big business and the financial industry.

Wells Fargo held its annual shareholder meeting in San Francisco today. Depending on who you read, a couple of hundred, or 500, or a thousand or thousands (plural) of protesters showed up. Some of the more clever protesters actually hold stock certificates and they were able to get inside. I still haven't seen reports on what they may or may not have said inside the meeting. Six protesters were arrested.

Protests are planned for General Electric's shareholder meeting in Detroit tomorrow. A couple of thousand are expected to protest. Protesters interrupted a speech by GE Chief Executive Jeff Immelt in Detroit today, yelling "pay your fair share," before being escorted out of the event. A Citizens for Tax Justice report released in February said GE had an effective tax rate of 11 percent in 2011. GE disclosed in filings with the U.S. Securities and Exchange Commission that its overall tax rate - on both foreign and US earnings - was 7 percent in 2010 and negative 12 percent in 2009.

Morgan Stanley says U.S. high-yield obligations, otherwise known as junk bonds, were in a “sweet spot” as borrowers cut their debt loads. JPMorgan said junk yields will fall more than half a percentage point by year-end. Bank of America favors debentures rated in the middle tier of speculative grade. Gains on U.S. high-yield, high-risk bonds, which are little changed since the end of February, are set to accelerate as central banks respond more aggressively to contain Europe’s fiscal imbalances, Morgan Stanley and JPMorgan said. While forecasting the default rate will rise this year, Moody’s Investors Service says the figure will stay below historic averages.

The Justice Department says a BP engineer intentionally deleted more than 300 text messages that said the company's efforts to control the Gulf of Mexico oil spill were failing, and that the amount of oil leaking was far more than what the company reported. Criminal charges have been filed against the engineer, Kurt Mix of Texas. Two years after the explosion that killed 11 men and spilled millions of gallons of toxic oil into the Gulf, and destroyed unknown amounts of marine life and crippled the livelihood of millions of residents of the Gulf – and we finally have a criminal charge – the first criminal charge - for obstruction of justice.

The Federal Reserve's top policymakers are meeting behind closed doors for two days, tweaking their economic forecasts and reevaluating their game plan for boosting the US recovery. Or maybe they'll order pizza and play pinochle. And then tomorrow morning, they'll announce the same thing they announced a few weeks back. They can't raise rates; they will continue to have a very accommodative monetary policy which they will not call QE3

A new case of mad cow disease has surfaced in a dairy cow in California. Mad cow disease, or bovine spongiform encephalopathy (BSE), can be fatal to humans who eat tainted beef. The World Health Organization has said that tests show that humans cannot be infected by drinking milk from BSE-infected animals. The disease is always fatal in cattle, however. There have been three confirmed cases of BSE in the United states, in a Canadian-born cow in 2003 in Washington state, in 2005 in Texas and in 2006 in Alabama.

Apple sold 11.8 million iPads in the last quarter, the latest version of which hit store shelves in mid-March. That compared with the average forecast of up to 13 million. Apple sold 35.1 million iPhones - which accounts for about half its revenue; and that was a little better than expected. Net income rose to $11.6 billion, or $12.30 a share, from $6 billion, or $6.40 per share, a year earlier. That also outpaced Wall Street's target of $10.04 a share. There margins are freaky high and they just might take over the world at this rate.

Monday, April 23, 2012 European Debate Austerity v. Growth, Walmart in Mexico, Apple in Seattle

DOW – 102 = 12,927
SPX – 11 = 1366
NAS – 30 = 2970
10 YR YLD - .04 = 1.93%
OIL +.03 = 103.14
GOLD – 4.10 = 1639.30
SILV - .84 = 30.86
PLAT – 22.00 = 1565.00

There is some uncertainty in Europe. Sarkozy is losing the election in France; the Dutch government has collapsed, and the debt continues to mount and the austerity plans aren't working and the natives are getting restless.

In France, Sarkozy came in second behind Francois Hollande, the Socialist candidate and a harsh critic of the spending cuts prescribed as a way to end the region's debt crisis. This was the first round of voting and there will be a runoff election on May 6^th. Hollande won 28.6 percent to Sarkozy’s 27.1 percent; Hollande has the momentum. Voter frustration with the status quo and with the E.U. fed a rise of support for extremes at both ends of the political scale, making potential kingmakers out of 11 million voters who supported candidates of the far right and left.

Sarkozy and Germany's Chancellor Angela Merkel have been the main architects of Europe's efforts to avoid a collapse of the region's shared currency. If Sarkozy loses, it means Merkel might not last. If both Sarkozy and Merkel lose power, we've got a whole new situation.

Figures reported by the European Union's statistics office confirmed the effects of budget-cutting programs on countries that use the euro currency. Even with widespread spending cuts, overall debt rose to 87.2 percent, the highest level since the euro was created. Separately, a survey of the euro zone's manufacturing and services sectors fell in April. Official data confirmed that Spain is in recession, after economic output fell 0.4 percent in the first three months of the year; that qualifies as a recession although I would categgorize it as a depression. Spain joins other European countries now officially in recession, including Italy, Belgium, the Netherlands and, outside the euro zone, the Czech Republic. Even Germany may have fallen into recession in the first quarter, though official data is not out yet.

The Dutch government resigned Monday after it couldn't reach agreement with an opposition party to bring its budget deficit within European Union rules. The budget dispute raised the prospect that the Netherlands could lose its top AAA credit rating. Euro zone unity is under strain as other Europeans resent what they perceive as Germany’s holier-than-thou attitude in insisting that all the other Euro-zone countries keep their promises to reduce government budget deficits to 3 percent or less of gross domestic product. The Dutch debate basically boils down to austerity versus growth.

Christine Lagarde, the president of the International Monetary Fund, speaking in Washington over the weekend, said: “A global, undifferentiated rush to austerity will ultimately prove self-defeating.” But Ms. Lagarde also acknowledged the quandary facing European leaders. Most of them simply do not have the resources to pay for public works projects or social programs that would ease the pain of rising unemployment and declining wages.

Last week, the International Monetary Fund called for Europe to begin issuing bonds backed by all members, so-called euro bonds, a measure that would take pressure off the most debt-burdened countries whose high borrowing costs are contributing to their economic woes. In Germany, there is little support for such measures. At weekend meetings the IMF announced an additional $430 billion in lending capacity by developed economies. The contributions came after IMF economists determined that countries around the world might require up to $1 trillion in new loans because of the combined effects of the sovereign debt crisis in Europe and sluggish global economic growth. 

There are also calls for the European Central Bank to issue another round of cheap three-year loans to banks, as it has already done twice since December. The bank should also cut the benchmark interest rate from 1 percent, or resume purchases of euro zone government bonds to hold down borrowing costs. Now, the ECB can't seem to enforce deficit reduction plans in exchange for bailing out the banks. The population is catching on to the idea that the banks are part of the problem and not the solution.

The IMF has three recommendations, as outlined in last week’s World Economic Outlook, which are somewhat at variance with current euro zone policy. First, it wants the region not to overdo short-term fiscal austerity while placing more emphasis on longer-term structural measures to improve budgets. Second, it wants the European Central Bank to continue very accommodative monetary policies. Finally, it wants the euro zone authorities to be prepared to inject capital directly into troubled banks and to accompany that with stronger European-wide supervision of lenders.

When the ECB give the banks cheap money, the banks take the money and gamble – why not? It is cheap money. The banks buy the sovereign bonds and then they bet against the same with Credit Default Swaps. For the banks, the best bet is that the economy will shudder and shake and quake and maybe default. And to aid in the bet, the banks are not lending out the cheap money they received from the ECB.

Just a reminder that the Greeks hold an election on May 6, the same day as the runoff in France. Surely the Greeks are looking at the Dutch indignation regarding austerity. The same Dutch that demanded Greek leaders submit to EU demands for punitive austerity measures or forget about getting any help to avoid bankruptcy.

From Reuters: A former chief executive of Calpers, the biggest U.S. public pension fund, and a former board member were charged by federal regulators on Monday with scheming to defraud Apollo Global Management, a private equity firm, of more than $20 million in placement fees.

The U.S. Securities and Exchange Commission said that Federico Buenrostro, a former chief executive of the California Public Employees' Retirement system, and Alfred Villalobos, a friend and former board member who became a placement agent, fabricated documents as part of the fraud. Villalobos is also a former deputy mayor of Los Angeles.

Investment firms hire placement agents to help them land business at pension funds. According to the SEC, Buenrostro and Villalobos, gave Apollo Global the impression that Calpers, which has $235 billion in assets, had reviewed and signed placement-agent fee disclosure letters in accordance with its procedures.

"In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos's firms," the SEC said in a statement. "The false letters bearing a fake Calpers logo and Buenrostro's signature were provided to Apollo, which then went ahead with the payments."

Villalobos generated more than $70 million in placement agent fees over approximately a 10-year period, at least $58 million of which was related to Calpers' investments, according to the SEC.

Buenrostro served as Calpers' CEO from 2002 to 2008.

From the Murdoch Street Journal: In a letter set to be sent to regulators and lawmakers on Monday, an MF Global customer group calls for J.P. Morgan to “return hundreds of millions of dollars in MF Global customer funds transferred” to J.P. Morgan in late October. The group, called the Commodity Customer Coalition, urged U.S. officials to “demand” that the New York bank “disgorge all MF Global customer property immediately.” J.P. Morgan is cooperating with the ongoing investigation, has said it did nothing wrong and lost some of its own money in the Oct. 31 bankruptcy because it was a creditor of MF Global.

Next up, we have two tales of corporations performing badly. We start with Walmart. Walmart, has just been caught in a massive bribery scandal that extends to the highest levels of the organization. Just as bad, Walmart's senior management appears to have long known about the scandal and has deliberately tried to cover it up. About 20% of all Walmart stores worldwide are in Mexico.

Walmart de Mexico apparently bribed Mexican officials for years; the bribes may have totaled more than $24 million and they were paid to win permission to open new stores without having to go through regular legal channels. The bribes were initially hidden from Walmart's global headquarters in Bentonville, Arkansas, by disguising them as normal legal bills, which would be accounting fraud. One of the key executives in charge of the bribery payments quit the company in 2005 after being passed over for promotion. He then detailed his behavior to some of Walmart's lawyers, implicating many senior Walmart executives in the process. The CEO of Walmart de Mexico is said to have personally approved the bribes. Walmart's global headquarters launched an investigation of the bribes but despite finding evidence of suspicious behavior and possbly clear violations of law, they shut down the investiagtion. Walmart's then-CEO, H. Lee Scott, Jr., was briefed on the investigation. He reportedly rebuked the company's investigators for being too aggressive.Walmart's current CEO, Michael Duke, was chairman of Walmart International at the time of the scandal. He received frequent briefings about the bribery allegations and progress of the investigation.

The Foreign Corrupt Practices Act makes it illegal to bribe officials in countries in which American companies do business, which is what Wal-Mart is accused of doing here. And don't forget the accounting fraud.

Our next example of a corporation behaving badly is Apple. A guy from Seattle named Rex sued Apple and won. He kept a blog of his battle. Here is the quick version. In 2008, Rex bought an Apple laptop was part of a batch that contained a defective chip. Apple acknowledged the defect and said it would replace it when it burned out. When the chip burned out three years later, Apple flaked out; they claimed his computer was a slightly different version than the model for which it had agreed to replace the chip. So, this guy, Rex, goes to the Apple store, he mails letters, he makes phone calls and he keeps meticulous records of everything, and he writes a blog about his experience. And finally, in March he ends up in small claims court and he wins. David beats Goliath.

If it sounds like a heck of a lot of work and hassle for a computer repair – it is. And that is what Apple was counting on. They thought they could just wear the guy down and eventually he would quit. Most people would give up. Who could blame them? In the past, wronged customers could band together and file a class-action lawsuit. The whole reason why class actions were set up is because most Americans don’t have time or money to go to court over a small item. But today, most companies have added clauses to their customer contracts that prohibit class-action suits. Instead of class action, the corporations now have contracts that mandate arbitration. The problem with arbitration is that customers lose 95% of the time. Coincidentally, the arbitrators are selected by the companies.

So, Rex sued Apple and took them to small claims and Apple fought back. They sent two attorneys to fight the battle, even though it was pretty clear they were liable for the defective chip. They probably thought they could wear the guy down, that he might not show up, or that he might slip up and not be prepared. Maybe Apple was just trying to be a bully. Now the guy is entitled to a new computer and Apple has to pay their attorneys. Once upon a time, Apple was the scrappy underdog, throwing a hammer through the window of conformity. Those days are gone. Apple is now a monolith that thinks the legal system is there to serve them; and customers are meant to be beaten into submission. And they do it for the worst possible reason: because they can. It is only a matter of degrees between screwing one guy in Seattle, screwing the Mexicans who live near a Walmart, screwing the clients of MF Global, screwing the pensioners in California, screwing Europe. And everybody is doing it.

Sinclair Noe

Eat the Bankers