Wednesday, January 15, 2014 - A Few Pages of Pork

A Few Pages of Pork

by Sinclair Noe

DOW + 108 = 16,481
SPX + 9 = 1848.38
NAS + 31 = 4214

10 YR YLD + .01 = 2.88%
OIL + 1.75 = 94.34
GOLD – 3.00 = 1243.00
SILV - .05 = 20.30

The S&P 500 hit a record high close, just a few pennies better than December 31^st. The market has had a weak start to January but we're still at elevated levels. The Dow Industrials are about another day like today away from records; that close was 16,576 on New Year's Eve.

A $1.1 trillion compromise spending bill that funds the government through September won approval today from the House of Representatives and now goes to the Senate for consideration. The Senate is expected to also pass the so-called "omnibus" bill and send it to President Barack Obama to be signed into law. The 1,582-page bill eases most of the automatic spending cuts that were part of the sequester and keeps the federal government funded through Sept. 30.

The budget bill calls for 1% increases in the paychecks of federal workers and military personnel, the first raises in three years for most agency workers. The spending measure also would protect disabled veterans and some military spouses from a pension cut set to go into effect in 2015.The bill would provide nearly $92 billion for US military operations abroad, mostly in Afghanistan, plus about $7 billion for disasters and other emergencies. That was just slightly less than last year’s war spending but about $44 billion less than was provided in 2013 for disasters, after Hurricane Sandy ravaged the Northeast in October 2012.

Democrats like a $1 billion increase in Head Start funding for early childhood education from its recent low point after forced budget cuts last year. Half of the money will go to help children 3 years old and younger, touching on an Obama administration priority. For Republicans, the compromise reduces funding to two of their least-favorite agencies: the Internal Revenue Service and the Environmental Protection Agency. Democrats also blocked GOP-sought curbs on the Environmental Protection Agency’s power to regulate utilities’ greenhouse gas emissions. The bill includes  an extra $155 million worth of financing for the Department of Energy to promote its nuclear projects. There is also money for the coal industry. The measure provided money for Obama’s 2010 health care overhaul and his revamping of federal oversight of the nation’s financial markets, though not as much as he requested. There are also cuts for financing the Securities Exchange Commission. Overall, federal spending would be lower than the final budget of President George W. Bush's administration.

Out of 1,582 pages I'm guessing we'll find a few pages dedicated to pork.

In the latest economic data, a measure of inflation at the wholesale level, the seasonally adjusted Producer Price Index rose 0.4 percent last month, the biggest increase since June, although inflation pressures remained benign. 

In its latest Beige Book report on business activity, the Fed said the economy grew at a moderate pace from late November through the end of 2013, with some regions of the country expecting a pickup in growth. Specifically, 9 of the 12 regions reported moderate growth, and 2 regions reported modest to moderate growth. Moderate is a little better than modest, both are better than mediocre, and that's just a smidge better than maudlin. In other words, the Fed's Beige Book is not very precise. They say that tourism has picked up in Florida, and that ripples out to help lift other parts of the Floridian economy. Around the Gulf of Mexico there has been significant energy investments, and that also ripples. In the Midwest, the auto industry has perked up, and that ripples out to other industries. Retail sales were pretty good across the country. Wages are still a problem across the country, and not likely to get better. Everything else was up just a little everywhere except the St. Louis region. Go figure.

The World Bank reported that advanced economies appeared to have turned the corner after five years of financial crises and recession. It forecast global growth will firm to 3.2% this year from 2.4% in 2013. The bank lowered its 2014 China GDP forecast to 7.7% from 8.0% forecast in June, but raised its Eurozone GDP estimate to 1.1% from 0.9%, and kept its US GDP estimate at 2.8% and its projection for Japan GDP at 1.4%.

The International Monetary Fund expects global growth to pick up this year, though it should still remain below its potential of about 4 percent. IMF Managing Director Christine Lagarde said: "Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven," and she says one of the biggest risks is deflation.

Earnings reporting season, and the big banks dominate the earnings news this week. Bank of America reported 4^th quarter net income of almost $3.2 billion. Revenue increased 14% to $22.3 billion. Consumer banking had its best quarter since 2011, the wealth management and global banking divisions posted record revenues. The bank made $11.6 billion in home loans, down 49% from the third quarter. BofA isn't alone in this. 

Both JP Morgan and Wells Fargo reported declines in their mortgage businesses yesterday. BofA' mortgage unit lost $1.1 billion, which was actually an improvement from a loss of $3.7 billion same time last year, but much of the earlier losses were due to legal expenses, which, at $2.3 billion for 4Q are still a bit of an embarrassment. BofA says the problem now is that demand for mortgages has dropped. This might explain the Fed taper; the banks just aren't producing mortgages. And the banks are setting aside fewer reserves for mortgage related losses. What could go wrong?

The housing market may be slowly improving, but weak spots remain. In 15 states, the share of “deeply underwater” foreclosures is larger than those with equity, according to housing data analyst RealtyTrac. But, overall, the December data show those deeply underwater foreclosures declining and homes rich in equity increasing. During the housing downturn we saw a downward spiral of falling home prices resulting in rising negative equity, which in turn put millions of homeowners at higher risk for foreclosure when they encountered a trigger event such as job loss. Now we are seeing the reverse trend: rising home prices resulting in falling negative equity, which in turn is giving millions of homeowners a lifeline to avoid foreclosure.

The data measure underwater status by comparing the value of a home loan to the value of the home itself. A foreclosure was defined as “deeply underwater” when the homeowner owed at least 25 percent more than the value of the property. (The loan-to-value was 125 percent or greater.) A foreclosure with equity was defined as one where the value of the loan was equal to or smaller than the value of the home. (A loan-to-value ratio of 100 percent or less.)

The states with the highest percentage of deeply underwater foreclosures were: Nevada (65 percent of foreclosures were deeply underwater), Florida (61 percent), Illinois (61 percent), Michigan (55 percent), and Ohio (48 percent).

But that data is just for those homes in foreclosure. In two states especially hard-hit by the housing crisis, Nevada and Florida, “deeply underwater” properties accounted for more than one in every three homes.

States with the most equity-rich homes — where the loan value was well below the value of the home — included Hawaii (36 percent), New York (33 percent), California (26 percent), Montana (24 percent), and Maine (24 percent). D.C. also had a rate of 24 percent.

Five bank regulatory agencies approved a tweak to the Volcker rule that would allow banks to keep interests in certain funds backed by trust-preferred securities. The change was aimed at easing the concerns of small banks that they needed to dump certain investments they thought would be allowed under the rule, losing money in the process.

The American Bankers Association, or ABA, a bank trade group, sued regulators, and lawmakers from both parties have backed the banks. After regulators announced the revision, the bankers group said it was considering the change and would decide whether to continue with its lawsuit.

The Volcker rule, which was required by the 2010 Dodd-Frank law, prohibits banks from making speculative bets with their own money and restricts their investments in certain funds. Five agencies, including the Federal Reserve and the Federal Deposit Insurance Corp, were involved in writing the rule. Smaller banks claimed that, as an unintended consequence of the final version, they would need to dump funds backed by trust-preferred securities, or TruPS, which are collateralized debt obligations, or CDO's that have characteristics of debt and equity. These CDOs were issued mainly by small banks and were attractive because they counted towards capital for regulatory purposes but they were regarded as debt instruments for tax purposes, so payments on them were deductible as interest. 

Regulators said banks could keep certain collateralized debt obligations backed by TruPS established before May 2010 and obtained before the Volcker rule was finalized last month. The agencies also said banks can continue to act as market makers in the TruPS-backed funds. Banks have 30 days to comment on the changes after which regulators have the power to make additional tweaks if necessary. Even the dumbest banker can get around the Volcker rule. The regulators started with a weak statute, and managed to make it weaker. 

Tuesday, December 10, 2013 - Impossible Until It Is Done

Impossible Until It Is Done

by Sinclair Noe

DOW – 52 = 15,973
SPX – 5 = 1802
NAS – 8 = 4060

10 YR YLD - .06 = 2.79%
OIL + 1.17 = 98.51
GOLD + 21.60 = 1263.00
SILV + .59 = 20.53

Today federal regulators voted to implement the Volcker Rule. It won't actually be implemented until 2015, but the vote was today. The Volker Rule will lay out specific activities that banks can and can't do.

The final rules would prohibit proprietary trading by banking entities. As required by the Dodd-Frank Act, the final rules would include exemptions for: Underwriting - this exemption would require that a bank act as an underwriter for a distribution of securities (including both public and private offerings) and that the trading desk’s underwriting position be related to that distribution. Market making-related activities - a market-making desk may hedge the risks of its market-making activity under this exemption. Risk-mitigating hedging - this exemption would require that hedging activity is identified specifically. Trading in certain government obligations banks could still trade in Treasuries and muni's, and what the heck, foreign sovereign debt or its political subdivisions.

The final Volker Rule would also clarify which activities are not considered proprietary trading, and it is looking like nothing is considered a proprietary trade with the possible exception of when a bank trader places a bet on the Yankees with his local bookie. You may recall that Jamie Dimon tried to claim that the London Whale was not involved in proprietary trading, rather hedging; of course this was after he claimed he didn't know what the London Whale was doing

The final rules would become effective (appropriately) April 1, 2014. The Federal Reserve Board has extended the conformance period until July 21, 2015. Turning the Volker Rule into regulations has been slowed by a lobbying onslaught. And it looks like the banking lobby has won. The banks met with regulators on a regular and constant basis, and basically rewrote the rules. There was a token appearance from bank reformers, but the odds were against them by about 99 to 1.

The Volker Rule won't be totally worthless. Already many banks have shut down or spun off the desks they used for trading that was clearly solely for their own account, what’s known as proprietary trading. Banks do other kinds of trading that can also make them money, or loses it. Figuring out which trades fall into which category isn’t always easy, and deciding how much risk is too much for which kind of transaction may be even harder. On these issues, how regulators decide to enforce the rules may be as important as the rules themselves. Some regulators may be concerned only with seeing that the markets operate smoothly, other regulators may actually try to prevent banks from trading that would blow up the bank and possibly the global financial system.

The banks say there is no way to distinguish between proprietary trading and hedging and market making. Paul Volker, the former Chairman of the Federal Reserve, the guy the rule was named for; Volker says the distinctions aren't tough: “It's like pornography, you know it when you see it.”

Bottom line is that the banks are going to try to skirt the rules, and whittle them down a bit more before implementation, but if this fails, the logical next step is to make it real simple and reinstate the Glass-Steagall Act.

And here is why it will likely fail: the banks wrote the rules, it's all way too complicated, too big to fail is still a problem – only bigger, and nobody cares. Admit it, your eyes are starting to glaze over. Your concern is whether the ATM will spit out cash, will the bank process your payment to the electric utility, and maybe they can pass out a few mortgages from time to time. So, nobody will say much until the next credit freeze, or the next international crisis when everything goes to hell in a handbasket and the banks come begging for bailouts. When that happens, we can all shout bloody murder.

Don't worry. What could go wrong?

Right now, politicians are gathering in Washington to craft and pass a budget deal and avert another government shutdown, which could happen January 15, unless they can put together a deal. And it looks like they might be close to a deal to de-fuse this fiscal time bomb they set themselves.

Any tentative budget deal might allow spending to rise from the scheduled $967 billion for fiscal 2014 to around $1 trillion. While that increase in outlays would be offset by raising some government fees and possibly cutting federal workers' retirement benefits. The plan does not purport to be any "grand bargain" that would slash the federal deficit. They may have a deal in the next few days, but for right now, there is no deal.

GM is once again General Motors, and no longer Government Motors. The US Treasury sold its last shares yesterday. Bailouts from the Bush and Obama administrations helped GM avoid liquidation and instead reorganized in 2009 bankruptcy. In return, the Treasury became a shareholder in GM. The US said it lost about $10.5 billion on its investment of $49.5 billion, but that's not the entire story.

GM was returned to investment-grade status by Moody’s Investors Service in September after losing it eight years ago; it's back in the S&P 500 index (it had been kicked out back when it was facing bankruptcy). Share price is up over 40% year to date. They're making good cars that are winning awards. And they have a new CEO, Mary Barra, the first female CEO of an automotive company.

According to a study by the Center for Automotive Research, a total automobile-industry shutdown from a liquidation of GM and Chrysler would have cut 2.63 million jobs from the US economy in 2009.  The bailout saved or avoided the loss of $105 billion in transfer payments and the loss of personal and social insurance tax collection in 2009 and 2010.

Eight major technology companies have joined forces to call for tighter controls on government surveillance, issuing an open letter to President Obama arguing for reforms in the way the US snoops on people.

The companies said that while they sympathize with national security concerns, recent revelations make it clear that laws should be carefully tailored to balance them against individual rights. The letter reads in part: "The balance in many countries has tipped too far in favor of the state and away from the rights of the individual — rights that are enshrined in our Constitution... This undermines the freedoms we all cherish. It's time for a change."

The companies signing off on the letter include: AOL, Apple, Facebook, Google, LinkedIn, Microsoft, Twitter, and Yahoo. It sure would have been nice if the tech companies had been loudly supporting intelligence reform before Snowden's disclosures.

And today, more than 500 authors delivered a petition urging the United Nations to create an international bill of digital rights that would enshrine the protection of civil rights in the internet age. The signatories say the capacity of intelligence agencies to spy on millions of people's digital communications is turning everyone into potential suspects, with worrying implications for the way societies work.

The petition says the extent of surveillance revealed by Snowden has challenged and undermined the right of all humans to "remain unobserved and unmolested" in their thoughts, personal environments and communications. "This fundamental human right has been rendered null and void through abuse of technological developments by states and corporations for mass surveillance purposes."

The statement adds: "A person under surveillance is no longer free; a society under surveillance is no longer a democracy. To maintain any validity, our democratic rights must apply in virtual as in real space."

Demanding the right "for all people to determine to what extent their personal data may be legally collected, stored and processed", the writers call for a digital rights convention that states will sign up to and adhere to. "Surveillance is theft. This data is not public property, it belongs to us. When it is used to predict our behaviour, we are robbed of something else – the principle of free will crucial to democratic liberty."

Have you heard about the Doomsday File. Edward Snowden claims he didn't bring a single NSA document into Russia, but as journalist Glenn Greenwald has hinted, he may have access to a trove of pilfered documents stored on a data cloud. British and US intelligence officials tell Reuters they think he may have a "doomsday" cache containing highly classified material to ensure he won't be arrested or physically harmed. He's believed to have enough data to keep the bombshell reports coming for the next two years. It's unclear if intelligence agencies know where the data is stored, but somehow they're aware that at least three people have the passwords, which are only valid at certain times each day.

Of course today also the memorial service for Nelson Mandela. More than 100 current and former heads of state plus tens of thousands of others, attended the service at a soccer stadium in Soweto. Jacob Zuma, the current president of South Africa was booed. President Obama shook hands with Cuban President Raul Castro. It was a peculiar service, rambling and punctuated by high winds and a harsh rain. I think the best quote of the day goes to President Obama, who said: "Nelson Mandela reminds us that it always seems impossible until it is done." And while there were many dignitaries, it was a day for the people, not the powerful.

Thursday, December 05, 2013 - 46664

46664

by Sinclair Noe

DOW – 68 = 15,821
SPX – 7 = 1785
NAS – 4 = 4033
10 YR YLD + .03 = 2.87%
OIL + .18 = 97.38
GOLD – 18.20 = 1226.10
SILV - .28 = 19.54

Nelson Mandela is dead. News reports say the former South African President died peacefully at his home. He was 95. Nelson Mandela will be remembered as the person who, more than any other, brought an end to apartheid, the heartless policy of “separate development” in which white, black and South Asian South Africans were obliged to live apart. It is part of his towering achievement that the very notion of racial segregation is anathema throughout the civilized world.

Yes, the stock market was down again today but the economy is doing better than you thought. Third quarter gross domestic product grew at a 3.6% pace, revised up from earlier estimates of 2.8%. Wow, sounds great, until you dig into the numbers. A large part of the revision, almost half, comes from an increase in inventories. Businesses were stocking the shelves. Were they predicting a gang-buster holiday shopping season or were they caught flat-footed by a lack of demand? We won't know with certainty until we get through the fourth quarter, but most indications are that the economy is still slogging forward, and there doesn't seem to be a need for such a large inventory buildup. We know businesses accumulated more than $116 billion in inventories in the quarter, the most since the first quarter of 1998.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, was revised down to a 1.4% rate, the lowest since the fourth quarter of 2009. That line about consumer spending is a bit misleading, and I always have to issue a caveat, because the economy is about much more than consumers, but still. Consumer spending had previously been estimated to have increased at a 1.5% pace. A sluggish start to the holiday shopping season offered another reason for caution on the economy's near-term prospects. Several big retailers reported disappointing November sales, with some relying on bargains to lure shoppers. And so, there is a strong possibility businesses will still have inventory on the shelves after the holidays, and there will be no need for new orders to replenish the stocks, and that will likely weigh down GDP growth in the fourth quarter and into the New Year.

Consumers are holding onto the purse strings. Some companies that reported sales gains had to offer more bargains to attract shoppers. The need to keep discounting, which stems from sagging consumer confidence and shoppers trained to wait for bargains, will persist through the remainder of the season. Retailers have created this expectation; just check your inbox; I'll bet you're getting more and more promotional e-mails from national chains. Why rush when there might be a better deal next week.

Meanwhile, the Commerce Department reported that after-tax corporate profits in the third quarter increased at a 2.6 percent pace in the third quarter, slowing from the prior quarter's 3.5 percent pace. So profits are still growing, quite nicely, but they are growing slower. Dividends decreased $179 billion in the third quarter, in contrast to an increase of $273 billion in the second; part of that decrease is from dividends paid by Fannie Mae to the federal government in the second quarter.

The knee jerk reaction on Wall Street was that the GDP number was stronger than estimates and Wall Street looks at good news as bad news, based upon the idea that the Fed will taper from Quantitative Easing; that speculation was enough to push treasury yields to 3-month highs, but a closer examination of the numbers shows the GDP numbers to be a little less than robust. Atlanta Federal Reserve Bank President Dennis Lockhart summed it up by saying: "I am not prepared to interpret the revised third quarter number as an indication that the economy is on a much stronger track."

Another number in the report was the price index for gross domestic purchases, which came in at 1.8%, up 0.2% from the second quarter. These measures of inflation are important because the Fed has repeatedly promised not to raise the so-called fed funds rate, now at nearly zero, until the jobless rate falls below 6.5% or inflation rises above 2.5%; those are the thresholds, rather than the targets. The Fed has targeted an inflation rate of 2%; that would be the sweet spot. And as long as inflation remains below target, that provides justification to keep the fed funds target rates in the zero range.

Why is that important? Markets are jittery about the Fed starting the process of ending some $85 billion in bond purchases each month. The purchases of Treasurys and mortgage-backed securities are meant to keep interest rates low and stimulate the economy. The tapering of bond purchases, however, is likely to trigger an increase in interest rates of all kinds and that could dampen economic growth. When the Federal Reserve first hinted during the summer that it would soon scale back, mortgage rates surged and interest rates also rose in many developing countries.

A new research report by the Cleveland Fed indicates that when the inflation rate remains low, it would be justification for the Fed to maintain its Zero Interest Rate Policy. In other words, the Fed will try a balancing act; keeping the fed funds rate lower for longer, to ease the worries of investors and let the economy more gradually acclimate to a future that at some point, might include higher interest rates.

An interesting point to ponder is that inflation remains tame, perhaps even disinflationary, even as the stock market has moved to record highs. Now you might suspect that a rising stock market, even a frothy stock market, even a bubblicious stock market might have an inflationary impact on the economy; then again, maybe not. Here we are in a stock market boom, and deflation is a greater concern, and apparently a guide for Fed policy. Go figure.

Today, the European Central Bank and the Bank of England left interest rates unchanged. Deflation is a big concern in the Eurozone. Producer price inflation (PPI) fell to -1.4% in the eurozone in October. This is how deflation becomes lodged in the price chain. Prices are sticky for a while as you approach zero inflation, but once you break through the ice into deflation things can move fast; an example would be Greece.

We seem to have a glut of things, and you know the old story about supply and demand. China's fixed capital investment over the past year has been $4 trillion; that represents an 8 fold increase in the past 10 years, and it compare with $3 trillion for the entire EU and $3 trillion for the US. China is a vast new source of supply for a saturated global economy. Meanwhile, today's data on GDP suggests US businesses are a bit saturated as well. Europe's slide towards deflation is replicating what happened in Japan in the 1990s at the onset of its lost decade.

Japan is now fighting back with a strong monetary stimulus program called Abenomics, an easy money policy after the abject failure of a tight money policy. The result of tight money was that fiscal policy had to carry the entire burden instead. Budget deficits exploded as Japan battled the slump. Public debt ballooned to 245% of GDP. ECB President Mario Draghi says the central bankers are fully aware of downside risks of protracted low inflation. The ECB has been behind the curve for most of the past three years, needlessly causing a double-dip recession that caused havoc to public finances; so I guess its no surprise they took no action today.

In other economic news, the Department of Labor released its weekly jobless claims report this morning, and these results were also better-than-expected. Seasonally-adjusted claims fell by 23,000 to 298,000, significantly beating the 320,000 claims economists had predicted. Combined with yesterday's ADP payroll report, this would seem to bode well for tomorrow's monthly jobs report, but this weekly claims report was over the Thanksgiving holiday week, and the results might be slightly distorted. Still, it was the third straight weekly drop in initial claims. Not bad.

Look for 180,000 new jobs and the unemployment rate to go from 7.3% to 7.2%.

Regulators are reportedly ready to approve a tough version of what is known as the "Volcker Rule," part of the Dodd-Frank financial-reform act, which prohibits banks from proprietary trading, which is fancy talk for "gambling with their own money." Regulators were originally planning to leave a big loophole in the Volcker Rule by letting banks do what's known as "portfolio hedging”. This is basically proprietary trading by another name, because it lets banks claim that any kind of trading they do is hedging against losses somewhere in their massive, multi-trillion-dollar portfolios.

One reason why the Volker Rule might actually have teeth is the London Whale. Remember the $6 billion loss that was, according to Jamie Dimon, a portfolio hedge? Not exactly. Bankers warn that this version of the Volcker Rule means mega-banks will not be able to protect themselves from future economic calamities, which means they have no choice but to get smaller and take fewer risks.

Sounds about right.

February, Wednesday 15, 2012

DOW – 97 = 12,780
SPX – 7 = 1343
NAS – 16 = 2915
10 YR YLD +.01 = 1.93
OIL + 1.15 = 101.89
GOLD + 7.00 = 1729.10
SILV -.08 = 33.60
PLAT + 7.00 = 1637.00

The Greek debt crisis has not been resolved. Euro-zone finance officials have been meeting in Brussels and trying to figure out some deal that would avoid a disorderly default on Greek bonds, and at the same time they are trying to impose ever-harsher austerity measures on the Greek people, and the Greeks are finally growing a little backbone and telling their northern neighbors to ease up. And there is an election in Greece scheduled for April, and the Euro-zone finance officials would like to postpone everything until after the election because the mobs, err, the democratic process might yield unexpected results.

A new report released today shows the economy of the Euro-zone shrank by 0.3% in the fourth quarter of 2011. France eked out a smidgen of growth. The German economy contracted slightly. The Greek economy remains in shambles despite imposed austerity; five years of recession and the economy still contracting at a 7% annualized rate. The European economic plan isn't working.

One thing the Euro-debt crisis has done is remind us that bonds are not risk free. Granted, Greek and Italian bonds are in a different league than US Treasuries, but there is still a decent chance the United States could lose its Triple-A credit rating. Meanwhile, the big multi-national blue chip stocks have been solid performers. What would you rather own. A European bond that implodes, or a US Treasury bill that is losing value to inflation, or a global franchise that is expanding its brand in emerging markets and pays a dividend of about 3 percent? It is worth noting that many countries are struggling under debt while many corporations are thriving. The deleveraging process has already come and gone for corporations, and it has a long way to go for countries.

Iran now claims it has developed its nuclear program to the point where they can enrich uranium much faster. Israel says the Iranians have targeted Israeli diplomats around the world for assassination. The Iranians say the Israeli's have targeted nuclear scientists for assassination.  Iran has long refused to negotiate curbs on its nuclear program, saying it is intended to produce electricity for civilian uses.

The United States and Israel have not ruled out military action against Iran if diplomacy and sanctions fail, but today, Defense Secretary Leon Panetta said there are no plans for attacking Iran. Iran's Oil Ministry denied a state media report that it had cut off oil exports to six European Union states. The EU ban on Iranian crude is due to take effect in July. The top three importers of Iranian oil are India, China, and Japan.

 

 Here's the short-form on the Volker Rule, named after former Federal Reserve Chairman Paul Volker. The Dodd-Frank Act’s Volcker Rule would prohibit banking entities from engaging in proprietary trading of securities, derivatives and certain other financial instruments for the entity’s own account. The SEC has been accepting comments on the Volker Rule. A sub-group of the Occupy movement has come up with a 325-page letter to the SEC, and this may be the best thing to come out of the Occupy movement. Meanwhile, the big banks and their lobbyists have been claiming that if the rules become law, it will destroy liquidity in the markets and there will be significant costs to the economy.  Let's break down these two major arguments.

First, a bit of liquidity in the markets is a good thing; we want to match buyers and sellers in the market; too much liquidity is not   a particularly good thing; a proprietary trading desk may be nothing more than a high speed computer scalping pennies by front-running trades. There is no benefit to a flash crash. And does all that computerized trading really add anything? Or is it just gambling?

The second argument is that breaking up prop trading will come at a cost to the economy. I don't buy it. There may be some costs to the big banks, specifically Goldman Sachs, Bank of America, JP Morgan, Citigroup, and Morgan Stanley. So what? The big banks are not the economy. And the whole idea is to make these mega-banks a little smaller. And the problem is that the big banks keep the profits from prop trading but when they lose, they slough off the losses onto the taxpayers. The bank lobbyists don't consider those costs but the rest of us should. And if it means the big banks get smaller – all the better. I wrote a book “Eat the Bankers” and part of the premise is that the big banks must be cut into smaller banks, so that if they fail, they may still be easily digested without destroying the economy. What is the cost if they just ramp back up and crash the global financial economy?

Much of the debate about the Volker Rule has centered around the distinctions between market making and proprietary trading, and I believe this is the major problem with the Rule; it doesn't go far enough. Prop trading should not be allowed on the same balance sheet as depository banking. We used to have a rule for that – it was called the Glass-Steagall Act and it worked quite well.

The Federal Reserve released the minutes of their January 24^th, and 25^th FOMC meeting. The general idea is that the Fed is taking a wait and see approach to another round of bond buying, in other words, no official announcement of QE3, unless the economy starts to falter. Several members said they anticipated that unemployment would still be well above their estimates of its longer-term normal rate, and inflation would be at or below the Committee's longer-run objective, in late 2014. Even if we don't see a QE3 proclamation, make no mistake, the Fed is active, buying gobs and gobs of mortgage-backed securities.

January, Wednesday 11, 2012

DOW –13 = 12449
SPX +0.4 = 1292
NAS + 8 = 2710
10 YR YLD -.07 = 1.90
OIL -.51 = 101.73
GOLD +10.80 = 1644.00
SILV + .03 = 30.07
PLAT + 30.00 = 1500.00

Fitch Ratings Agency reminds us all that Europe isn’t in good shape. Fitch says the ECB should take a more active role in buying Eurozone debt to avert a cataclysmic collapse. Fitch said they’re not really predicting a collapse of the Euro; just that it is a concern. Meanwhile, Fitch downgraded Hungary to junk status. The euro hit a 16 month low of $1.27. Germany reported its economy shrank in the fourth quarter. European regulators will recommend blocking the deal that would have seen Germany’s largest stock exchange buy the New York Stock Exchange. France says they have not been informed of an imminent decision to cut the country’s credit rating.  In Italy, the banks stopped lending and organized crime has stepped in to fill the void for short-term lending, meaning the Mafia has become the number one bank in Italy.  And the rest of the Eurozone seems determined to grind Greece into the ground. Grecian formula austerity has seen unemployment jump from 13% to 19%. Rates of homelessness, suicide, crime, and HIV have skyrocketed; and public hospitals are facing severe shortages – they’ve run out of bandages and similar necessities. And Germany’s Angela Merkel and the IMF’s Christine LaGrande warn that Greece won’t get any more bailout money if they don’t pull themselves up by the bootstraps. So, it’s not like Europe had a cataclysmic collapse – not today, anyway.

Back in the USSA, life is good. We have seen “ongoing improvements in economic conditions in recent months”, so says the Federal Reserve in the most recent Beige Book. Economic activity increased “at a modest to moderate pace.” Holiday sales were better this year. Price pressures are limited. Tourism is down because of a lack of snow in some areas. The Sierra Nevada region is experiencing the driest winter in more than 100 years. This results in winners and losers. Losers include tourism; in a few months the farmers will feel the effects; natural gas prices have dropped, in part due to the mild winter weather. One bright spot is construction, which is unhampered by the weather. A lack of snow and cold has allowed road building to go uninterrupted over at least 80% of the country.

But I digress: the White House is touting the economic growth trend and unveiling tax proposals aimed at encouraging US firms to keep jobs at home; they’ve come up with a catchy description – insourcing jobs. The new proposals include making research and development tax credits permanent, write-offs for new equipment, and hiring credits for adding new workers.

The Dodd-Frank financial oversight law included provisions to boost protection and segregation of customer collateral. Of course, not much of Dodd-Frank has actually been enacted because the bankers objected to the excessive regulation. Today, the Commodities Futures Trading Commission adopted a measure to protect swap traders’ collateral used in trades to reduce risk. The move prevents commingling customers funds with a firm’s own money, at least on swaps trades – no protection for the futures traders. Typically, large corporations and banks dominate OTC swaps; typically farmers and smaller traders are involved in the futures markets. What motivated the move to increase regulation? MF Global. The regulators still haven’t been able to find the money lost by MF Global; there’s $600 million to $1.2 billion floating around; they don’t know how much; they don’t know where it is; they don’t know how it disappeared; they don’t know blank from Shinola, but have no fear – the regulators are investigating; that’s unofficial but sources close to the situation say they are investigating.

At some point you have to think the regulators are being told to wear blinders, they must be forced to look the other way, they must have received direct orders to do anything other than their jobs.

Meanwhile, if you’re wondering whatever happened to the Dodd-Frank Act – well, it is still being debated. The banks are saying there will be dire consequences if they are forced to follow the rules, especially onerous is the Volker Rule, designed to prohibit banks from making risky trades for their own accounts with money they don’t have. The Volker Rule wouldn’t prohibit banks from making risky trades for their own accounts – just that if the risky trades go bad, they can’t come beggaring for bailouts from taxpayers; you know – like they did 3 years ago.

The Volker Rule, named after former Federal Reserve Chairman Paul Volker, who helped write the rule, would basically restore a little of the protections old Glass–Steagall Act. Here’s how Volker described the rule to keep the banks from gambling with taxpayer backed money: "If you are going to be a commercial bank, with all the protections that implies, you shouldn't be doing this stuff. If you are doing this stuff, you shouldn't be a commercial bank."

The financial industry has been fighting the Dodd-Frank Act and very specifically they have been fighting the Volker Rule – they say it would crash the economy. The former customers of MF Global know what a bummer a crash can be; they’re just thankful it’s not a cataclysmic collapse.

The journal “Nature” released results of a new report that shows the Milky Way has 100 billion stars and they updated earlier estimates that there are 50 billion planets circling those stars – Now they say a recount shows there are 160 billion planets. There might be more but the chief planet counter was tired and needed a vacation. Our galaxy is much bigger than you knew, which means the universe is infinitely bigger than we imagined; and you and I are just specks in the great beyond, and our own individual problems are nearly non-existent in the grand scheme of things.  So, prioritize and have a great day.