Tuesday, August 19, 2014 - It’s Just a Matter of Time

It’s Just a Matter of Time
by Sinclair Noe

DOW + 80 = 16,919
SPX + 9 = 1981
NAS + 19 = 4527
10 YR YLD+ .02 = 2.40%
OIL (sept) = 94.48
GOLD – 2.00 = 1296.20
SILV - .18 = 19.50

The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.4%, but energy costs declined 0.3%; the first drop in energy prices since March. Consumer prices have risen an unadjusted 2% over the past 12 months, down slightly from June. Prices surged in the early spring but have since tapered off. Excluding volatile food and energy prices, the core rate has risen 1.9% in the same span, unchanged from the prior month. Almost all of the increase in consumer prices can be traced back to housing costs, or shelter prices; over the past year, shelter prices are up 2.9%.

Hourly wages have risen about 10% overall since June 2009, to $24.45 an hour. But over the same span they’ve slipped 0.3% in “real” or inflation-adjusted terms. Since the Great Recession ended five years ago, the amount of money Americans earn each hour after adjusting for  inflation has actually fallen. And that largely explains why the economy is growing so slowly.

The Federal Reserve should be in no hurry to raise interest rates because there is no serious threat from inflation, at least not now.

According to the US Travel Association and GfK, a market research firm, you might not take a vacation this year. About 40% don't plan on using all of our paid time off. The share of American workers taking vacation is at historic lows. In the 1970s, about 80 percent of workers took a weeklong vacation every year. Now, that share has dropped to a little bit more than half. The declining popularity of vacation has wide-ranging effects not just on workers, but also on their employers and indeed the overall economy. Studies have found that taking fewer vacations is correlated with increased risk of heart disease; other research has shown that workers who take vacations, or even a small break during the workday, are more productive when they return. This vacation aversion is a North American phenomenon; the US is the only “advanced” economy that doesn’t require companies to give paid vacation days.

Housing starts rose to an eight-month high in July. Groundbreaking for new housing jumped 15.7% last month to a seasonally adjusted 1.09-million unit annual pace; this follows 2 straight months of declines. Groundbreaking for single-family homes, the largest part of the market, increased 8.3% in July to a seven-month high. Starts for the multi-family homes segment, such as apartments, jumped 33%.

Home Depot reported quarterly profit today. Profit rose 14% to $2.05 billion. Sales rose 5.7% to $23.8 billion. The number of transactions rose 4.2%. Home Depot said it expects same store sales to grow faster in the second half of the year, as more people take on remodeling projects. However, Home Depot maintained its full-year sales growth forecast of about 4.8%. Lowe's, the world's second-largest home improvement company, is scheduled to report results tomorrow.

Back in 2006 bust, when the housing market went bust, Phoenix was one of the first cities to get hammered with lower prices; in 2011, Phoenix was one of the first cities to snap back; prices, off by nearly 60% from peak, then rebounded sharply; home prices are up nearly 46% from the 2011 low. The number of homes in some stage of foreclosure has fallen to about 4,300 homes today from more than 50,000 four years ago.

Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. Investors accounted for nearly 15% of homes bought in June, down from about one-quarter last year and one-third of sales in June 2012. The market is moving away from from bargain-hunting investors, who typically pay cash for distressed properties, to traditional buyers with mortgages. The Phoenix market is slowly moving back to normal, but there is still a long way to go.

Employment in Phoenix, after expanding at an average annual pace of 2.6% and 2.8% in each of the last two years, is up just 1.5% so far this year. When people don’t have a job or are not secure in their jobs, they don’t buy houses. The sluggish local economy is compounded by consumers still too battered from the bust to think about getting a loan. Some don't have sufficient equity to turn a house sale into an adequate down payment on their next purchase. Others suffered credit blemishes or income hits that make banks reluctant to lend.

Reuters reports Phoenix based PetSmart is exploring a potential sale of the company. Jana Partners, which has reported a 9.8% stake in PetSmart, has been calling on the company to pursue a sale after what it calls years of financial underperformance. There is no guarantee the review will lead to a deal and PetSmart could still determine that it would be better off on its own.

Today marks the ten year anniversary of Google. The company went public August 19, 2004 at a price of $85 a share; and it’s gone up 1,304% since then. A few stocks have done better over that time, but only a few, and of those, only Apple was in the S&P 500 10 years ago when Google went public. Today, Google’s revenue tops $65 billion, more than all but 40 US companies. Net profit margins exceed 20%, higher than all but three. Ten years ago, Google had a forward PE of 52; today, the forward PE is 20. So as share prices have constantly moved higher, valuation has constantly moved lower; which is a neat trick.

Over the past 10 years, or you could say over the past 25 years, a great deal of wealth has flowed to the tech giants of Silicon Valley; which means that the wealth has flowed away from Wall Street. And the techies have finally figured out they don’t need Wall Street bankers to make a deal. According to data from Dealogic, approximately 70% of the tech deals completed in early August have been sealed without a Wall Street bank consultant helping the buyer identify the transaction. And over the past two years, the trend has been growing, with more than half the tech deals in 2012 occurring without a banker working on behalf of the buyer. This M&A consulting shift highlights a subtle but growing divide between fee-eager bankers and the tech giants of today.

Maybe the problem is that the banks just have a hard time remembering who their clients are. Case in point: you may remember the story of Standard Chartered, the British bank, which back in 2012 paid about $667 million to settle charges that it had engaged in money laundering by making transfers for clients in Iran and other countries that were covered by American sanctions. They had to add compliance monitors. A few months later the bank’s chairman denied any wrongdoing, which was a direct violation of the settlement; and he was forced to quickly recant. Today, it seems that all of those new legal staffers and crime-fighting committees also didn’t get the memo about what they are meant to be doing. New York’s financial regulator slapped another $300 million fine on Standard Chartered for “failures to remediate anti-money laundering compliance problems as required” in its previous settlement.

Part of the bank’s 2012 agreement included hosting an independent monitor permanently installed by regulators on-site to vet anti-money laundering procedures. This monitor was back-testing the bank’s processes and found them lacking, particularly when it came to flagging suspicious dollar transfers from its Hong Kong and United Arab Emirates affiliates.

In a statement, Standard Chartered said that it “has already begun extensive remediation efforts and is committed to completing these with utmost urgency.” And this time they really, really mean it; not like last time. So, this raises the question of how many times a bank can break the law, and get away with a slap on the wrist. What does a bank have to do before they forfeit their charter?

The New York State regulator, Benjamin Lawsky, said: “If a bank fails to live up to its commitments, there should be consequences. That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”

So, the penalty is nearly $1 billion in fines over the past couple of years, but actually works out to about 12% of bank profits over the same time.

You might also remember last month when Attorney General Eric Holder announced the $7 billion settlement with Citigroup for its role in packaging troubled mortgages into securities and selling them as investments in the years before the crisis, even though a bunch of Citigroup bankers knew better and did it anyway. And last November, there was a settlement with JPMorgan. And there is a chance that later this week we will see a settlement announced with Bank of America.

It all falls in line with the “too big to fail” idea known as the Holder Doctrine, which stems from a 1999 memo, when then Deputy AG Holder included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern. Holder was thinking of the collapse of Arthur Anderson after the collapse of Enron. So, now Holder holds to the idea of settlement over prosecutions.  Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong.

The problem is, of course, that these settlements allow for the Wall Street bankers to get away with their bad behavior without being held the slightest bit accountable. And with no real deterrent, as Standard Chartered has just confirmed, it’s just a matter of time until they do it all over again. 

Wednesday, June 19, 2016 - Don't Fight It

Don't Fight It

by Sinclair Noe

DOW – 206 = 15,112
SPX – 22 = 1628
NAS – 38 = 3443
10 YR YLD + .13 = 2.31%
OIL - .52 = 98.15
GOLD – 17.00 = 1352.30
SILV - .34 = 21.45

One of the best known adages in the financial world is “Don't fight the Fed”. Marty Zweig is credited with that sage wisdom. Zweig was a professor of finance, and a financial analyst; he went on to become a hedge fund manager and he wrote a newsletter. He famously bet that the market would go down in 1987, and by October of that year he was short the market and made a big profit while most other money managers were getting clobbered.

“Don’t fight the Fed”; that meant, according to Zweig’s theory, that if interest rates were going down, stocks would go up, and vice versa. He also claimed the way to make money was to be risk-averse, rather than taking chances on the upside. He said he was a big poker player while at Wharton, but had stopped playing when he became a money manager because he hated losing.

In addition to “Don't fight the Fed”, Zweig is credited with the adage, “Don't fight the tape”; in other words, the market will have the last word, and complaining that the market is wrong is an excellent way to lose money. Zweig had a third rule: “Never relax”.

Today the Federal Reserve concluded their Federal Open Market Committee meeting; they issued a formal statement and then they issued their quarterly economic projections and then Fed Chairman Bernanke held a press conference.

The formal statement was almost identical to the statement from the FOMC meeting in March. No real change in interest rate targets. No real change in their purchases of securities to prop up the markets. No real change in outlook. No real change in targets. No real change in anything. No talk of taper. We'll go through that statement in a moment.

The economic projections showed a very, very, very slight improvement in the economy; a tiny improvement in GDP growth, a slight improvement in unemployment, and just a hint more inflation; it was not a cause for optimism.

Then Bernanke held a press conference. Bernanke said job gains and housing markets had increased consumer confidence; most FOMC participants do not favor selling agency debt; he reiterated that thresholds aren't triggers on rates; the Fed's monetary policy will continue to support recovery; the Fed may vary it's purchases based upon economic data; the Fed may moderate the pace of purchases later this year; the Fed may stop purchases by the middle of next year; and the Fed will ease QE if the economy improves.

And then Bernanke tried to soften the blow by saying: “If you draw the conclusion that I've just said that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy."

And then Bernanke tried to reassure market participants that any change in the bond purchase program would “be akin to easing off the gas pedal rather than putting on the brake,” and that the Fed is able and willing to adjust its purchases back upward if its forecasts turn out to be too optimistic.

Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy,” and he said he was a “little puzzled by that” and it couldn't be explained by “Monetary policy”. Well, he can believe that if he wants but if it looks like a duck, and quacks like a duck.

In his prepared remarks Bernanke referred to the newly released economic projections: "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year."

Let's review the key points of the formal statement:

… economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline... The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

... the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.

The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

So, we got a combination of official statement saying “no taper”, then Bernanke saying “taper”. And the bottom line here is that traders in the financial sector are terribly afraid of losing free money from the Fed; and the most obvious rationale behind the fear is that the economy is not strong enough to support valuations.

Elsewhere.

The Congressional Budget Office just released their analysis of the fiscal impact of the immigration reform legislation from the Senate and it turns out that the bill is expected to lower the budget deficit by $197 billion over the next decade. The CBOs guesstimate of the bill's impact over its second decade (2024-2033) is $690 billion in deficit reduction. 

What's going on here is that the budget agency expects immigration to generate more costs but even more revenues. Between health programs, entitlements, SNAP, etc., they expect spending to go up about $260 billion over the next ten years. But they estimate revenues to go up about $460 billion. The net difference, about $200 billion, is the projected impact on the deficit.

Deloitte Financial Advisory Services settled with New York's banking regulator over its consulting work for Standard Chartered Bank on money-laundering issues. In August, the agency said Deloitte consultants hid details from regulators about Standard Chartered Bank's transactions with Iranian clients.

Under the agreement, the consulting firm affiliate of Deloitte & Touche agreed to pay $10 million, to implement reforms designed to address conflicts of interest, and to a one-year suspension from consulting work at financial institutions regulated by New York's Department of Financial Services.

Remember the $25 billion settlement last year with the five biggest mortgage lenders? The mortgage settlement came after the housing crash led to a wave of foreclosures across the country and after widespread improprieties in mortgage lending and in the foreclosure process were uncovered. The Big Five were supposed to change their evil ways. A report has now been issued to see if the lenders are getting better and the answer is “sort of”, but four of the five have yet to meet their commitment to end the maze of frustrations that borrowers must navigate to modify their loans.

The new chair of the Securities and Exchange Commission, Mary Jo White, in an interview with the Murdoch Street Journal said the agency was no longer going to just settle all of its fraud and abuse cases by letting the accused get away without admitting or denying wrongdoing. In some cases, she said, the SEC will actually try to force some admissions of wrongdoing.

White said: "We are going to, in certain cases, be seeking admissions going forward. Public accountability in particular kinds of cases can be quite important." But she went on to say that settling is quicker and not as risky, and it gets money to investors faster, and settling without admitting guilt is still a major tool in the arsenal. White said the SEC will decide case-by-case when to seek admission, depending on "how much harm has been done to investors, how egregious is the fraud." In other words, don't hold your breath waiting for a perp walk.

Meanwhile, Britain's Commission on Banking Standards has just issued a 500 page report calling for a new criminal offense for “senior persons” who run banks in a “reckless manner”, as well as much more stringent clawback rules that could see managers being stripped of several years’ worth of pay. The Commission warned that bankers had escaped “personal responsibility” for their actions, and said that drastic reforms were the only way to restore trust in banks. The report also said the bailout of the Royal Bank of Scotland had hurt the broader economy and the bank should be broken up.

Thursday, May 30, 2013 - The Money Laundering Criminals at HSBC and Standard Chartered Continue to Skate

05302013 Script

The Money Laundering Criminals at HSBC and Standard Chartered Continue to Skate

by Sinclair Noe

DOW + 21 = 15,324
SPX + 6 = 1654
NAS + 23 = 3491
10 YR YLD un = 2.12%
OIL + .45 = 93.58
GOLD + 21.00 = 1414.70
SILV + .32 = 22.88
PLAT + 31.00 = 1487.00
PAL + 8.00 = 761.00

So, apparently Wall Street moved higher today because the economy looks weaker and that means the Fed won't taper or quit QE. It's twisted logic, but we figured it out a while back.

The weak economic news started with this week's initial claims for jobless benefits; applications increased by 10,000 to 354,000. One week does not make a trend. Next week we'll get the jobs report for the month of May. Today's figures were just a reminder that the Fed won't have an easy path to end QE without crushing the labor market.

In a separate report, the Commerce Department said first-quarter gross domestic product was revised down to 2.4%, down from an initial estimate of 2.5%.  The gain in first-quarter growth follows a sluggish increase of 0.4% in the fourth quarter. Consumer spending increased, but that was likely due to higher prices for gasoline and electricity. Government expenditures fell by 4.9%, up from initial estimates of a 4.1% drop. The bulk of the decline was in military spending. Inflation as measured by the PCE index was muted, rising just 1.0% overall or by 1.3% excluding food and energy.

So, the economy is slowing, the sequester cuts are just starting to kick in and act as a drag on the economy, and inflation is running at half the Fed's target, and the jobs market is weak. And don't forget the Fed is finding no help in the form of fiscal policy. Against this backdrop, it will be hard to make a case for ending QE.

There is a market “disconnect” between the world’s gloomy outlook and talk of tapering by the US Federal Reserve, the supposed moment when it starts to wind down its $85bn of monthly bond purchases. Yet the markets seem to be betting that the central banks will come to the rescue yet again if needed.

Maybe, but there is that slight risk the central bankers might feel the compulsion to strike a blow against moral hazard and display their displeasure for asset bubbles. In other words, we could see a nasty sell-off at some point. We have been through these episodes of putative Fed tightening twice since the Lehman crisis. Markets tanked in 2010 and again in 2012 after the Fed turned off the spigot.

Yet QE critics clearly have a point. As Pimco’s Bill Gross points it, there are “bubbles everywhere”. The Credit Suisse index of Global Risk Appetite has been flirting with the “euphoria” line, not far short of levels seen in 1987, 2000 and 2007. There is a big market disconnect. The Gini co-efficient of wealth inequality is soaring, which means that all the money that's been pouring into the markets isn't trickling down.

American households have rebuilt less than half of the wealth lost in the financial crisis, leaving them without the spending power to fuel a robust economic recovery. From the peak of the boom to the bottom of the bust, households watched nearly 40% of their net worth disappear amid sinking stock prices and the rubble of the real estate market. Since then, Americans have only been able to recapture 45 percent of that amount on average, after adjusting for inflation and population growth.

The report from the St. Louis Federal Reserve showed most of the improvement was due to gains in the stock market, which primarily benefit wealthy families. That means the recovery for other households has been even weaker. The report states: “A conclusion that the financial damage of the crisis and recession largely has been repaired is not justified.”

The economy is twice as large as it was three decades ago, and yet the typical American is earning about the same, adjusted for inflation. The notion that we can’t afford to invest in the education of our young, or rebuild our crumbling infrastructure, or continue to provide Social Security and Medicare and Medicaid, or expand health insurance is absurd. Maybe the Fed should look at tapering off QE. It doesn't really work. That doesn't mean they should eliminate stimulus; it just means they need to inject the stimulus directly into the veins of the middle class.

Remember last September when US authorities decided to fine HSBC for money laundering? It seemed a mere slap on the wrist. A new batch of emails and letters were released to a Washington-based advocacy group, Public Citizen, and they paint a picture of the Treasury Department making hasty decisions following more than a 10 year investigation. The pressure started to build when a New York state regulator threatened to revoke the banking license of another British bank, Standard Chartered.

Public Citizen is hoping to obtain even more documents under the Freedom of Information Act. The New york Department of Financial Services determined that Standard Chartered had laundered $250 billion in illegal transactions over nearly a decade of business with US-sanctioned countries including Libya, Burma and Sudan. The bank was fined $327 million.

HSBC took money laundering to the next level. In total, the bank's US and Mexican units failed to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of US dollars from HSBC Mexico. - Bloomberg

HSBC laundered billions for murderous drug gangs around the world; in Mexico, they changed their teller's cages to accommodate the boxes of drug cash. HSBC aided Iranian entities to evade US financial sanctions on Iran. If Iran ever develops nuclear weapons, we can thank HSBC and Standard Chartered. HSBC aided terrorist organizations including Hamas, Hezbollah, and al Qaeda.

HSBC was fined $1.9 billion.

Now, Judge John Gleeson is considering cancelling December’s so-called deferred prosecution agreement that gave HSBC immunity from money laundering claims. This could leave the bank open to criminal prosecution and a ban from operating in America. However, HSBC disputes this.

The US Department of Justice (DoJ) is reportedly challenging Mr Gleeson’s need to sign off on the deal. The judge last mentioned the case in February, stating that he had not yet approved nor disapproved of the settlement.

In a statement, HSBC said: “For more than two years, our new leadership team in both New York and London has been implementing reforms and new controls, investing in compliance systems and staff, and putting in place the most effective global standards across our network to combat financial crime on a global basis.

“We are focused on taking all necessary steps to fulfill our obligation under the agreements with the US and UK governments, and on implementing effective global standards across HSBC.”

That would sound more credible if only they had stopped laundering money. In March, fresh money laundering and tax evasion allegations surfaced in Argentina.

Standard Chartered was forced to admit it had violated the International Emergency Economic Powers Act, and if they didn't misbehave, then the charge would be dismissed in two years. It only took a couple of months for Standard Chartered's Chairman John Peace to lie to reporters, and investors by claiming there was no “willful intention” to violate financial rules. US regulators then forced Chairman Peace to write an apology for lying about money laundering.

Nobody went to jail.

Nobody.

On Wednesday, the Department of Justice announced arrests for money laundering. The DOJ statement says: "Today, we strike a severe blow against a professional money laundering enterprise charged with laundering over $6 billion in criminal proceeds."

Nope, not Standard Chartered, not HSBC; they arrested some guy running an online mish-mash out of Costa Rica called Liberty Reserve, or as the Department of Justice described it: “a massive criminal enterprise”, and “the largest international money laundering prosecution in the history of the Department."

It sounds like puffery, but it's true, I guess. The Department of Justice did not prosecute HSBC or Standard Chartered for a combined $929 billion in money laundering. Now, that would have been something to brag about, but they handed out deferred prosecution agreements, which have been violated. Of course, the judge hasn't signed off on the deferred prosecution agreement; apparently feeling a twinge of remorse in letting these criminals off the hook in light of the fact that 35,000 people were brutally murdered at the hands of drug traffickers in Mexico, who then laundered money through HSBC. Or maybe the judge can't reconcile how HSBC faces no jail time, while the FBI reports that in 2011 there were 663,032 arrests in this country for marijuana possession.

Meanwhile, the Washington Post reports the Office of the Comptroller of the Currency is expanding a probe that began in 2011 with allegations that JPMorgan Chase was using error-filled documents in lawsuits against debtors. The regulatory agency is examining the process several banks use to verify consumers’ outstanding debt before taking legal action.

If it sounds familiar it is. Remember the housing crisis, and how mortgage servicers were accused of falsifying records and robo-signing thousands of documents without review? The banks did pretty much the same thing, filing thousands of lawsuits against delinquent credit card holders. Consumer lawyers began noting a number of collection cases built on shoddy records. 

Authorities in California, for example, say JPMorgan flooded the courts with lawsuits against credit card holders based on flimsy evidence that cardholders were in default. California Attorney general Kamal Harris filed a case against JPMorgan. Iowa attorney general Tom Miller is organizing a 50 state effort, a replay of the 50 state attorney general effort on mortgages. So, the OCC is now getting involved because it looks bad when the state AG's take the reins and the federal regulators act like they're in a coma.

A former JPMorgan employee claims nearly 23,000 delinquent accounts were riddled with inaccuracies. The bank fired her; she sued; the case was settled out of court.

And still, none of the banksters has been jailed.

Friday, March 22, 2013 - And the Award Goes to...

And the Award Goes to...

by Sinclair Noe

DOW + 90 = 14,512
SPX + 11 = 1556
NAS + 22 = 3245
10 YR YLD - .02 = 1.91%
OIL + 1.35 = 93.80
GOLD – 5.60 = 1610.20
SILV - .42 = 28.86

For the second time this year, the S&P 500 was down on the week, slipping 0.2% over the past five trading sessions. The Dow and the Nasdaq Comp also ended just a smidge lower for the week.

Cyprus has been a big concern this week. It is a tiny little island in the Mediterranean, and it is just a blip on the overall Euro-economy, but it could have big implications for the Euro-zone; which is something like the Hotel California; you can check in any time you please, but you can never leave. If Cyprus does leave, or get kicked out of the Euro, others may follow suit. If Spain or Italy leaves the Euro, there is no more Euro.

It has also not helped confidence in the euro that the Cypriot crisis has erupted at a time when other troubling problems are now raising their ugly heads in Europe. Less than a month ago, the electorate in Italy, the euro area’s third largest economy and a country with around 2 trillion-euro in public debt, voted overwhelmingly against austerity and structural reform. Imposing fiscal austerity on the periphery in those circumstances only seems to drive the periphery ever deeper into economic recession. Actually, depression may be more descriptive. In Greece and Spain, unemployment is about 25% and youth unemployment is running at about 50%; that's the stuff of depressions and long, tense summers.

And then to put salt on a wound, the Euro technocrats impose a tax on bank deposits. But it's not really a tax. It's just stealing. This isn't supposed to happen in a democracy. And if it happens to one sovereign European Union nation, there is nothing to prevent it from happening to another. The cure is worse than the disease. There is no reason Cyprus should have any significant impact on the global economy, and it probably won't.., probably; but if it does, it is because of the stupidity of the Euro technocrats.

The Cyprus Parliament, the elected officials today rejected the bank confiscation scheme. Instead they have approved a “National solidarity fund; they will pool together state held assets for an emergency bond issue. The Cyprus President meets with the Euro technocrats tomorrow in Brussels, (technically that's the Troika, or the EU, the ECB and the IMF). German officials are leaking news to the press, saying that Cyprus cannot expect any more help from Berlin, or Brussels, than what has already been offered. A Greek bank said it would offer to take over local units of Cypriot banks. This would safeguard all the deposits of Greek citizens in Cypriot banks. So, the only place in Europe willing to lend a helping hand is Greece. How bizarre.

The European Central Bank has given Cyprus until Monday to find a solution, or it says it will stop transferring money to its under-capitalized banks. Banks on the island have been closed since Monday and many businesses are only taking payment in cash. There were protests outside parliament again today.

Last week I talked extensively about the Senate investigation into the London Whale trading losses at JPMorgan. The 300-plus page report details multiple irregularities and plain and simple, criminal activity; ongoing criminal activity.

One of the interesting revelations deals with disclosure. In April 2012, just about a week after the London Whale trading losses first became public knowledge. Douglas Braustein, then Chief Financial Officer for JPMorgan said that regulators were fully aware of the London based chief investment office and what that trading unit had been doing. This was before JPMorgan’s acknowledgement in May that it had a serious problem, which eventually added up to more than $6 billion in trading losses.

At JPMorgan's quarterly earnings conference call in April of 2012, Braustein was quoted as saying: “We are very comfortable with our positions as they are held today, and I would add that all of those positions are fully transparent to the regulators. They review them, have access to them at any point in time” and “get the information on those positions on a regular and recurring basis as part of our normalized reporting.”

Last week at the Senate hearings, Senator Carl Levin asked  Scott Waterhouse, the OCC examiner-in-charge for JPMorgan, if Braunstein’s statement was true. “That is not true,” Waterhouse said. Levin asked if it was true that regulators got “the information on those positions on a regular basis.” Waterhouse answered: “No, we didn’t.”

And so, Braunstein changed his story last week. He told the Senate investigators that the statement he made in April 2012 was not true, but he covered his but, saying: “I believed it to be accurate based on the information that I had received.” Of course we still don't know what information he had a year ago that would make him think the regulators were getting accurate information.

What we learned is that the OCC is spineless. The testimony revealed that the OCC knew that Braunstein had made the claim that he was keeping the OCC informed with normalized reporting, and the OCC knew that was a lie, and they knew it one year ago, and they did nothing. Was it an act of omission or commission?

Part of the conclusions drawn from the Senate report: “The ability of C.I.O. personnel to hide hundreds of millions of dollars of additional losses over the span of three months, and yet survive internal valuation reviews, shows how imprecise, undisciplined and open to manipulation the current process is for valuing credit derivatives. This weak valuation process is all the more troubling given the high-risk nature of synthetic credit derivatives, the lack of any underlying tangible assets to stem losses, and the speed with which substantial losses can accumulate and threaten a bank’s profitability.”

Pretty harsh criticism, but not entirely accurate; the Senate report mentions the” lack of underlying tangible assets to stem losses”. While, the London Whale was gambling with derivatives which are nothing more than bets on side bets of side bets, there were tangible assets. Specifically, there were FDIC insured deposits.

And there is absolutely no evidence that gambling in shadowy and complicated derivatives markets has helped banks do the job that justifies giving them the benefit of deposit insurance. When you make a deposit in the bank, you are not turning over your hard earned money to a gambling addict. Well, actually you are doing that, but it probably isn't your intent.

Last week, the Federal Reserve released the results of its stress test on the big banks. Ally Financial did not pass. JPMorgan and Goldman Sachs passed but there were problems. The Fed is making them go back  to submit new capital plans by the end of the third quarter of this year to "address weaknesses in their capital planning processes."

The Senate investigation has laid out multiple instances of criminal activity. Now we sit back and see if the Department of Justice has the cajones to enforce the rule of law. Attorney General Eric Holder has stated that some banks were so large that he feared it would “have a negative impact on the national economy, perhaps even the world economy,” if criminal charges were filed against the bank.

Perhaps the Fed needs to change the terms of the stress test; if they economy can't stand them being prosecuted, they fail the test. At the very least somebody needs to stop them from gambling with FDIC insured money. We don't need a stress test to let us know that always gamblers eventually lose.

The Senate probe of JPMorgan did more than conclude that the bank hid the full damage of last year’s trading losses from investors and regulators. It delivered 900 pages of evidence that could help the Securities and Exchange Commission make the case that bank executives broke the law.

Former SEC Chairman Mary Schapiro said last year that her agency was investigating whether JPMorgan adequately disclosed the losses that eventually swelled to $6.2 billion on a derivatives portfolio. SEC officials will now be able to draw on the 300-page report by the Senate’s Permanent Subcommittee on Investigations—chaired by Michigan Democrat Carl Levin—as well as more than 90,000 e-mails and other documents, 200 transcribed telephone calls, and 25 interviews with bank officials compiled by the committee.

The case may become an early test for incoming SEC Chairman Mary Jo White, the former U.S. Attorney for the Southern District of New York whom President Obama picked to help the agency shed a reputation for failing to prosecute Wall Street wrongdoing. The report puts tremendous pressure on the SEC to address the responsibilities of JPMorgan and its top officers for what is happening in the trenches.

Then the craziest thing happened last night. A trade magazine called IR, hosted a black tie dinner to hand out awards for investor relations; kind of like the Oscars without the music, but with a bunch more irony. JPMorgan won the IR award for “Best crisis management”.

Maybe we are starting to see a change among the regulators. Remember Standard Chartered, the British bank? US regulators found that Standard Chartered back between 2001 and 2007, had laundered $24 million of transactions processed on behalf of Iranian parties and a total of $109million to Burma, Sudan and Libya also appeared to be in violation of sanction laws. Last year regulators fined Standard Chartered a little over $500 million and reached deferred prosecution agreements with the bank to avoid further sanctions.

Normally when this type of settlement is reached the banksters get to claim that there is no admission of guilt or innocence, but not in the case of Standard Chartered. Standard Chartered Bank signed a deferred prosecution agreement which, among other things, requires it to take responsibility for its previously illegal sanction-busting actions. When a bank gets caught laundering money to terrorists, they don't always get to claim innocence.

And so we fast forward to March 5 2013, and what did Sir john Peace, Chairman of Standard Chartered do? He claimed innocence. During a conference to announce the banks annual earnings, he said the bank's breaches were “not willful acts” and he described the multi-year money laundering operation on behalf of Iran as nothing more than a “clerical error”.

Well, the US regulators heard about that and they told Sir John Peace that he needed to revisit those remarks. In an unusual step, the bank was forced to issue a formal stock market announcement yesterday by US regulators. In a signed letter by Peace, the chairman said that during the press conference: "I made certain statements that I very much regret and that were at best inaccurate."

The formal apology went on to say:  "My statement that Standard Chartered 'had no willful act to avoid sanctions' was wrong, and directly contradicts Standard Chartered's acceptance of responsibility in the deferred prosecution agreement and accompanying factual statement. To be clear, Standard Chartered Bank unequivocally acknowledges and accepts responsibility, on behalf of the bank and its employees, for past knowing and willful criminal conduct in violating US ­economic sanctions laws and regulations, and related New York criminal laws, as set out in the deferred prosecution agreement."

So, very clearly, Sir John Peace lied, and with regard to the legal side of things, he made deliberate misrepresentations about securities. He also violated Standard Chartered's deferred prosecution agreement with US regulators. Standard Chartered - in the person of Sir John - has deceived prosecutors, regulators, and the investing public. This is outrageous executive behavior and it cannot be tolerated in a company that holds a US banking license.

The sad reality is that money laundering should have been enough to pull their banking license; violation of the deferred prosecution agreement should be enough to pull the license. We have senators asking just what is the level of criminality required to bring a bankster to trial; and the regulators they're afraid to prosecute. And so, Sir John was forced to read a letter which clearly states he is a liar.

And then he collected his bonus.

Monday, December 10, 2012 - The Fed After the Twist, Italy After Monti, China After 2030, Warming After Doha

The Fed After the Twist, Italy After Monti, China After 2030, Warming After Doha

by Sinclair Noe

DOW + 14 = 13169
SPX +0.48 = 1418
NAS + 8 = 2986
10YR YLD -.01 = 1.62%
OIL -.25 = 85.68
GOLD + 8.10 = 1713.60
SILV + .16 = 33.37

Economic reports due this week are not likely to be market movers. Tomorrow we'll see data on wholesale trade, plus the trade deficit; a report on how many new job opening exist. Later in the week, we'll find out about retail sales. The big event this week is the Federal Reserve FOMC meeting Tuesday and Wednesday. The Fed will be looking at the unemployment numbers from Friday. The unemployment rate fell to 7.7% from 7.9%, but that was because more people dropped out of the labor force. Usually that’s not a good sign because it means jobs are harder to find. Ultimately the Fed wants to see the jobless rate fall to 6% or less, the same levels that prevailed before the 2008 meltdown.

Nobody seems to think there will be a big uptick in new jobs. Lackluster hiring means consumer spending is unlikely to rocket higher. Too many people remain out of work and the growth in the average worker’s paycheck isn’t even keeping up with the low increase in annual inflation. Business are waiting for the consumer to spend, consumers are waiting for businesses to hire. Something needs to happen to kick start the economy, a jolt of stimulus, but don't hold out for any major announcements from this week's FOMC meeting. Bernanke should be able to point to the fact that a much-needed recovery in the housing sector has taken hold. And that's partly due to the Fed's effort to reduce mortgage rates and keep them low. Hiring has continued at a modest pace; in other words, nothing that would cause the Fed to do anything dramatic.

The Fed will need to make a decision on Operation Twist. The policy, set to end this month, let the Fed sell short-term Treasuries it already owns in order to buy longer-term bonds. The basic goal of Twist has been to lower long-term interest rates without having to increase the dollar amount of the assets on its books. Here's the problem though. The central bank is quickly running out of short-term bonds available for it to swap in a one-for-one exchange. So, the Fed might just look at some kind of an outright bond purchase program.

The Fed could double down on its purchase of mortgage-backed securities, which currently totals $40 billion a month. That program puts downward pressure on mortgage rates. The Fed announced this third round of quantitative easing, or QE3, in September.

Or, the Fed might say it will buy more Treasury bonds as a way to keep longer-term interest rates low, maybe $45 billion a month in bond purchases. Treasury purchases without offsetting sales would expand the Fed's bond portfolio, pumping more cash into the economy but also making it more difficult to eventually sell the bonds to head off inflation.

Or, the other option is the Fed waits until the new year and to see how Congress handles the fiscal cliff, and then they'll know whether they need to do something dramatic or not.

President Obama and House Speaker Boehner held closed door meetings at the White House yesterday. No announcements were made; your guess is as good as mine. President Obama traveled to Michigan today to push for his proposed extension of tax cuts for middle class earners. The president's message in Michigan will be that the economy is rebounding and Congress should not risk that progress to save tax cuts for the rich. Meanwhile, there is a political battle in the state about union recognition.

President Obama threw his support behind labor unions opposed to a Republican-led drive for "right-to-work" laws in Michigan, saying efforts to pass such measures were not about economics but about politics. Obama used a visit to an auto plant to weigh in on the controversial push in the state legislature to impose new restrictions on unions.

Obama told a crowd of workers at the Daimler Detroit Diesel plant in Redford, Michigan: "What we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions. These so-called right-to-work laws, they don't have to do with economics, they have everything to do with politics. What they're really talking about is giving you the right to work for less money."

Union members and others opposed to Michigan becoming a right-to-work state plan major protests in the state capital, Lansing, this week. Organizers expect thousands at a rally tomorrow when the state legislature reconvenes. With Republicans in control of the legislature and the Republican governor committed to sign the laws, Michigan could become the 24th right-to-work state by the middle of the week.

The rest of the world watches to see if the fiscal cliff can be resolved, and with the International Monetary Fund's managing director Christine Lagarde warning of "zero growth" in the US as a worst case scenario: The International Monetary Fund has already lowered its growth estimate for next year for the United States to 2.1%, and Lagarde reiterated that the implications of going over the cliff would be precipitous. She said, "If the US economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero."

Italian equities and bonds sank after Prime Minister Mario Monti's decision to resign stoked concern about who will lead the euro zone's third biggest economy out of its debt crisis. The euro initially weakened on the news out of Italy, but it managed to rebound against the dollar and pared most losses versus the yen; the reaction to Monti's resignation may have been overdone. Monti announced over the weekend he would resign once the government's 2013 budget is approved, potentially bringing forward an election due early next year. Monti became an investor favorite over the past year as he spearheaded a reform agenda to rescue Italy from the threat of a Greek-style collapse.

Commodities markets rose on data that showed factory output in China, the world's No. 2 economy accelerated to an eight-month high in November. Copper prices hit their highest level in almost two months.

A new intelligence report says that by 2030 Asia will overtake North America and Europe combined in global power based on gross domestic product, population, military spending and technological investment.

China alone will probably have the largest economy, surpassing that of the United States a few years before 2030. Meanwhile, the economies of Europe, Japan, and Russia are likely to continue their slow relative declines.

The report, "Global Trends 2030: Alternative Worlds,"  www.dni.gov/nic/globaltrends. was issued by the National Intelligence Council, an analytical arm of the U.S. government's Office of the Director of National Intelligence. The report says that despite the economic power of China, the United States is expected to retain its superpower status because it still is the only country able to pull together coalitions and mobilize efforts to deal with global challenges.

The report claims China isn't going to replace the US on a global level,and while being the largest economic power is important, it isn't necessarily the largest economic power that always is going to be the superpower.

China recognizes that it cannot play that role of organizing across regions and across state-nonstate boundaries. The health of the global economy increasingly will be linked to progress in the developing world rather than the traditional West.

HSBC is apparently ready to settle money laundering charges for $1.9 billion. The settlement with HSBC stems from accusations that the British banking giant transferred billions of dollars on behalf of sanctioned nations like Iran and enabled Mexican drug cartels to launder money through the American financial system. The deal will force the bank to forfeit more than $1.2 billion in ill-gotten gains and pay additional penalties.

Since January 2009, the Justice Department, Treasury and the Manhattan prosecutors have charged six foreign banks, including Credit Suisse and Barclays. In June, ING Bank reached a $619 million settlement to resolve claims that it had transferred billions of dollars in the United States for Cuba and Iran.

Earlier today, federal and state authorities announced a $327 million settlement with Standard Chartered. The British bank, which in August agreed to a larger settlement with New York's top banking regulator, admitted to processing thousands of transactions for Iranian and Sudanese clients through its American subsidiaries. To avoid having Iranian transactions detected by Treasury Department computer filters, Standard Chartered deliberately removed names and other identifying information

The Doha Climate Change Conference wrapped up this week. As Doha kicked off, we had just seen the effects of Hurricane Sandy, meanwhile environmental groups were prepared with a lineup of grim studies on just how far the world has fallen short on its environmental efforts. Carbon dioxide emissions hit a record high last year. Yet nations around the world, despite a formal treaty pledging to limit warming, and 20 years of negotiations aimed at putting it into effect, have shown little appetite for the kinds of controls required to accomplish those stated aims. There were no new emissions targets up for discussion at Doha. Commitments of monetary aid have been drying up.

Thursday, December 6, 2012 - Dude, Watch Out for That Cliff

Dude, Watch Out for That Cliff

by Sinclair Noe

DOW + 39 = 13,074
SPX + 4 = 1413
NAS + 15 = 2989
10 YR YLD -.01 = 1.58%
OIL – 1.44 = 86.44
GOLD + 5.70 = 1701.00
SILV + .12 = 33.13

So, Barack Obama and John Boehner have figured out a way to deal with this whole fiscal cliff, man. There going to go to Seattle, Washington and they're gonna smoker reefers and drink coffee until they come up with, like a really great idea, dude.

Why not? It wouldn't be any worse than what they're doing now.

In economic news:

New applications for unemployment benefits dropped for the third straight week, but we're still not back to the levels before Hurricane Sandy. Initial jobless claims declined by 25,000 to a seasonally adjusted 370,000 in the week ended Dec. 1. Tomorrow is the monthly jobs report; don't expect it to reveal any long term trend; it will be distorted by the Hurricane and also by the holiday shopping season. The guess is for about 75,000 new jobs in November, well below the average for the past few months.

The Federal Reserve issues a quarterly flow of funds report; the most recent volume shows households trying to cut back on debt in the third quarter; or at least cutting mortgage debt, while student loan debt and car loan debt piled up. When factoring in inflation, American households have deleveraged by about 13% since the meltdown of 2008.

In the third quarter, a 3% drop in mortgages more than offset the 4.3% increase in consumer credit, namely student and car loans. Household net worth, the difference between assets and liabilities, rose $1.7 trillion to $64.8 trillion.

Companies again built up debt, with non-financial debt leaping 4.4% as firms hit the corporate bond market with interest rates so low. Corporate stockpiles of cash hit a record $1.74 trillion, up 2.6% from the second quarter. After rising for the first time in a year and a half in the second quarter, state and local government debt slipped 0.1%. Federal government debt climbed 6.2%, which marked the smallest rise since the second quarter of 2008. All told, households, businesses and governments saw debt expand by 2.4% in the third quarter, which is the smallest increase since the fourth quarter of 2009.At $39.28 trillion, that’s just less than 2.5 times the nation’s annualized output in the third quarter.

Debt may well be one of the biggest drags on economic growth: 35-40% of everything we buy goes to interest; 29% of business profits go to the financial industry; 21-32 trillion are hidden in offshore tax havens.

You don't have to be paying interest on anything directly to be paying interest. Interest is built into the product; 40% of public projects, on average, goes to interest;12% interest for garbage collection; 38% interest on water processing; 70+% interest as part of public housing costs. US debt has not been paid off since 1835. In past 24 years US has paid $8.2 trillion in interest on $15 trillion in debt.

And Now – Banks Behaving Badly:

The British bank, Standard Chartered say it expects to pay $330 million to settle claims by United States government agencies that it had moved hundreds of billions of dollars on behalf of Iran, in violation of American sanctions against Iran. The estimated settlement payment would come in addition to a $340 million settlement the bank reached in August with the New York State Department of Financial Services, which charged Standard Chartered with scheming with Iranian companies and banks for nearly a decade to hide 60,000 transactions worth $250 billion from regulators.

Last Month, HSBC Holdings, another major British bank, set aside an additional $800 million to cover potential fines stemming from a money laundering investigation, bringing its total provisions for the case to $1.5 billion. HSBC is still negotiating a settlement. Last summer, ING Bank, reached a $619 million dollar settlement with the Treasury Department over claims the bank violated American sanctions against Iran, Libya, and other countries.

Now, we have another example of why corporations are not people. While several big banks set aside hundreds of millions of dollars, while neither admitting nor denying guilt, we present the strange tale of Gustl Mollath, a German man, who seven years ago, may the accusation that staff at the Hypo Vereinsbank (HVB) – including his wife, then an assets consultant at HVB – had been illegally smuggling large sums of money into Switzerland. Mr. Mollath was committed to a high-security psychiatric hospital after being accused of fabricating a story of money-laundering activities. He remains in that hospital to this day, against his will. But recent evidence brought to the attention of state prosecutors shows that money-laundering activities were indeed practiced over several years by members of staff at the Munich-based bank, the sixth-largest private financial institute in Germany, as detailed in an internal audit report carried out by the bank in 2003. The report, which has now been posted online, detailed illegal activities including money-laundering and aiding tax evasion. A number of employees, including Mollath's wife, were subsequently fired following the bank's investigation.

Asked why the bank kept the report to itself and did not approach the authorities, a bank spokeswoman said: "In 2003 HVB initiated extensive investigations via internal audits in response to information provided by Mr Mollath on transactions that had taken place a long time before … It was determined that employees had acted contrary to their instructions regarding Swiss banking transactions". While the findings did result in some firings, the audit "did not produce sufficient evidence indicating criminal conduct … that would have made a criminal charge seem appropriate". There are now calls for the judiciary to reassess Mr. Mollath's case, but nothing yet.

And that brings us to Argentina. You may recall that Argentina suffered a major financial crisis in 2001; the country successfully managed an external debt restructuring; they said no to the standard austerity package, and the result was a fairly remarkable economic recovery. But they're not out of the woods just yet. Elliott Capital Management, a vulture fund based in the tax haven Cayman Islands refused to accept the terms of the debt restructuring that was accepted by more than 92% of bondholders in 2005 and 2010. It has demanded payment in full, and has actively pursued its case in different courts across the world. A few months ago, Elliott Capital got a judge in Ghana to seize an Argentine navy ship. Then a judge in a district court in New York ruled that the Argentinian government must pay $1.3 billion to the same vulture fund, the full face value of their holdings plus accumulated interest starting in late 2001.

Elliott and other vulture funds are not conventional investors. They buy bonds at discount rates during a crisis with the explicit intention of taking the distressed countries to court in foreign jurisdictions, while also holding out for payment in full with no renegotiation of the debt. Obviously vulture funds are not concerned with niceties such as how the debt was accumulated, the principle that debts should be served according to the debtor's capacity to pay or how the enforced payments will affect the well-being of the most vulnerable. They represent global finance in its most nakedly aggressive and exploitative form.

The New York ruling also contained an injunction that prohibited third parties from "aiding and abetting" any violation of his order, thereby preventing Argentina from being able to continue payments to the creditors that had accepted the restructuring. This has far-reaching implications beyond this case, because it calls into question all debt restructuring deals that are not just likely, but also necessary to preserve international finance. For example; why would those holding Greek bonds accept a debt restructuring plan that might be necessary for a solution and beneficial to all, if they know that vulture funds can hold out and receive judicial support in international courts?

The ruling also contradicts US internal bankruptcy laws, which force minority creditors to confirm to deals accepted by 70% of creditors. If this ruling is supported in the higher courts (both Argentina and other creditors have already appealed) it will create an unviable situation for global bond markets. Creditors will only be making one-way bets if no possibility of restructuring is accepted, making the only options all (full payment) or nothing (complete default).

And then the credit rating agencies stepped in this week and cut Argentina's rating to slightly above junk status. Is Argentina at risk of default? Well, the current account is in balance, international reserves are above $46bn and the ratio of debt service payments to exports is less than 20%. Unemployment has gone from a high of around 22% to about 7%. Argentina has been one of the fastest growing economies in the world.

After 2002, Argentina reversed the austerity measures promoted by the IMF, renationalized key productive sectors like aviation, pensions and most recently oil, increased social protection and income transfers to the poor, and reduced poverty substantially. Real wages have increased, and wage inequalities have been reduced. In other words, Argentina is a dangerously successful story. It shows that there is life after a default, and that austerity is not the best way out of a crisis. These are two lessons that clearly frighten financial markets and their allies within the judicial system, and obviously there is concern that other countries in financial distress could seek to emulate this example. Remember Iceland? It's a safe bet that the Greeks, and Spaniards, and Italians remember.