Tuesday, June 10, 2014 - Equity Party in the Wormhole

Equity Party in the Wormhole
by Sinclair Noe

DOW + 2 = 16,945
SPX – 0.48 = 1950
NAS + 1 = 4338
10 YR YLD + .02 = 2.63%
OIL - .22 = 104.19
GOLD + 7.90 = 1260.90
SILV + .13 = 19.29

The Dow Industrial Average hit another record high close; the fourth consecutive record. How did the Dow manage to move higher? Who knows? It wasn’t a big move but any positive results in a new record. How now Dow? Maybe it has something to do with the Federal Reserve and the other central bankers vacuuming up all the toxic detritus from the world of finance, pushing rates to sub-zero; leaving investors with little choice but a move to equities. Maybe global corporations have found a way to squeeze extra value out of a bone dry economy. Maybe the major indices have entered a cosmic wormhole devoid of common sense.

Today’s case in point is Uber, which is an app designed to connect riders with cars and drivers; which sounds a lot like hailing a taxi, but this is different because you can hail the taxi and pay the taxi with your smartphone; which means it’s software that eats taxis. Uber is different mainly because it is worth about $18 billion; which means it is worth more than most of the companies in the S&P 500 index. It’s an equity party, and for now at least, nobody is turning out the lights.

Friday’s jobs report was run of the mill; the economy added 218,000 jobs and the unemployment rate held steady at 6.3%. Today, we get a positive follow-up from the Labor Department, saying there were 4.7 million hires in April, the most since June 2008. By comparison, before the financial crisis, we averaged about 5.04 million hires per month. And workers’ opportunities look to be improving, too. There were 4.46 million job openings in April, the most since September 2007, up 17% from a year earlier.

OPEC is meeting in Vienna this week. The oil production cartel, which controls about 40% of global oil supplies, has imposed a 30 million barrel-per-day production ceiling for all 12 members’ output for the last two years. And the current price range of $100 to $110 a barrel seems to be the sweet spot; not too high to reduce demand; not too low to cover costs and national budgets. North American crude oil production is expected to be a major topic of discussion.

Estimates of North American oil supply have increased to 18.5 million barrels a day from 18.2 million six months ago, driven by US production at 11.4 million barrels a day. In 2012, the International Energy Agency (IEA) forecast that the US would outpace Saudi Arabia in oil production thanks to the shale boom by 2020, becoming a net exporter by 2030. The forecast was seen by many as decisive evidence of the renewal of the oil age and the end of peak oil. Not so fast.

This week, the IEA released its World Energy Investment Outlook which says that US oil production, drawing largely from the Bakken in North Dakota and the Eagle Ford in Texas, will peak around 2020 before declining. The US government’s Energy Information Agency recently downgraded its assessment of the Monterey Shale oil fields by 96%. The shortfall will make the US, and countries in Europe looking to import from America, increasingly dependent on Middle East supplies.

The report states: "… there is a risk that Middle East investment fails to pick up in time to avert a shortfall in supply, because of an uncertain investment climate in some countries and the priority often given to spending in other areas."

The IEA report reveals that over 80% of oil company investment is going into making up for exhausted fields where production is in decline. The agency also calls to ramp up investments in renewables and increasing efficiency, along with regulatory reform to incentivize investments, as part of the package. This is where we are headed.

Warren Buffet’s Berkshire Hathaway has been expanding its utility business in Nevada and Canada; and Buffet plans to increase the investment in renewable power. At the Edison Electric Institute’s convention in Las Vegas yesterday, Buffet said, “We’ve poured billions and billions and billions of dollars in retained earnings, and several billion of additional equity, and we’re going to keep doing that as far as the eye can see.”

Berkshire Hathaway Energy has $70 billion in assets and more than 8.4 million customers worldwide, according to its 2014 brochure. It has more than 34,000 megawatts of power generating capacity owned or under contract. Wind, solar, hydro, geothermal, and other renewable plants account for about a quarter of capacity, representing about $15 billion.

Yesterday Buffet said: “There’s another $15 billion ready to go, as far as I’m concerned.” Unlike other utility-holding companies, Berkshire Hathaway Energy retains all of its earnings. That probably will continue, Buffett said yesterday, estimating that the unit could reinvest about $30 billion into its business in the next decade.

Investments in renewable energy will be needed as the US seeks to reduce its reliance on fossil-fuel generation. Electric utilities face cuts of 30% in carbon dioxide emissions by 2030 compared with 2005, based on proposed regulations issued by the EPA on June 2.

Yesterday we talked about a Merger Monday. It has been a busy year for mergers and acquisitions. Some of the deals are all cash, as many corporations are sitting on piles of cash; but many deals are still done the old fashioned way, with leveraged lending. The Wall Street banks are more than happy to overload companies with too much debt for the simple reason that it is one of the most profitable forms of loans for the banks. Banks’ fees on US junk-rated loans stand at $4.9 billion so far this year, a year-to-date record and up 10% from the same period last year.

The Federal Reserve, the Office of the Comptroller of Currency, and the FDIC have issued guidelines to restrict banks making loans in deals like leveraged buyouts that would leave a company with debt levels that are more than 6 times its annual cash flow. Wall Street banks immediately started looking for loopholes, and the newest trick is to issue bonds that would split the overall debt load between a holding company and its operating subsidiary.

Companies typically borrow at the operating company level through loans. Since the loans can be secured against the company's assets, they are cheaper than other options. They can also borrow through the holding company by issuing bonds. Payments on those securities are made from the cash that remains after the liabilities of the operating company are met, making them riskier than operating company loans.

Many holding company bonds are structured as payment-in-kind (PIK) notes that pay interest by adding to the outstanding principal rather than returning cash to the bond's holder. Such bonds are expensive for the issuer and the risk involved makes the investor universe limited, but the market has been growing as investors chase yield.

We’ve seen this story before. You may recall the case of the $48 billion leveraged buyout of Texas power utility Energy Future Holdings in 2007, the biggest LBO in history. The deal's $40 billion debt was equal to 8.2 times adjusted EBITDA (earnings before interest, tax, debt and amortization). Energy Future filed for bankruptcy earlier this year, one of the largest bankruptcy cases ever.

For now, the banks are violating the 6 times annual cash flow limit, most of the time, but it’s a tactical decision. Three longtime banks for private equity firm KKR snubbed a request for a $725 million buyout loan for Brickman over concerns it was too risky to pass muster with US regulators, in spite of the firm’s strong track record of leveraging up and then reducing debt quickly. Others banks are trying to guess how big the fines could be, and weighing that up against the fees for underwriting such deals.

Welcome to the wormhole.

Wednesday, January 22, 2014 - A Mixed Bag

A Mixed Bag

by Sinclair Noe

DOW – 41 = 16,373
SPX + 1 = 1844
NAS + 17 = 4243
10 YR YLD + .04 = 2.86%
OIL + 1.69 = 96.66
GOLD – 3.80 = 1237.80
SILV - .07 = 19.90

Another mixed day on Wall Street. It’s earnings season. IBM reported quarterly revenue that missed estimates for the fourth straight quarter, due to a steep fall in demand for servers and storage products in emerging markets such as China. IBM thinks part of the reason for declining revenue was backlash from emerging economies against US government spying. IBM was down enough to drag the Dow Industrials into negative territory for the day.

Coach, the handbag maker, was the biggest loser in the S&P 500 after posting disappointing sales in North America. United Technologies, the air conditioner and elevator company, reported higher fourth-quarter profit that topped Wall Street estimates, though revenue fell shy of expectations. Norfolk Southern posted a 24 percent rise in quarterly income.

After the close, Netflix reported higher profit for the fourth quarter as the company added 2.3 million customers to its TV and movie streaming service in the United States.

A mixed bag of earnings today. Not much to cause the bulls or the bears to run.

Target Corp said it will stop offering health coverage to part-time workers, citing new public insurance exchanges floated by the US government. Less than 10 percent of the company's 361,000 employees currently participate in the insurance plan that is being discontinued. Target is not the first or the last company to take this position.

The winter storm blanketing most of the Midwest and East Coast pushed natural gas prices to their highest level in nine months on Wednesday. February natural gas jumped 26 cents, or 6 percent, to $4.689 per thousand cubic feet. The last time natural gas prices were this high was late April 2013. Americans who use propane to heat their homes are scrambling to deal with sharply higher prices and a limited access to the fuel. Domestic production has increased to an estimated 17.8 billion gallons in 2013, from 15.2 billion gallons in 2008, but offsetting the increased production is a robust export market. The country exported an estimated 4.3 billon gallons of propane last year, compared to 800 million gallons in 2008. The tighter supply has led to wholesale price increases, to $2.20 a gallon from $1.10 a gallon a year ago. Prices for retail customers have risen to nearly $3 a gallon from $1.90 a year ago.

According to data released by the IRS, conversion from tax-deferred individual retirement accounts to Roth IRAs increased ninefold in 2010, to $64.8 billion. That was the first year when a $100,000 income limit on eligibility to convert was eliminated - and it marked the first time the amount of assets converted to Roths exceeded contributions. The higher your income, the more likely you are to convert to a Roth. Paying taxes now rather than later isn't beneficial if you expect to be in a lower tax bracket when you begin drawing down funds in retirement.

Mohamed El-Erian is stepping down as head of the asset-management firm Pimco. Bill Gross, who founded Pimco and serves as its co-chief investment officer with El-Erian, said he was in disbelief when the chief executive told him of his intentions several weeks ago. El Erian will stay on as an adviser to Pimco’s parent company, Allianz. The past year was difficult for bond fund managers and Pimco, the largest of the bond funds, saw huge outflows.

Warren Buffett is offering a $1 billion prize to anybody who can fill out a perfect March Madness bracket. The prize would be paid out in 40 annual installments of $25 million, or a one-time lump sum of just $500 million. The first 10 million people to enter the contest will be eligible for the ludicrous grand prize. If there’s a tie, they’ll split. The odds of a perfect basketball bracket are staggering; 9.2 quintillion to one. Apparently there has never been a documented perfect bracket. Madness just got crazier.

The Center for Economic Policy and Research has run some numbers on how much the housing bubble and the collapse cost. Based on Congressional Budget Office data looking at GDP growth going back to 2008, the dollar losses through 2013 are at $7.6 trillion, in 2013 dollars; or about $25,000 for every person in the country. This is just economic losses, it does not include any effort to quantify the pain that workers or their families have suffered from being unemployed or losing their homes. The numbers are speculative but likely a good guess.

Years of banking crises, credit droughts and economic uncertainty have prevented businesses investing for the future. Instead, they have clipped costs, wages and jobs and built up huge stockpiles of cash rather than investing in new plants, staff, updated technology, equipment or acquisitions. According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 - more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years. At some point, the thinking goes, all that corporate cash will come flooding into the economy. Maybe.

Merrill Lynch surveyed fund managers, and a record number think companies are under-investing and most respondents want firms to deploy their cash on capital expenditures. Sounds good, but there is no obvious catalyst for such a move.

Treasury Secretary Jack Lew sent a letter to House Speaker John Boehner warning that the country would likely exhaust the extraordinary measures used to stay beneath the debt limit by late February. In a previous letter to Boehner, Lew had projected the deadline might not be hit until early March. In the deal reached in mid-October to end the government shutdown, lawmakers extended the nation's debt limit into the first week of February. It was always understood that Treasury could take extraordinary measures to extend the deadline even further. But in his note to Boehner, Lew made clear that those tools weren't as potent as they have been in previous debt limit crises, partly because of limits on borrowing capacity and partly because of financial constraints that are unique to the month of February.

But now Secretary Lew writes: "The length of time that the extraordinary measures can extend the nation's borrowing authority is significantly shorter than it was in 2011 and 2013. This is in large part because the government experiences large net cash outflows in the month of February, due to tax refunds. For example, in 2013, the government experienced net cash outflows of approximately $230 billion in the month of February, as compared to average net outflows of $45 billion in the other months of the year.”

House GOP leaders have stated that they won't simply vote to extend the debt limit without receiving something in return. The White House, meanwhile, has steadfastly refused to negotiate over raising the debt limit. So it appears we are headed for another showdown, and it is approaching much faster than you thought.

This is Day Two of the World Economic Forum in Davos, Switzerland. Over 2,500 Presidents, Prime Minsters, CEOs, Celebrities, Academics, and moneyed elites, will be holed up in a small and posh mountain resort in Switzerland to discuss, in the words of the WEF, "improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas."

This year's theme is "The Reshaping of the World: Consequences for Society, Politics and Business." A few words from the preamble are worth noting: "political, economic, social and, above all, technological forces... are shifting power from traditional hierarchies to networked hierarchies." That means the false idea of reducing democracy to the singular act of voting every few years is over. People are begging to assert participatory democracy and exercise people power, using many new technologies and methods of interconnection, as levels of confidence in political leadership are dangerously declining around the world.  The WEF warns its members that we are witnessing a shift of power. But those attending the WEF are largely focused on the symptoms of various crises not the causes or the cures.

The WEF's 2014 Global Report helps set the agenda and prioritization for the great and the good to discuss. Financial risk, unsurprisingly, still ranks at number one, followed by high unemployment or underemployment. Water crises come in third place with climate at fifth, behind severe income disparity. There is therefore a growing recognition that economy, ecology and equity are all in crisis; that they are all fundamentally interconnected. None can be solved without solving the others. For example, the water scarcity crisis is driven, in part, by the expansion in coal. Go to West Virginia if you need proof.

The big question for 2014 will be how the plutocrats respond. Some are still in denial. Today's economy is going so well for those at the very top that it can be hard to see how badly it is working for those in the middle and at the bottom.

Tuesday, November 27, 2012 - Economic Data, Geithner's Cliff, Greek Bailout, Warren's Pitch, Blankfein's Irony

Economic Data, Geithner's Cliff, Greek Bailout, Warren's Pitch, Blankfein's Irony

by Sinclair Noe

DOW – 89 = 12,878
SPX – 7 = 1398
NAS – 8 = 2967
10 YR YLD -.02 = 1.65%
OIL - .45 = 87.29
GOLD – 7.60 = 1742.80
SILV - - .13 = 34.15

Durable goods orders leveled off in October, mainly because of slack demand for automobiles and airplanes and a reversal in defense orders. Most other manufacturers saw an uptick in demand; so, conditions aren't getting worse; they aren't getting better either. Or at least that is how it looks at first blush. Overall orders for durable goods were virtually flat in October, but factoring out the volatile defense and transportation industries, so-called core capital orders jumped 1.7% last month to mark the strongest gain since May.

Home prices rose in September for the sixth straight month. The S&P/Case-Shiller 20-city composite posted a non-seasonally adjusted 0.3% increase in September to reach the highest level in two years, following a 0.8% gain in August. Home prices were up 3% from September 2011 for the largest annual percentage growth since July 2010.

In the latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York reports that non-real estate debt jumped 2.3% to 2.7 trillion, with increases in student loans, auto loans, and credit card balances. Overall consumer debt shrank $74 billion to $11.3 trillion as mortgage debt decrease more than $120 billion. Nearly a quarter of a million people had a foreclosure tacked onto their credit reports.

Late last year, total student debt outstanding surpassed $1 trillion for the first time. New data released today shows 11% of student loans were 90 days or more past due in the third quarter, up from 8.9% in the previous quarter and 8.8% a year prior. Students who graduated with a Bachelor’s degree this spring left school with roughly $28,700 in student debt, up 31% from five years ago. And in many cases, borrowers who’ve fallen behind on loans dropped out of college. Those borrowers are four times more likely to default on student loans than those who graduate.

Consumer confidence rose in November to the highest level in more than four years. The Conference Board’s confidence index climbed to 73.7, the highest since February 2008, from a revised 73.1 reading the prior month.

The percent of respondents expecting more jobs to become available in the next six months increased to 20.3, the highest since February 2011, from 19.7 the previous month. The share planning to buy a house within the next six months jumped to 6.9 percent, the most in data going back to 1964. The previous all-time high was 5.5 percent.

Even as consumers are feeling more confident, business sentiment has been stagnating as the year-end deadline for automatic fiscal tightening approaches.

The Obama administration has a way to blunt about half of the fiscal cliff’s economic fallout for 2013, even if Congress stays deadlocked: Freeze paycheck withholding levels. Treasury Secretary Tim Geithner has the authority to set withholding, whether or not tax rates increase. He has said Congress should act to extend current rates for most taxpayers. A freeze could keep $10 billion per pay period in taxpayers’ pockets and prevent a loss of 1.5 percent of monthly gross domestic product.

The move would make sense, especially if by late December a congressional deal to avert the tax-rate increases set for January looks probable though isn’t completed. The tax code gives Geithner broad latitude to set withholding tables. The statute says only that he must set the tables in a manner consistent with the purposes of withholding and the income tax rates. It doesn’t prescribe specific numbers or a specific relationship between withholding and the underlying rates. Geithner has indicated he would prefer to see a deal come out of Congress rather than have to test the Treasury's powers.

The White House has tapped the Treasury secretary as its lead negotiator in deficit-reduction talks with Congress, giving Mr. Geithner about a month to help cut a deal before $500 billion in tax increases and spending cuts begin in January—and before his long-planned departure from the administration. Yes, Geithner has said he'll stay on at Treasury until a deal gets done but you have to imagine he's itching to get out of Washington and sign a lucrative deal to sit on the Board of Directors of one or more mega-banks, so if you think he's going to let people fumble around and screw up his liquidity event, well, think again.

President Obama is scheduled to meet with small-business owners at the White House today and plans to travel to a toy factory in Pennsylvania on Nov. 30 to build public support for his approach to averting the fiscal cliff at year’s end.As Congress returns to Washington this week to confront the fiscal dilemma, many Republicans who long dismissed any tax increase as unacceptable say now they are willing to consider higher revenue -- so long as Democrats accept cuts in entitlement programs as part of a deficit-reduction deal. So far, talks between Obama and congressional Republicans haven’t yielded any significant progress. Even with the changes in rhetoric and the willingness to work together, neither side has offered a plan that moves off their pre-election position.

For the past week, GOP lawmakers have been falling over themselves to move away from Grover Norquist, pied piper of low tax rates on rich people. Tennessee Senator Bob Corker said that he was not “obligated on the pledge,” and Georgia Senator Saxby Chambliss followed suit, telling a local TV station that he cares “more about his country” than a “20-year-old pledge.” Likewise, South Carolina Senator Lindsay Graham declared that he would violate his promise for the good of the country, only if Democrats will "do entitlement reform."

On the face of it, this is both high-minded and politically realistic. The Norquist pledge is a bad idea; it hampers legislators as they attempt to solve a series of fiscal problems. And it's pretty clear that Obama campaigned for higher taxes for the top income earners, and he won. You could read these statements as a declaration that some Republicans, at least, are ready to work with the president.

Unfortunately, you’d be wrong. As loud as Republicans have been about bucking the Norquist pledge, none have actually signaled support for higher tax rates on the rich. Instead, they’ve turned the conversation toward closing loopholes as a way of raising revenue. And in the case of Lindsay Graham, the pre-condition for cooperation is for Democrats to support Bush-era tax rates, minus the loopholes, or at least a couple of loopholes.

This is the opposite of cooperation, and a sign that Republicans are still committed to keeping tax rates low on the rich. The only difference, now, is that they’ve decided to stay quiet about it.

Meanwhile, European finance ministers say they've worked out a deal to nurse Greece back to financial health. The ministers cut the rates on bailout loans, suspended interest payments for a decade, gave Greece more time to repay and engineered a Greek bond buyback. The country was also cleared to receive a $45 billion loan installment in December. Greek bonds rose.

The ECB chipped in by steering profits from its Greek bond holdings back into the rescue program. National governments will funnel their share of the profits to Greece’s bailout account, getting around rules that bar the politically autonomous central bank from directly lending to the state. The batch of measures will help pare Greece’s debt from 190 percent of gross domestic product in 2014 to 124 percent of GDP in 2020, a target set by the IMF as its condition for continuing to fund a third of the Greek program. One IMF concession was to raise that target from 120 percent.

While the financing pact rewarded the government’s budget cuts and steps to overhaul the economy, Greece will have to deliver on its commitments to earn each payout. Doubters questioned whether Greece can stomach further economic discipline and whether the bond buyback will generate enough savings. A shortfall would put outright debt relief back on the agenda.

Don't celebrate the Greek deal for long. Currency traders certainly didn't celebrate long; there was a quick rally in the euro, then it slipped. Spain is thinking about asking for a bailout. And did you notice that Britain just named a Canadian as it's top central banker? The new governor of the Bank of England will be Mark Carney, currently governor of the Bank of Canada. Carney is to take over for Mervyn King in June, when King’s term ends. Carney helped lead the Canadian economy through perhaps the best performance of the major Western nations during the crisis itself; there were no major failures of Canadian banks at a time when their international counterparts were falling like dominos, and the economic downturn in Canada was relatively mild.

Meanwhile, while we've all been looking elsewhere Argentina's credit rating was cut by Fitch Ratings, which said a default is probable after a US judge ruled the country can’t make payments on its restructured bonds unless it pays holders of defaulted debt by Dec. 15. So, now there is speculation that Argentina will halt payments on performing bonds rather than pay the holdouts on the old bonds. In other words, there might be defaults.

Warren Buffett has been talking about the fiscal cliff. Yesterday he published an op-ed piece in the New York Times. This morning he was interviewed on NBC and he said the ability of some of the highest earners to avoid federal taxes shows why laws should be changed so the wealthy pay more. Buffet said: “They were the moochers, and they paid zero,” and “The way they get at them is a minimum tax and it’s very simple to do.”

Buffet's idea is to set a minimum tax on incomes above $1 million, and among the 400 with the highest incomes in the US in 2009, the average income was about $200 million, and that six people in that group paid “nothing at all.”

Buffett’s tax bill for 2010 was about $6.9 million, or 17 percent of taxable income, he wrote in the Times last year. He said that’s a lower rate than the other 20 employees in Berkshire’s office in Omaha, Nebraska, and that the wealthy benefit from favorable treatment of capital gains and dividends, compared with wages. Buffett’s salary is $100,000 a year, so most of his income comes from capital gains and dividends at the lower tax rates. Buffet says raising the top tax rates won't dampen economic growth and would not scare off critical investment for job creation, however it would "raise the morale of the middle class."

Buffet was asked about a recent quote from Honeywell CEO David Cote who told Meet the Press that he and others like him were feeling a lack of confidence in the political process, so much so that the uncertainty was making them keep their money on the sidelines and preventing them from making additional investments, including hiring. Buffet said: "At Berkshire Hathaway, we're investing 9 billion in plant equipment, a record, breaking last year's record. It's always uncertain."

So, Buffet sounds optimistic, and he seems to be talking common sense, and then he broke from message and says he thinks Jamie Dimon, the CEO of JPMorgan Chase would make a great replacement for outgoing Treasury Secretary Geithner. And what sounded good, suddenly sounds like the insane ravings of a lunatic.

Of course Buffet isn't the only high profile corporate lunatic CEO trying to sway public opinion on the deficit negotiations. Several executives have formed a group called “Campaign to Fix the Debt” and they know a few tricks of deficit reduction because they have received trillion in federal defense contracts, subsidies and bailouts, as well as specialized tax breaks and loopholes that virtually eliminate their corporate tax bills, and sometimes result in refunds.

The CEOs are part of a campaign run by the Peter Peterson-backed Center for a Responsible Federal Budget, which plans to spend at least $30 million pushing for a deficit reduction deal. During the past few days, CEOs belonging to what the campaign calls its CEO Fiscal Leadership Council have barnstormed the media, making the case that the only way to cut the deficit is to severely scale back social safety-net programs -- Medicare, Medicaid, and Social Security -- which would disproportionately impact the poor and the elderly. Leading the charge: Goldman Sachs' Lloyd Blankfein and Honeywell's David Cote.

As part of their push, they are advocating a "territorial tax system" that would exempt their companies' foreign profits from taxation, netting them about $134 billion in tax savings. Three of the companies -- GE, Boeing and Honeywell -- were handed nearly $28 billion last year in federal contracts alone. Many of the companies recommending austerity would be out of business without the heavy federal support they get, including Goldman Sachs and JPMorgan Chase, which both received billions in direct bailout cash, plus billions more indirectly through AIG and other companies taxpayers rescued. To hear them tell, the 2008 financial crisis was caused by Social Security and Medicare, not by banksters.

In an interview yesterday, Goldman Sachs chairman and CEO Lloyd Blankfein said Social Security "wasn't devised to be a system that supported you for a 30 year retirement after a 25-year career." (who works only 25 years?) The key to cutting Social Security, he said, was simply a matter of teaching people to expect less: "You're going to have to do something, undoubtedly, to lower people's expectations of what they're going to get, the entitlements, and what people think they're going to get, because you're not going to get it."

Following Blankfein's evening news appearance on Monday, Cote, the Honeywell CEO was interviewed and he said essentially the same thing that Blankfein did. Cote recommends cutbacks in Medicare and Medicaid, but when it comes to the tax obligations of corporations, he's clear about what he wants: corporate tax rates at zero.

At Honeywell, Cote practices what he preaches. Between 2008-2010, the company avoided paying any taxes at all. Instead, the company got taxpayer-funded rebates of $34 billion on profits totaling nearly $5 billion.

So, the Campain to Fix the Debt sends out Lloyd Blankfein of Goldman Sachs to tell us that we need to expect less from Social Security, and David Cote of Honeywell to tell us that we have to slash Medicare and Medicaid; the council says we have to make drastic cuts to “entitlement programs” and what they call “low-priority spending”.

Just in case your thinking about casting a vote for the Academy Awards, consider this: Blankfein and Cote lay out this drivel without the least sense of irony or self-awareness; it is a remarkable performance.

Monday, November 26, 2012 - Shopping, Cliffs, Greece, Two-Tiered Justice, Doha, Infrastructure

Shopping, Cliffs, Greece, Two-Tiered Justice, Doha, Infrastructure
by Sinclair Noe

DOW – 42 = 12,967
SPX – 2 = 1406
NAS + 9 = 2976
10 YR YLD -.03 = 1.66%
OIL + 1.22 = 86.67
GOLD – 2.50 = 1750.40
SILV + .05 = 34.28

Well, I survived Black Friday, which actually creeped into Black Thursday; I made it through Shop Small Saturday, and I've arrived at Cyber Monday. Tomorrow will be Buyers' Remorse Tuesday. Don't forget Credit Card Shock January. I have not and will not go into debt for the holidays. Consumer debt is the worst.

A rebound in housing and the job market, along with a drop in household debt, has led additional consumers to say they’ll buy more this holiday. A new survey from the Credit Union National Association and the Consumer Federation of America shows 12 percent said they would boost spending, the highest level since 15 percent in 2007, while 38 percent said they would spend less.

According to the National Retail Federation, retail sales for the weekend are up about 13% from a year ago. Online shopping on Black Friday rose 26 percent to exceed $1 billion for the first time. Spending in stores and online rose to $59 billion in the four days starting Nov. 22. Customers spent $423 on average this weekend, up 6.3 percent from last year. The 13 percent jump in total spending suggests that some sales were pulled ahead from December and that retailers will have to keep up the promotions to avoid a lull. Retailers are going to have to get creative, such as price discounts or special events, to keep the customer engaged

Major indexes last week gained 3 to 4 percent, with the Dow above 13,000 and the S&P above 1,400 for the first time since November 6. Those gains represented a turnaround from recent losses founded on worries about Washington's ability to solve budgetary problems.

Once again today, the fiscal cliff and the Euro-crisis seemed to weigh on Wall Street, or maybe it was just a good excuse. The White House threw cold water on a proposal that tried to avoid the "fiscal cliff" of spending cuts and tax hikes by limiting tax deductions and loopholes, instead of allowing tax rates to rise for the richest Americans. Investors are hoping for advances in talks over the $600 billion in spending cuts and tax hikes scheduled to begin next year, which threaten to drag the U.S. economy back into recession.

The White House released a report today that warns of the catastrophic consequences if Republicans allow the tax bill for the middle class to rise $2,200 by not freezing middle class tax cuts. The report says that going over the cliff could take a combined $800 billion or so, out of the economy.

In its report, entitled “The Middle-Class Tax Cuts’ Impact on Consumer Spending & Retailers,” prepared by the National Economic Council and the Council of Economic Advisers, the White House argues that if Congress allows the middle-class tax cuts to expire, the economy would be devastated—the growth of the GDP could be slowed by 1.4 percentage points and consumers could spend an estimated $200 billion less than they would have in 2013 just because of the higher taxes. While Republicans are trying to get Democrats to agree to larger cuts in entitlements, Democrats are trying to hold the line on entitlement cuts while getting Republicans to agree on tax hikes for the wealthy.

In an op-ed article in the New York Times today, Warren Buffet Buffett asks readers to imagine they've been offered a great investment opportunity. The Oracle of Omaha concludes from his decades of experience in the investment world that most wouldn't shy away from an opportunity just because they might have to pay more in taxes. "Only in Grover Norquist’s imagination does such a response exist," Buffett writes.

Buffet writes that solving the country's deficit problem and getting the economy on track requires raising taxes on the rich and higher taxes won't keep the super-rich from trying to make money. He calls for a minimum 30% tax on incomes between $1 million and $10 million. At first blush, his position seems noble: A rich guy says that people like him should pay more to support the commonwealth. But on closer examination, one realizes that Mr Buffett never mentions doing anything to eliminate the tax-avoidance strategies that he uses most aggressively. And don't forget, we have been talking for a couple of years about the fact that Buffet pays less tax than his secretary, which means there is a huge gap between tax rates in theory and tax rates after the accountants have shredded the code.

The brunt of the cliff could be delayed, however. For instance, the Treasury Department and the Internal Revenue Service could wait to adjust withholding tax tables, which determine how much money is taken out of paychecks. Tax rates could also be fixed retroactively. The Federal Reserve is clothed in immense monetary power and has a few tricks up its sleeve that could keep money flowing to the government despite Congress. And the spending cuts to defense and domestic programs may be phased in over time rather than crashing down all at once at the beginning of January.

Part of the strategy might be to go over the cliff and let the blame fall; knowing that wherever the blame falls, that party will be forced to cave in. Of course, the whole process is being painted as a potential catastrophe, when it is in fact just politics as usual.

Finance ministers from the 17 countries sharing the euro, the European Central Bank and the IMF were locked in a third round of talks today to decide how to make Greek debt, expected to rise to 190 percent of GDP next year, more sustainable by reducing it to 120 percent or below by 2020. The International Monetary Fund wants Euro-zone finance ministers to agree to cut Greece's debt by 20 percent of GDP now and commit to further debt reduction in the future to get the country's finances back on a sustainable path. The IMF and the ministers are at odds on how to achieve the goal, with the IMF pushing for a bolder reduction of Greek debt through the forgiveness of some of the official loans to Athens which now make up the bulk of the country's obligations. Greece's biggest creditor, Germany, opposes any debt forgiveness for Athens.

The IMF argues that if there is no debt reduction up front, the Greek economy will not grow, nobody will invest and Greeks themselves will not spend, derailing other macro-economic assumptions of its adjustment program.

Mary Schapiro will step down as chairman of the Securities and Exchange Commission next month; Schapiro has lead the SEC since being appointed in 2009. President Obama designated Elisse Walter, an SEC commissioner, to replace Schapiro.

Under Schapiro, the SEC reached its largest settlement ever with a financial institution. Goldman Sachs agreed in July 2010 to pay $550 million to settle civil fraud charges that it misled investors about mortgage securities before the housing market collapsed in 2007. Similar settlements followed with Citigroup, JPMorgan Chase and others. The SEC has authority to pursue civil charges.

Although there were large fines, there was little accountability required by Schapiro's SEC. For example, in the Goldman Sachs case: no senior executives were singled out. The penalty amounted to roughly two weeks of earnings at Goldman. And Goldman was allowed to settle the charges without admitting or denying any wrongdoing, as were other large banks that faced similar charges.

Among the leading critics was U.S. District Judge Jed Rakoff, who questioned how the SEC could allow an institution to settle serious securities fraud without any admission or denial of guilt. Rakoff later threw out a $285 million deal with Citigroup because of that aspect of the deal.

Regulators sued Intrade today. Intrade is the online prediction market that gained popularity as an informal oddsmaker for the presidential election, saying it illegally let customers bet on future economic data, the price of gold and even acts of war. The Commodity Futures Trading Commission said in a complaint in federal court that Intrade and its operator solicited customers to trade investment contracts that technically are options. Options must be traded on approved, regulated exchanges.

The private Swiss bank, Pictet, is under investigation by US authorities trying to determine if the bank helped wealthy Americans seeking to avoid paying taxes. The investigation is part of a global offensive on the tradition of strict banking secrecy that has helped Switzerland build up a $2 trillion offshore wealth management industry. UBS was the first Swiss bank to come under scrutiny by the US authorities in a tax evasion crackdown, an investigation it settled in 2009 by handing over client data, admitting wrongdoing, and paying a $780 million fine to avert prosecution. US officials have subsequently mined the UBS data as well as a flood of voluntary disclosures by U.S. citizens and have widened their investigation to other Swiss banks, including Credit Suisse and Julius Baer. Switzerland is trying to get those investigations dropped in return for the payment of fines and the transfer of names of US clients. It is also seeking a deal to shield the remainder of its 300 or so banks from US prosecution.

Tax avoidance, flash crash trading from Knight Capital, insider trading at SAC, don't forget MF Global. The new head of the SEC should get busy, and please, please no more deals that don't admit or deny guilt. I'm getting sick of two-tiered justice.

That radical green pressure group PriceWaterhouseCoopers warns that even if the current rate of global decarbonisation were to double, we would still be on course for six degrees of warming by the end of the century. Confining the rise to two degrees requires a sixfold reduction in carbon intensity: far beyond the scope of current policies. The World Bank, another group of tree-huggers, expects warming in the range of 4 degrees.

And that Brings us to Doha 2012, in the gas-rich, gas-flaring nation of Qatar. The tiny Persian Gulf emirate owes its wealth to large deposits of gas and oil, and it emits more greenhouse gases per capita than any other nation. And it is now playing host to a United Nations climate change summit, which tend to be messy affairs, going back to the 1997 conference that produced the Kyoto Protocol, which has now largely unraveled. While there is always the potential for a diplomatic disaster at any negotiation involving 194 countries, the agenda for the two-week Doha convention includes an array of highly technical matters but nothing that is likely to bring the process to a screaming halt.

Despite the occasional chaos at the summits over the past three years, negotiators achieved a number of significant steps, including pledges by most major countries to reduce their emissions of climate-altering gases, a promise by rich nations to mobilize $100 billion a year by 2020 to help more vulnerable states adapt to climate change, a system for verifying emissions cuts and programs to help slow deforestation. The delegates in Doha hope to firm up these promises and create the concrete means to fulfill them.

The success of the Doha 2012 talks will likely hinge on the approach of the world’s two biggest greenhouse gas emitters and robust economies, the United States and China.

In the aftermath of Hurricane Sandy, which inflicted tens of billions of dollars in damage, it’s might sound like a good idea to take some preventive measures. Sandy was not an isolated incident: only last year, Hurricane Irene caused nearly sixteen billion dollars in damage, and there is a growing consensus that extreme weather events are becoming more common and more damaging. The annual cost of natural disasters in the US has doubled over the past two decades. Instead of just cleaning up after disasters hit, we would be wise to take steps to make them less destructive in the first place.

There are several interesting ideas, including building seawalls , burying power lines, and elevating buildings and subway entrances. The question is whether we can find the political will to invest in such ideas. Several new York politicians have called for major new investment in disaster prevention, but it appears Congress is more willing to spend money on relief than on preparedness. That’s what history would lead you to expect: for the most part, the U.S. has shown a marked bias toward relieving victims of disaster, while underinvesting in prevention. A study by the economist Andrew Healy and the political scientist Neil Malhotra showed that, between 1985 and 2004, the government spent annually, on average, fifteen times as much on disaster relief as on preparedness.

Politically speaking, it’s always easier to shell out money for a disaster that has already happened, with clearly identifiable victims, than to invest money in protecting against something that may or may not happen in the future. Voters reward politicians for spending money on post-disaster cleanup, but not for investing in disaster prevention, and it’s only natural that politicians respond to this incentive. The federal system complicates matters, too: local governments want decision-making authority, but major disaster-prevention projects are bound to require federal money. And much crucial infrastructure in the U.S. is owned by the private sector, not the government, which makes it harder to do something like bury power lines.

We’ve been skimping on maintenance of roads and bridges for decades. In 2009, the American Society of Civil Engineers gave our infrastructure a D grade, and estimated that we’d need $2.2 trillion to bring it up to snuff. Our power grid is, by the standards of the developed world, shockingly unreliable. A study by three Carnegie Mellon professors in 2006 found that average annual power outages in the U.S. last four times as long as those in France and seven times as long as those in the Netherlands.

Disaster-prevention measures are expensive: a New York seawall might cost from ten to twenty billion dollars. Yet inaction can be even more expensive; after Katrina, the government had to spend more than a hundred billion dollars on relief and reconstruction; and there are good reasons to believe that disaster-control measures could save money in the long run. The A.S.C.E. estimates that federal spending on levees pays for itself six times over, and studies of other flood-control measures find benefit-to-cost ratios of three or four to one. A 2005 independent study of disaster-mitigation grants made by FEMA found that every dollar in grants ended up saving taxpayers $3.65 in avoided costs. Right now, it's cheap to borrow money for infrastructure; the projects would create immediate employment.

The size of our current deficit does not change the math.

Wednesday, August 15, 2012 - I've Never Been to Spain and I've Never Seen a Flash Flamenco

I've Never Been to Spain and I've Never Seen a Flash Flamenco
- by Sinclair Noe

DOW – 7 = 13,164
SPX  + 1 = 1405
NAS + 13 = 3030
10 YR YLD +.08 = 1.80%
OIL -.07 = 94.26
GOLD + 4.10 = 1604.10
SILV un = 27.93
PLAT un = 1400.00

JPMorgan Chase, Barclays, UBS,  Deutsche Bank, Royal Bank of Scotland, HSBC Holdings, and Lloyd's are the seven banks subpoenaed in the past week in New York and Connecticut’s investigation into alleged manipulation of Libor. Citigroup and UBS received subpoenas earlier this year as part of the investigation. New York Attorney General Eric Schneiderman and Connecticut Attorney General George Jepsen are jointly investigating alleged manipulation of the London interbank offered rate, or Libor. 

Meanwhile, HSBC has handed over details of current and former employees to the US authorities as part of a tax probe that almost sank rival bank UBS in 2009. As a result, the bank may be sued by the former employees claiming banks infringed the criminal code and Swiss privacy laws. HSBC claims it has avoided breaching strict Swiss banking secrecy laws by redacting from the documents any information that could lead to the identification of clients.

Yesterday, I told you that Standard Chartered had reached a settlement with New York State regulators. There will be no criminal prosecutions as a result of the settlement, mainly because the New York state regulator doesn't have prosecutorial powers. You may also recall that when this story broke last week, one of the first things Standard Chartered did was to hire PR firms that tried to say most of the Iranian transactions were before the sanctions, and it wasn't really $250 billion in money laundering, it was at the most maybe a paltry $14 million. 

Part of the settlement with the New York State Department of Financial Services is that both parties agree the conduct involved transactions of at least $250 billion. Not that it matters. SCB still gets off with a slap on the wrist, just a $340 million dollar fine, not even one percent of the business done. And you will note the language did not say, “the conduct at issue involved FRAUDULENT transactions of at least $250 billion.” Still, they face investigations from the federal regulators, the Treasury, the Federal Reserve, and the Department of Justice; all are notorious for cutting sweetheart deals with the banksters. Whatever deal they reach will now be based on $250 billion not $14 million. 

Meanwhile, Reuters reports the estates of the victims of the 1983 bombing of the US Marine barracks in Beirut sued Standard Chartered seeking compensation over the bank's concealment of Iran-linked transactions. The civil lawsuit, filed in US district court in Manhattan, said the bombing victims obtained a $2.6 billion judgment in compensatory damages against Iran in 2007. The court document said the plaintiffs include representatives of the estates of the 241 US servicemen killed in the attack in the Lebanese capital, relatives and heirs and bombing survivors. The  lawsuit on behalf of the bombing victims claims "those unlawful actions are part and parcel of Iran's longstanding, determined efforts to evade collection of the judgment, and other judgments."

Treasury prices fell, sending 10-year yields toward the highest in almost three months. Ten-year yields have climbed from the record low of 1.38 percent on July 25. We've been getting some fairly positive economic reports and that weighs on bonds. We've seen a slightly better than expected July jobs report; it wasn't great but it was better than expected. The July retail sales report was pretty solid. Today, a report showed that industrial production in the US increased more than forecast in July; manufacturers are turning out more cars and computers. 

On the flip side, we've seen inflation is flat. The BLS reported that the seasonally adjusted Consumer Price Index, a measure of inflation at the retail level, was virtually flat at 0.0%  in July, or just 0.6% annualized rate. The CPI less food and energy increased 0.1% (1.1% annualized rate) on a seasonally adjusted basis. There is a different calculation, the CPI-W, used for figuring the cost of living adjustment for Social Security and other programs – not a big jump but positive. 

The Fed is focused on the future, because monetary policy influences the economy only gradually, so what officials really care about is what the data will show in the coming months. Their most recent guesses, published in June, pegged core inflation between 1.2 and 1.7 percent this year, which is well below their target. All in all, inflation is below target for the Federal Reserve calculations, which means they have some room to be a little looser with monetary policy, but the slightly positive economic reports mean that another round of QE is not in the immediate future. You may recall that in 2010, Fed Head Bernanke gave a speech at the Jackson Hole Economic Symposium and signaled a second round of quantitative easing or QE2. There is another Jackson hole Symposium on August 31st, but don't expect QE3. This  doesn't mean the Fed is not loose with money – they are; just that they likely won't be announcing QE3. 

Last week, for a brief time, the machines took over the stock markets; tens of thousands of trades took place of some of the major stocks; trades done by what they are now calling rogue algorithms. This created instability in prices; trading was halted, but not before Knight Capital lost about $400 million on rogue trades. This instability is troubling for anyone trading or investing in stocks.

Knight Capital's business is these quick in and out trades. They've established computer rooms in close proximity to the exchanges, and they get a split second advantage, just enough for the computers to jump in front of a trade, and manipulate the bids and offers in such a way as to scalp a tiny amount from thousands or even millions of trades. The federal commodities trading commission reports that something like 500 to 600 people at Goldman Sachs are employed doing nothing but working on these kinds of quick in-and-out algorithm tradings, although I don't think Goldman's algorithm is to blame for this particular incident. But it's a very widespread thing that's happening, and last week it went out of control.  So, now there is talk about the need for regulation; there has been talk about regulating these kinds of flash trades for a few years. There was supposed to be something in Dodd-Frank. Nothing has been regulated. 

One possible solution is a financial transaction tax, just a small tax on each share traded, the tax might even increase as volume increases. That would probably eliminate the flash traders, who are really nothing but middle men, skimming from each trade while adding nothing of value. Rightfully, isn't that the role of government? New York state actually has stock transaction tax and it's been on the books for more than 100 years, and it rebates the tax to the Wall Street traders for some inexplicable reason. The tax doesn't cover flash trades. 

Don't confuse flash trades with flash mobs; that is apparently the latest thing in Spain. The Spanish government gave in to demands to bailout the Spanish banks and imposed harsh austerity measures on the Spanish people. So the people are having flash mobs in grocery stores and then they steal food and give it to the poor. Other flash mobs dance the flamenco in bank lobbies and they sing songs about how they dislike the bankers. I've never been to Spain but I would like to go. 

According to regulatory filings late yesterday, some well-known money managers reported significantly reduced stakes in big banks, including JP Morgan Chase and Goldman Sachs, as well as food companies such as Kraft Foods Inc. in the second quarter. Billionaire investor George Soros’s Soros Fund eliminated positions in JPMorgan Chase, Goldman, and Citigroup. The investment company also reported a new stake in Wal-Mart and a big stake in Facebook. 

Warren Buffet's Berkshire Hathaway reduced positions in Procter&Gamble, Johnson and Johnson, Intel, and Visa.  Berkshire increased its existing positions in Wells Fargo and IBM. Buffet bought National Oilwell Varco, an oilfield equipment company, and Phillips 66. 

And John Paulson, the guy who made a fortune bundling subprime junk through Goldman Sachs and then betting against it; Paulson was selling stock in the second quarter and buying GLD, the exchange-traded fund that tracks the price of gold.  Paulson's $21 billion hedge fund now has more than 44 percent of its US traded equities tied to bullion.