Friday, May 30, 2014 - Record Highs, Bonds, Coal Mines

Record Highs, Bonds, Coal Mines
by Sinclair Noe

DOW + 18 = 16,717
SPX + 3 = 1923 (another record)
NAS – 5 = 4242 (not a record)
10 YR YLD + .01 = 2.45%
OIL - .71 =  102.87
GOLD – 4.60 = 1252.30
SILV - .23 = 18.91

For the week, the Dow rose 0.7%, the S&P 500 gained 1.2% and the Nasdaq added 1.4%. For the month of May, the Dow gained 0.8%, the S&P 500 rose 2.1% and the Nasdaq climbed 3.1%. Meanwhile, if you are looking for action, the bond market is the place; the yield on the 10 year note has dropped from 2.65% to 2.45% this month.

Nearly everyone is looking for an explanation as to why longer-term interest rates continue to fall in the face of reduced Fed support and what is being hyped as better economic data. This wasn’t supposed to happen. The Federal Reserve has been propping up Treasury bond prices, and suppressing yields, for the past several years by buying large quantities of bonds each month in an effort to increase investment and consumption, and force investors into riskier assets. To some extent, the Fed’s QE purchases have worked; ultra-low interest rates have supported housing price increases and have led to skyrocketing stock prices.  Household net worth has increased by $25 trillion from the financial-crisis lows in the first quarter of 2009.  However, these gains in net worth have overwhelmingly accrued to the well-to-do while low- to moderate-income folks continue to suffer from poor employment opportunities, stagnant incomes, inadequate retirement savings, and rising costs for everything from food and energy to health care and education.  In other words, the economy hasn’t really improved but the Fed may have created financial asset bubbles.

Last December the Fed began winding down its large scale asset purchases by tapering, or incrementally reducing the amount of purchases over a scheduled period of a year or so. Back in December the Fed was buying $85 billion a month in mortgage backed securities and treasuries; they have now cut that to just $45 billion a month, and by the end of the year they anticipate they will end the large scale asset purchases. This means that demand for treasuries and MBS has, or should have dropped significantly. If there is less demand and the supply stays the same, then prices should fall and bond yields should be moving higher. The exact opposite has been happening; long term bond prices have increased and bond yields have been falling; and the timing of this increase in prices and drop in yields coincides with the start of the Fed taper.

Is there something wrong with the supply/demand equation? Is there invisible demand out there? Well, treasuries are considered a safe haven investment, and if we saw volatility in the stock market, we might expect a move to the safe haven of treasuries. Right now the CBOE Volatility Index known as the VIX, is down. As the 10-year yield touches the 2.4% level, its lowest in nearly a year, the VIX is hovering around 11.5, near its lowest levels since before the financial crisis.

The VIX measures volatility in the US market, so maybe we need to broaden out horizons. Europe is experiencing low-flation, and in some Euro countries the low-flation has turned to deflation; as a consequence, the rates in Europe are very low: German 10 year bonds yield 1.36%, France yields 1.75%, Spain 10 year notes yield 2.86%. In a global market there is something wrong with pricing. Why is the US bond yield higher than the French bond yield? That does not compute.

Of course, one explanation is that foreign investors are looking for a place to park money and if you can get a better yield on US treasuries compared to French bonds, it just makes sense that you wouldn’t buy the French bonds; add in the idea that buying US treasuries serves as an effective hedge against home currency depreciation and treasuries should be attracting money that might be held in emerging market economies.

In general, if economic growth is expected to accelerate, interest rates should rise as well.  The reason for this is fairly straightforward.  Increased demand for goods and services should lead to price increases.  Inflation is one component of "nominal" interest rates.  The other component is called the "real" rate of interest, and it is determined by the demand for money.  As economic growth accelerates, the demand for money should increase as people become more confident in making spending and investment decisions.  Therefore, higher inflation expectations and higher demand for money should lead to higher interest rates in a strengthening economy; but they haven't. Perhaps the weak economy of the Eurozone is holding back rates in the US, or maybe the US economy isn’t as strong as we imagine.

Another consideration has us going back to the supply-demand equation; if supply dries up faster than demand dries up, then that would push prices higher. Remember that the federal deficit has been trimmed to the lowest levels in about 13 years and that means the government isn’t issuing as much new debt. And the housing market has slowed and that means there should be less in the way of mortgage backed securities.

That was certainly the case for the first quarter; the US economy shrank. And there are no real signs of inflation in the US, or at least we didn’t see inflation for quite some time. That may be changing; the April CPI and PPI showed a minor pop in prices; the low interest rate environment has boosted financial asset prices, so stocks and housing prices have moved higher; food prices are also higher but they tend to be overlooked as a weather related aberration, although I doubt that is temporary; the labor market is still weak and despite the unemployment rate dropping to 6.3% there is tremendous slack and little participation and there doesn’t seem to be any wage inflation. The Fed might claim the economy is getting stronger and the Fed might not consider deflation to be a problem, but the bond market seems to be saying the recovery is sick. At least for the Main Street economy.

Further proof today showing American shoppers dialed it back in April. Household purchases fell 0.1%, the first decrease in a year, and following a 1% gain in March; that was the bounce back from the pent up demand of the frozen winter. After adjusting the figure to account for inflation, the news was worse; spending dropped by the most since September 2009 as income growth cooled. Incomes advanced just 0.3% in April, and without pay gains, consumers lack confidence. Consumer sentiment dropped from 84.1 in April to 81.9 in May. What we’re seeing is the failure of trickledown. The stock market may be strong, the well-off may be better off, but it doesn’t trickle down. The economy is never going to recovery without broad based demand, and that will only happen when the labor market gets strong, until then, the Fed is pushing on a string with QE and the Zero Interest Rate Policy.

There are many possible reasons behind the move in bonds, but a big part still has to do with the economy, even with all the subplots of the international markets and the inflation-deflation debate, we get back to the idea that the economy is weak, and the recovery is uneven. The first quarter GDP contraction was certainly weather related but that doesn’t mean the economy will bounce like a quarter on a trampoline. Second quarter GDP should be positive but probably not sizzling hot. I don’t buy that story, and apparently the bond market isn’t buying it either.

Next week’s economic calendar includes the ISM surveys of business activity in the manufacturing and services sector. What will be important to the outlook is what the surveys say about employment, export prospects and inventories. On Wednesday the Fed will release its Beige Book of regional economic reports. The next Fed FOMC meeting is June 17-18. Next Friday is the monthly jobs report; the unemployment rate, the headline number is at 6.3%, but that’s based on a participation rate at 62.8%. If the participation rate moves higher, look for the unemployment rate to jump.

Another big event next week, President Obama on Monday will unveil a plan to cut carbon pollution from power plants and promote cap-and-trade, undertaking the most significant action on climate change in American history. The proposed regulations could cut carbon pollution by as much as 25% from about 1,600 power plants in operation today. Power plants are the country's single biggest source of carbon pollution; responsible for up to 40% of the country's emissions.

The rules, which were drafted by the Environmental Protection Agency and are under review by the White House, are expected to put America on course to meet its international climate goal, and put US diplomats in a better position to leverage climate commitments from big polluters such as China and India. The plan is certain to result in political backlash with critics making doomsday claims about the costs of cutting carbon. Coal mining companies, power plant operators and others are already lining up for legal challenges to the executive action, claiming the approach oversteps the EPA’s authority.

Friday, April 25, 2014 - Don't Hold Your Breath

Don’t Hold your Breath
by Sinclair Noe

DOW – 140 = 16,361
SPX – 15 = 1863
NAS – 72 = 4075
10 YR YLD - .02 = 2.66%
OIL – 1.25 = 100.69
GOLD + 9.90 = 1304.80
SILV + .07 = 19.83

Consumer sentiment rose in April to a nine-month high as views on current and near-term conditions surged. The Thomson Reuters/University of Michigan's final April reading on the overall index of consumer sentiment came in at 84.1, up from 80 the month before.

Meanwhile, a new Gallup poll shows more Americans are optimistic about the job market this month than at any time since the 2008 financial crisis, with 30% saying now is a good time to find a quality job.

That marks a significant improvement from the 8% who said they were optimistic about the job market in 2010, but it’s still a drop from the pre-2008 highs of almost 50%. And even though almost a third of Americans are optimistic, two-thirds still say the job market is lackluster; 66% of Americans say it’s not a good time to hunt for employment.

Next week’s economic calendar includes a two day Federal Reserve FOMC meeting. Next Friday, we’ll have a monthly jobs report; the current estimates call for 215,000 net new jobs in April and the unemployment rate dipping to 6.6% from 6.7%. Also, the Commerce Department will release its first guess of first quarter GDP; the consensus estimate on the initial estimate is that the economy grew about 1%.

The situation in Ukraine is going to hell in a hand basket. Russian militants have now become entrenched in towns across eastern Ukraine; Russian troops are massed on the border. Ukrainian leaders said operations to expel pro-Russian militants in eastern cities would continue, even though military action so far has done little more than prompt Russia to stage military exercises on Ukraine’s border and raise concerns about Moscow’s next move. The government in Kiev says that if the Russians cross the border they would view that as an invasion. Ukraine's Prime Minister said Russia wanted to start World War Three by occupying the country and creating a conflict that would spread to the rest of Europe.

A group of foreign military observers, possibly including some Germans, traveling under the auspices of the Organization of Security and Cooperation in Europe, along with their Ukrainian military hosts, were detained by pro-Russia separatists in Slovyansk. It was unclear precisely how many were in the group, about a dozen, but the detention appeared to be the first time that members of the Ukraine armed forces had been taken into custody by the separatists.

The US, Britain, and Germany are now calling for more sanctions against Russia, but none of the three countries gave any details of what the sanctions might be, or when they might be enacted. The standoff has already led to heavy capital flight from Russia, prompting credit rating agency Standard & Poor's to cut the country's ratings. That forced the Russian central bank to raise its key interest rate to reverse a drop in the ruble.

The Federal Communications Commission announced new rules governing Internet service. The rules effectively put an end to net neutrality, or the idea that all web traffic should be treated equally. A court decision in January struck down FCC rules meant to ensure that Internet providers do not discriminate by blocking or slowing certain content.

That new rule gives broadband providers what they’ve wanted for a long time, the right to speed up some traffic and degrade others. When broadband accelerates some traffic the result is that other traffic slows down. We take it for granted that bloggers, start-ups, or nonprofits on an open Internet reach their audiences roughly the same way as everyone else. Now they won’t. They’ll be moved over to a slow lane and forced to line up for their chance to reach an audience as they watch as companies that can pay tolls to the cable companies speed ahead. The motivation is not complicated. The broadband carriers want to make more money for doing what they already do. Never mind that American carriers already charge some of the world’s highest prices, around sixty dollars or more per month for broadband, a service that costs less than five dollars to provide.

After the ruling, internet providers like Comcast and Verizon cut deals with content providers, such as Netflix, which would pay to stream their content in an Internet “fast lane.” The new rules effectively create a fast lane and a slow lane on the internet. The fast lane includes big tech companies that can afford to pay; the slow lane includes startups, small businesses and everybody else. The internet providers are also becoming more and more involved in providing content, and it just makes sense to think their content will get preferential treatment. Companies like Verizon and Comcast will have staggering power to decide what bits of information reach your devices and mine, in what order and at what speed. That is, assuming we're permitted to get that information at all.

Bottom line is that the internet is going to get more expensive; if content providers have to pay extra for the fast lane, they’ll pass those costs on to the end user. The finer details will be hashed out in the coming months, starting on May 15, when the proposed rules become public.

Back in the Spring of 2010 the Office of the Comptroller of the Currency (OCC) and the Federal Reserve issued consent orders to 11 mortgage servicers, mandating that borrowers who had pending foreclosures, or had completed foreclosure sales in 2009 or 2010 could request an investigation by independent reviewers. The independent reviews would be paid for by the servicers, and in a shocking twist, the independent reviewers were anything but independent.

Eventually 16 servicers were included in the reviews, accused of using forged and shoddy paperwork to rapidly foreclose on homeowners, a practice known as “robo-signing.” The servicers, including Bank of America and Wells Fargo, agreed to have independent consultants review their foreclosure files for errors. In the 12 months that the review was up and running, not a single homeowner received any compensation. But the eight consultants managing the process were paid a total of $1.9 billion.

And so the independent review was cancelled and the regulators and the banksters worked out a quick and dirty settlement, with $3.3 billion going to wronged homeowners; a bunch of insultingly small checks distributed to a wide swath of people, and the regulators and banksters got to say: look how many people we helped. Meanwhile, nobody went to jail for the thousands of forged documents, the perjury, the obstruction of justice, etc., etc. in what was surely one of the largest fraud cases in American history.

Another problem is that nobody really knew who had been wronged and in what amounts, and so when the restitution was paid, nobody really knew if there was any rationale for the payments. The OCC said the consultant’s review had found an overall error rate of about 4.5% after assessing about 100,000 files, but that always seemed to be a lowball estimate.

Meanwhile, Representative Elijah Cummings continued to get data, and now that data is coming to light. In one example, a reviewer, Promontory Financial, found errors with 60% of the loan modifications conducted by Bank of America; a partially completed review found similar problems of the cases reviewed for PNC Bank. Based upon those numbers, the banksters got off with a puny little fine, and the wronged homeowners got shortchanged.

Now, you’re probably thinking to yourself, that this is old news about the robo-signing, but what is still relevant is  how the politicians have suppressed this information for so long; further proof of how deeply pretty much all of Washington DC is in bed with the banks. Only now when foreclosure abuses are considered old news does the public begin to get an inkling of how much the official story was close to a complete fabrication.

Of course, the people who went through the Independent Foreclosure Review process knew full well what a charade it was, but they were never taken seriously. The review process cost nearly $2 billion and it turned out to be a cost efficient whitewashing by the banksters. If you’ve lost your home, you are sure to be under financial duress, and people with no money don’t have any clout with our government. Foreclosure is considered a stigma, which discourages victims from telling their stories and sets those brave enough to do so up for abuse; the banks have done a great job of playing up the “deadbeat borrower” meme, whether it fits or not.

And we finish today with the story of how a top bank executive finally has to pay for his fraudulent actions. Bank of America's former finance chief, Joe Price, has agreed to pay $7.5 million to settle a New York lawsuit that accused the bank and its former executives of misleading investors during the lender's acquisition of Merrill Lynch. The top execs at BofA lied about the toxic assets on the books at Merrill Lynch and mounting losses leading to the merger; and misrepresenting the impact the merger would have on the bank's future earnings; this violated so many securities laws that it is crazy.

New York Attorney General Eric Schneiderman said: "This settlement is one more step in our effort to hold top financial executives accountable for their actions." What a crock.

The bank paid the fine for Joe Price, which means the shareholders are actually paying. Joe Price did not have to admit wrongdoing. Former BofA CEO Ken Lewis settled last month; the bank paid his fine too; Lewis did not admit wrongdoing.

Meanwhile, there is still a $2.3 billion class action lawsuit pending, and the Department of Justice is now offering a $13 billion settlement to Bank of America to resolve federal and state investigations of the lender’s sale of bonds backed by home loans in the run-up to the 2008 financial crisis. Don’t hold your breath for justice.

Friday, March 14, 2014 - The Circle of Life

The Circle of Life

by Sinclair Noe

DOW – 43 = 16,065
SPX – 5 = 1841
NAS – 15 = 4245
10 YR YLD - .01 = 2.64%
OIL + .81 = 99.01
GOLD + 10.90 = 1383.00
SILV + .29 = 21.56

In economic news, the early-March consumer sentiment index fell to 79.9. That’s down from a final February reading of 81.6 but the latest number is within the range of numbers posted since November.

A separate report from the Labor Department shows the producer price index dropped o.1% last month. The PPI measures inflation at the wholesale level. Final demand for goods rose 0.4% in February. Final demand for services dropped 0.3%. Producer prices excluding volatile food and energy costs fell 0.2%. In the 12 months through February, producer prices increased 0.9%, the smallest one-year gain since May 2013. Inflation is not a concern. The economy is still too sluggish to generate inflation.

There are two big news stories of the day: Flight 370 and Ukraine. We don’t know anything about either. A total absence of actual information about the missing Malaysian flight is not in any way hindering 24 hour news coverage of the story. Facts have given way to fantastic fantasizing about everything from terrorism to hidden island airstrips to alien abductions. The news networks have been gathering tons of erroneous and conflicting reports which they immediately pass to their viewers. They must think we’re all morons.

Secretary of State John Kerry and his Russian counterpart Sergei Lavrov wrapped up meetings in London by announcing they have no common vision on the crisis in Ukraine. Russia will go forward with a referendum vote on Crimean sovereignty on Sunday. Monday will be a strange day as we watch the markets try to weave a narrative.

The Swiss bank UBS said it will conduct an internal review of its precious metals business amid expanding regulatory investigations into potential manipulation of interest rates and the price of commodities and currencies. European regulators began looking at other benchmark rates, including for gold and silver, as part of an outgrowth of its investigation of rigging of the London interbank offered rate, or Libor, and other global interest rate benchmarks. The process of setting the benchmark price for gold in London dates to 1919. It is set twice a day by five firms that serve as market makers; those market makers are: Barclays, Societe Generale, Deusche Bank, Scotiabank, and HSBC.

The Hong Kong Monetary Authority said that after an investigation of nine banks that were part of the local consortium making daily submissions to determine the Hong Kong Interbank Offered Rate, which is used as a benchmark to price corporate loans, household mortgages and other types of debt; only UBS was found to have tried to manipulate the rate, but the regulators conclude that they were not good at rigging the rate, so no fines have been levied.

Today the Federal Deposit Insurance Corp sued 16 of the world's largest banks, accusing them of cheating dozens of other now defunct banks by manipulating the Libor interest rate. The big global banks broke certain swaps contracts they had entered into with the now-closed banks by separately colluding to rig the Libor rate to which the contracts were tied. Some of the big banks have already paid fines to resolve the charges; but the big banks are also being sued by investors and other who claim they lost money due to the manipulation.

A federal judge last March dismissed many of those claims that were based on antitrust law, but has yet to rule on cases that rely on the "breach of contract" theory used by the FDIC.

The Inspector General for the Department of Justice has released a report that basically says the crackdown on mortgage fraud is a joke. In 2010, Attorney General Eric Holder said, “mortgage fraud crimes have reached crisis proportions, but we are fighting back.” The only problem is it didn’t happen. More money was given to the FBI, but the inspector general’s report shows that the FBI considered mortgage fraud to be its lowest-ranked national criminal priority.

Holder announced in 2012 that prosecutors had charged more than 530 people over the previous year in mortgage fraud related cases, but the new report says the actual number of cases was 107. Yep, the regulators are now cooking the books.

Yesterday we reported that Wall Street bonuses grew 15% last year to more than $26.7 billion, or an average of $164,000 per employee, according to the New York Comptroller; it marked the third highest bonus payout on record. The average salary including bonuses in 2012 was $360,700, or more than five times greater than the rest of the private sector. The average Wall Street bonus is now 7 times larger than it was 30 years ago. Meanwhile the median household income has been stagnant for the past 30 years.

People who park their savings in these big banks accept a lower interest rate on deposits or loans than they require from America’s smaller banks. That’s because smaller banks are riskier places to park money. Smaller banks won’t be bailed out if they get into trouble; big banks are too big to fail. That implied government protection is like a hidden subsidy for the big banks, and it affords them a competitive advantage, and allows them to rake in more profits than smaller rivals.

How large is this hidden subsidy? Two IMF researchers have calculated it’s about eight tenths of a percentage point; and based on the total amount of money parked at the 10 biggest Wall Street banks that works out to a subsidy of about $83 billion a year. The top 5 banks account for $64 billion of the $83 billion subsidy; and that pretty much equals the top 5 banks average annual profits. Bottom line, no subsidy, no bonus pool.

Meanwhile, I almost missed this story from Tuesday. In Vermont, 15 towns have voted to support the creation of a public bank in Vermont, calling for the state legislature to establish such a bank and urging passage of legislation designed to begin its implementation. The specific proposal under consideration, Senate Bill 204, would turn an existing agency, the Vermont Economic Development Authority, into a public bank that would accept deposits and issue loans for in-state projects.

Currently, the only state in the US to maintain a public state bank is North Dakota. However, since the financial downturn of 2008, other states have looked into replicating the North Dakota model as a way to buck Wall Street while taking more control of state and local finances.

Here’s how the public bank in North Dakota works: All state revenues must be deposited with the state public bank by law.  The bank pays no bonuses, fees or commissions; does no advertising; and maintains no branches beyond the main office in Bismarck. The bank offers cheap credit lines to state and local government agencies. There are low-interest loans for designated project finance. The Bank of North Dakota underwrites municipal bonds, funds disaster relief and supports student loans. It partners with local commercial banks to increase lending across the state and pays competitive interest rates on state deposits. For the past ten years, it has been paying a dividend to the state.

An economic study on a public bank in Vermont suggests the plan would create 2,500 new jobs and increase the gross state product by more than $340 million, with no new appropriations or bonding to establish the bank.

And we wrap up with this; today is Pi Day. March 14, or expressed another way 3-14, which happen to be the first 3 digits of pi, that Greek letter that has come to be defined as the ratio of a circle’s circumference to its diameter; in other words the ratio of the linear distance around the edge of a circular object to its measure of a straight line going through the center of a circle connecting two points on the circumference. So, if you want to know the circumference of a circle you could just multiply the diameter times 3.14 (pi). This also happens to be the birthday of Albert Einstein, which just makes both all the more intriguing.  A year from today, the date will be 3-14-15, which happens to be the first 5 digits of pi; it’s a once in a lifetime event.

Pi is, of course, an irrational number, which means it cannot be expressed as a ratio. It’s a decimal that’s neither finite (like 2.0 or 2.2) nor repeating (like 3.3333) nor periodic (like 9.1818). It just keeps going past 3.14159 for as long as you’d like to take it. Some people have done the calculation out to more than 2 trillion decimal places, with the help of computers. And so we consider pi to be infinite.

Another way to consider this is that there is no perfect circle. Or we might say that since pi is an infinite, non-repeating decimal every possible number combination exists somewhere in pi’s infinite sequence of numbers, and if you were to convert it to ASCII text, somewhere in that infinite string of digits is the name of every person you will ever love, or even meet, plus the date, time and manner of your death, and every question and every possible answer, and all the mysteries of the universe are contained in this infinite sequence of digits, and the only way we can wrap our minds around it is to think of it as a circle.

Celebrate safely.

Friday, October 25, 2013 - New Records on Bad News

New Records on Bad News

by Sinclair Noe

DOW + 61 = 15,570
SPX + 7 = 1759
NAS + 14 = 3943
10 YR YLD - .02 = 2.51%
OIL + .79 = 97.90
GOLD + 5.60 = 1353.90
SILV - .13 = 22.70

The S&P 500 closed at a record high. The Nasdaq Composite closed at a 13 year high. The Russell 2000 hit a record high intraday, but closed slightly down on the day. The Dow Industrial Average did not hit a high; maybe next week, but not today, and so no milk and cookies.

For the week, the Dow was up 1.1%, the S&P up 0.9%, the Nasdaq up 0.7%. Based on results so far and estimates for companies still to report, S&P 500 earnings are expected to have risen just 3.4 percent in the third quarter, with 69 percent of companies reporting earnings above analysts' expectations. Revenue growth is seen at 2.2 percent for the quarter, with just 54.2 percent beating sales estimates, below the long-term average of 61 percent.

Consumer sentiment dropped in October to its lowest level since the end of last year. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 73.2 in October from 77.5 in September and was the lowest final reading since December 2012. This report covered the time when the government shutdown. Consumer confidence is often linked to consumer spending expectations, and so there is some concern this report might foretell a weak holiday spending season.

Meanwhile capital goods orders were weak in September. Excluding orders for aircraft, orders dropped 1.1%. This report covers data prior to the shutdown. It's estimated the shutdown will shave as much as 0.6 percentage point off annualized fourth-quarter gross domestic product through reduced government output and damage to both consumer and business confidence. And even before the impasse, the pace of hiring by US employers had slowed sharply in September, as we learned earlier this week in the delayed jobs report.

This shutdown and threat of another coming in January are clearly going to change how people act and feel. Government employees and contractors (and other creditors) have been presented with a realistic scenario of not being paid either for a period of time, or even never being paid. Behavior will change in response to this newly found recognition of a vulnerability. The partial bounce back may even be muted by social security recipients realizing that they may one day find their checks delayed (and need to have a cash reserve to deal with that).

The single biggest impediment to a stronger economic recovery has been the years of dysfunction in Washington and the policies that have emerged. S&P estimates the shutdown will cost the economy $24 billion, but that's just the shutdown. Most substantively, the sharp decline in the budget deficit, from $1.4 trillion in 2009 to $642 billion in the 2013 fiscal year that ended Sept. 30, has braked the economy at a time when it was already improving only slowly.

Federal spending has been declining for 2 straight years and the Congressional Budget Office calculates that the pullback in spending, together with higher taxes will cause the economy to grow by 1.5 percentage points less this year than it would have if the deficit had remained constant, that’s the equivalent of 1.5 million fewer jobs.

So, we have bad economic news and expectations for a weak 4^th quarter and the stock market at record highs, because on Wall Street, bad news is good news. The weak economy means the Federal Reserve is not going to taper, or cut back on it's quantitative easing program of buying $85 billion a month in securities.

Right now the potential costs of withdrawing even a little bit of monetary support from the economy appear much greater than they were. For proponents of asset purchases, the cost-versus-efficacy calculation that figures into their votes each meeting is now chiefly about assessing the impact of slowing purchases, rather than of continuing them. The Fed holds its next FOMC meeting next week, and it looks like there will be about zero chance of a change in QE. The window to make changes in the bond buying program is now closed, and likely closed for quite some time.

Yesterday I addressed at length (click here) the Federal Reserve's proposals to have banks increase capital reserves, which is a positive though incomplete effort to avoid future bailouts. That process of increasing reserves would be phased in beginning in January 2015, and that taper could produce a shortage of high-quality assets. So, the pigs on Wall Street gorge at the Fed's Free Money trough, and push equities to new highs; and if it all sounds irrational and a tad exuberant, well it is; but the market can be irrational at times and brutal at others.

White House officials say the have submitted the paperwork necessary to confirm Janet Yellen as the next head of the Federal Reserve. Yellen will meet Senators next week as part of the process to install her as the next head of the central bank.

Yellen is expected to secure the 51 Senate votes needed to confirm her position. However, the hearings are expected to be contentious. Several Republican Senators have already indicated that they will oppose Yellen's nomination. Kentucky Senator Rand Paul is threatening to block the nomination to get a vote on his Fed transparency bill, which would require the Fed to undergo a complete audit by a specific deadline. 

Today, JPMorgan Chase announced it has reached a $5.1 billion settlement with the US Federal Housing Finance Agency (FHFA) over charges it misled mortgage giants Fannie Mae and Freddie Mac during the housing boom. A separate settlement with the US Justice Department is expected to be announced soon, that's the proposed $13 billion deal. It is the biggest settlement ever by a US bank. In a statement JP Morgan said the settlement resolves the biggest case against the firm relating to mortgage-backed securities.

The bank added that the agreement relates to "approximately $33.8 billion of securities purchased by Fannie Mae and Freddie Mac from JP Morgan, Bear Stearns and Washington Mutual" from 2005 – 2007. As part of the agreement with the FHFA, the bank will pay $4 billion to Fannie Mae and Freddie Mac to settle claims that it violated US securities law.

It will pay the agencies an additional $1.1 billion for misrepresenting the quality of single-family mortgages.JP Morgan has set aside a total of $23 billion to help the bank work through its many investigations by regulators in the US and abroad.

Last month, the bank agreed to pay more than $1bn to help it end various investigations into its 2012 "London whale" trading debacle, which cost the bank more than $6 billion in trading losses.

It's estimated that JPMorgan has now paid out more than $31 billion in fines and legal costs since 2009. The settlement announced today is the biggest settlement ever by a US bank. Now, what seems really crazy is that you have these massive fines and legal costs, and you still have apologists for Jamie Dimon to stay on as the chief at JPM. Either JPMorgan is incapable of turning a profit without violating the law, or they have squandered an enormous amount of profits by violating the law.

Meanwhile, kudos to Bill Black for recognizing a bit of media legerdemain, specifically, this one sentence which describes this week's jury verdict against Bank of America for the Hustle scam: “Bank of America, one of the nation’s largest banks, was found liable on Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.”

I'm still waiting for aggressive efforts to hold banks accountable.

An earthquake of magnitude 7.3 struck early Saturday morning off Japan's east coast, the U.S. Geological Survey said. Japan's emergency agencies declared a tsunami warning for the region that includes the crippled Fukushima nuclear site. Japan's Meteorological Agency issued a 3-foot tsunami warning for a long stretch of Japan's northeastern coast, which isn't really much more than a swell.

There were no immediate reports of damage on land. Tokyo Electric order workers near the Fukushima nuclear plant to move to higher ground but there were no reports of trouble at the plant. All but two of Japan's 50 reactors have been offline since the March 2011 magnitude-9.0 earthquake and ensuing tsunami triggered multiple meltdowns and massive radiation leaks at the Fukushima Dai-ichi nuclear power plant, about 160 miles northeast of Tokyo. About 19,000 people were killed.

The Fukushima plant has been leaking radioactive water into the ground and into the ocean, and there are concerns about the stability of the damaged buildings holding radioactive fuel rods. So, something like an earthquake could easily damage the buildings, resulting in a meltdown 85 times larger than Chernobyl. But the good news is that did not happen; not today.

Friday, October 11, 2013 - We Have Met the Enemy

We Have Met the Enemy

by Sinclair Noe

DOW + 111 = 15,237
SPX + 10 = 1703
NAS + 31 = 3791
10 YR YLD un = 2.68%
OIL – 1.22 = 101.79
GOLD – 13.20 = 1274.20
SILV - .34 = 21.44

The Nobel Peace Prize was awarded to the OPCW, the Organization for the Prohibition of Chemical Weapons, the international chemical weapons watchdog helping to eliminate the Syrian army's stockpiles of poison gas. Its inspectors have just begun working in the active war zone, and the Norwegian Nobel Committee said it hopes the award offers "strong support" to them as they face arduous and life-threatening tasks.

Overall consumer confidence decreased from 77.5 in September to 75.2 in October, according to the Index of Consumer Sentiment published by Thomson Reuters and the University of Michigan. The economic expectations index in the survey also fell from 67.8 in September to 63.9 for October, reaching the lowest level so far this year as consumers reported less optimism about the course of the economy for the next 12 months.

In what has become an almost daily occurrence, Thursday night brought another poll, this one from NBC and the Murdoch Street Journal, showing that Americans really don't like the politicians.

A recap: Only 24% of Americans had a favorable view of Republicans, the lowest figure in the poll’s multi-year history and four percentage points lower than last month. Another low: only 21% had a favorable view of the tea party. Obama's standing was relatively stable, moving from 45% favorable last month to 47% now, within the poll’s margin of error of 3.5 points. Democrats overall were at 39% positive, with congressional Democrats at 36%. And 70% of Americans said Republicans were putting politics ahead of what was best for the country. A lesser 51% said that about Obama.

The poll also shows  the GOP-Tea Party efforts to defund or delay Obamacare—the demand which directly led to the government shutdown—has brought about a seven point increase in popularity of the law. Immediately prior to the shutdown, only 31 percent of Americans believed Obamacare was a good idea. Today, that number is 38 percent.

To paraphrase Pogo, the GOP has met the enemy, and they are it.

It looks like the politicians might be getting closer to some sort of deal to avoid throwing Treasury bonds into a financial abyss. The idea is to combine a government funding bill (which would end the shutdown) along with a debt-ceiling increase (which would avoid a default) along with a repeal of the medical device tax in Obamacare (which has nothing to do with Obamacare and is just a bone to throw at the GOP). The deal would avert default for 6 weeks, and would demand negotiations on a variety of issues including spending levels, means testing for entitlements, chained CPI for Social Security.

President Barack Obama has been adamant that he will not negotiate over anything while the government is shut down and the debt limit is held hostage. According to a New York Times report, Obama thinks the Republicans are demanding too much, saying “The only thing not on their list is my own resignation.” The paper also reported that Obama told a group of Democrats that “If he gives in now, Republican demands would be endless.” The sides would have to figure out some sort of agreement to get past that obstacle. If the House Republicans don't move fast to cut a deal with themselves that the White House can support, the Senate appears ready to step in and take over.

Something might get done. That's what Wall Street traders were betting on yesterday and today. But the important point is that it hasn't happened yet. Which means that average ordinary citizens need to maintain pressure on the politicians, and there are two ways to do that: get drunk and then drink coffee.

Now you can get drunk and dial up Congress in a very random way and spout something so intelligent that your representative will feel compelled to end the partisan nonsense.

Drunkdialcongress.org connects the disgruntled to the House of Representatives. You can enter your phone number into the website and an inebriated voice from a 1-800 number will call you back and ask, “Is this government shutdown making you want to drink?” before transferring to Capitol Hill so that you can “tell them what’s on your mind and tell them to get back to work.”

The site, created by the mobile ad firm, Revolution Messaging, offers talking points like “I can’t watch the panda!” or “Why don’t you make yourself useful and at least mow the lawn?” For those who need help selecting their form of liquid courage, there are also recipes for drinks like “the bad representative” (three parts liquor, one part lemon juice).

After you sober up, you can go get a coffee at Starbucks and sign a petition begging Washington to end the shutdown. Yea, this isn't such a great idea either. I've always thought there was a problem with Starbucks' semantics: “grande” means medium, “tall” means small, and “magna cum laude” means barista, and “barista” means someone who works slightly less than full-time and therefore does not qualify for corporate health insurance. Plus, I'm not sure if the long term solution that Starbucks CEO Howard Schultz wants is the same solution I want. Plus, the coffee tastes like it's been burned.

It's earnings reporting season and today JPMorgan Chase reported a loss of $380 million. This is the first quarterly loss for JPMorgan under the reign of Jamie Dimon. The loss was connected to legal expenses. Dimon tried to explain that, “While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense.” The financial press picked up on that and the refrain was … leaving regulatory problems aside... JPMorgan would have turned a profit. But it was more than regulatory problems, it was legal problems. Big difference.

Of course that is a problem encountered by illegal enterprises of all stripes; crime doesn't pay; not in the long run. Earlier this year, when Dimon faced a shareholder referendum over his fitness to serve as both chairman and CEO of the legally besieged bank, some big Wall Street names came to his defense with a flawed rationale: the company was booking record profits; who cares about anything else? Maybe it's time to rethink.

Today, I saw Maria Bartiromo on CNBC trying to say the banks had done everything right and we should blame the regulators for not doing their jobs. That debate should be laid to rest. Just because the cops don't stop the crime, it doesn't mean the criminal is innocent.

And even if you get past the multi-billion dollar legal problems, the banks still have another problem. Mortgage production at JPMorgan Chase and Wells Fargo fizzled in the last quarter as fewer borrowers sought to refinance their home loans amid rising interest rates. Wells Fargo felt the most pain from rising rates. The bank reported $1.6 billion in mortgage banking income for the third quarter, a 43 percent drop from the same period one year earlier.  The slowdown reflects a shift in the housing recovery, which has largely been relying on refinance activity. The number of loans eligible for interest rate reductions dropped and interest rates have been higher, and if the Fed tapers, rates will move higher still. And if the politicians can't come up with some sort of deal over the weekend and if we actually see a default, you don't even want to imagine what will happen to rates.

About one week ago, it started to snow in South Dakota, the wind kicked up to 60 mph, and there was more snow; blizzard conditions; five feet of snow in some places. Cattle ranching is big business in South Dakota, about a $5.2 billion dollar industry. When the freak early snowstorm hit, the cattle hadn't yet grown a winter coat; it killed a lot of cattle, maybe 20,000, plus a yet to be determined number of horses, sheep, and other livestock. Losses like this would be enough to cripple many ranchers even in the best of times, especially with the loss of future calves next spring whose would-be mothers were killed, but with the federal Department of Agriculture still shut down, ranchers are cut off from the livestock insurance that would normally keep them afloat following a disaster like this.

The federal Farm Service Agency's livestock indemnity program, which offers compensation for lost livestock. As long as the government stays shut, FSA offices nationwide will be shut too, leaving ranchers without support.  Even before the shutdown, the insurance program was already threatened by delayed passage  of the new farm bill, which allocates money for a wide range of programs including food stamps and farm subsidies and what is basically insurance for farmers. While the shutdown debate rages, the Senate and House are still hashing out the farm bill, leaving the livestock indemnity program in midair.

There are about 8.5 million people in Switzerland, and of that total more than 100,000 have signed a petition which should result in a vote by the Swiss parliament on a modest proposal to provide a basic monthly income of about $2,800 to each adult in the country. The idea is called universal basic income and the basic idea is, no matter what you do, if you’re a resident, or a citizen you get a certain amount of money each month. And it’s completely unconditional: If you’re rich you get it, if you’re poor you get. If you’re a good person you get it, if you’re a bad person you get it. And it does not depend on you doing anything other than making whatever effort is involved to collect the money.

So far, the biggest opposition to universal basic income is from the left. They fear it threatens the existence of the existing social welfare systems there, because it’s very hard to finance both the full set and full range of social welfare institutions that exist already, and side by side to give people $2,800 a month.

Friday, August 16, 2013 - Who Knows?

Who Knows?

by Sinclair Noe

DOW – 30 = 15,081
SPX – 5 = 1655
NAS – 3 = 3602
10 YR YLD + .07 = 2.83%
OIL + .62 = 107.95
GOLD + 11.10 = 1378.20
SILV + .25 = 23.36

The Dow fell 2.2 percent for the week, its biggest decline since June 2012, while the S&P 500 dropped 2.1% for the week and the Nasdaq dropped 1.6%; their biggest weekly losses since June, 2013. It was a second week of losses for the major indexes. The yield on the 10 year note climbed to the highest level in 2 years. Gold settled at its highest price in almost two months.

The productivity of US workers rose more than projected in the second quarter. The measure of employee output per hour increased at a 0.9% annualized rate, after a 1.7% decline in the prior three months. Even with the second-quarter pickup, productivity was unchanged in the 12 months ended in June, below the average 2.4% annual gain in the 2000-2011 period. Businesses are reaching the limit of how much efficiency they can squeeze from their existing staff. So, we're at a point where any increase in demand could prompt more hiring, but we're not seeing an increase in demand.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment slipped to 80.0 from 85.1 in July. We're all consumers aren't we; that's how we are measured; that is our value to corporate America. Earlier this week I repeated the old idea that consumer spending is 70% of overall economic activity. One listener took me to task, writing: “Why do you keep perpetuating the lie that consumer spending makes up 70% of GDP when the federal government alone accounts for more than 20% State and local government accounts for more than 10%. Then there is business spending.  You are supposed to be the one busting these lies.”

By the way, if you would like to take me to task, the email is sinclair@moneyradio.com

The consumer spending thing is like a whole bunch of other statistics, which is to say, it's not very accurate. What government statistics call consumer spending is not what most people consider consumer spending. Most of it isn’t, anyway. Lots of that so-called consumer spending is in fact government spending; Medicare and Medicaid, for instance, are lumped in there, as is most health-care spending, which amounts to about $2 trillion a year,which might tend to throw the consumer-spending numbers off a bit. Health-care spending isn’t really driven by consumers but by insurance companies, government, and other non-consumer enterprises. Something on the order of 15 percent of health-care spending actually comes out of consumers’ pockets.

Other examples of not really consumer spending include money spent by nonprofits, for instance, along with political parties and campaigns. I think that bank fees and such are included in consumer spending numbers, and who knows what else, and it's a certainty that interest compounded into the economy accounts for about 30% of what we pay for everything; and I really don't know how the consumer spending numbers try to reconcile that data.

Never mind, for the moment, that a big chunk of that actual consumer spending goes to things like clothes and electronics and shoes made abroad, and the consumption of stuff made in China has little direct impact on domestic economic activity, the truth is that consumer spending, in reality, represents less than half of US economic activity, probably around 40 percent.

There is a formula for consumer spending, and almost anything can get tossed into the mix, and the formula has changed over time. It's estimated consumer spending was around 75% of the economy in 1929; it grew to 83% in 1932, largely because business spending dropped. Consumer spending dropped to 50% in World War II because of large expenditures by government and very low expenditures by individuals.

I think this gets back to the idea of whether demand or production drives consumption, and as a consequence, economic growth. I tend to think it is demand. Otherwise, the Fed's spending a couple of trillion dollars on Quantitative Easing would have resulted in real economic growth, rather than just inflating asset bubbles. A few trillion in Fed monetary stimulus never really found its way from Wall Street to Main Street. But back to original complaint; you have a point, the consumer spending numbers are skewed. But then GDP is also skewed; if someone buys cigarettes and gets cancer; the cost to treat the cancer is considered as part of GDP, as if it is adding to the growth of the economy rather than watching a part of the economy die. Meanwhile, they are just starting to factor in movies as having some economic value; and we're still a long way from having a poem contribute to GDP. So, yea, the consumer spending numbers are a myth and every economic number is skewed. You and me, we're kind of stuck with the numbers we get.

Anyway, today on Wall Street, retailers took a beating. From Wal-Mart and Gap to Macy’s and McDonald’s, chains that cater to middle- and lower-income Americans. Nordstrom, the luxury department store chain, reported lower-than-expected revenue in its second quarter Thursday, prompting the company to trim its full-year sales and profit forecasts. Nordstrom's has products in their stores, they just aren't finding demand for those products.

Everyone wants to talk about recovery, but it's more like the unrecovery. Look no further than Macy's for a snapshot of the consumer. For its namesake mid-tier department stores, Macy's reported the first decline in same-store sales in nearly four years this week, and said shoppers had been gravitating to its less expensive items. That's a contrast with Macy's upscale Bloomingdale's, which came in with strong results.

The trend also turns up in results posted on Thursday by Wal-Mart, which emphasizes low pricing. Its sales at stores open at least a year unexpectedly fell 0.3 percent last quarter, a second decline in a row, prompting the world's largest retailer to lower its sales forecast for the year.

Last week, a group of retailers including Costco and Gap reported modest gains in July same-store sales, thanks largely to bargains. Adding to the pressure, Macy's said many shoppers are redirecting their spending to their cars, housing and home improvement.

Automakers reported a 14 percent sales increase in July from a year earlier. Home improvement chain Home Depot is expected to report same-store sales rose 7 percent. Outside of home improvement and cars, many retailers say economic conditions were less than ideal.

In July, U.S. employers slowed their pace of hiring, with the number of jobs outside of farming increasing less than economists expected. The average price for a gallon of gasoline in the United States was still high: at the end of July, it was $3.67 compared to $3.51 a year earlier, according to the Lundberg survey. And the problems in Egypt could push the price at the pump into an upward spiral at any moment.

As of May, 47.6 million Americans, or one in seven, received food aid - highlighting the ongoing strain on Americans struggling to make ends meet. That was 1.1 million more than a year earlier, and 7 million more than in 2010. Real wages are also stagnating: they fell 0.1 percent between June 2012 and June 2013, according to the Bureau of Labor Statistics, excluding inflation and civil servants and military personnel.

Wal-Mart Chief Financial Officer Charles Holley told reporters on a call: "The consumer doesn't quite have the discretionary income, or they're hesitant to spend what they do have."

A recent government report showed 5.7 percent of Americans who had jobs in July could not get enough hours to qualify as full-time workers, the same percentage as in June. While the unemployment rate has fallen steadily over the last year, the share of part-time workers who want more hours has barely dropped, according to BLS statistics. Workers are not doing well. They're losing ground because wages are not growing in real terms.

And so, consumers are holding onto their purses. Macy's said shoppers at its namesake chain were holding back on anything nonessential, adding it didn't expect to make up the sales shortfall this year and cut its forecasts. Kohl's said comparable sales had slid for purchases paid for with a credit card, transactions typically made by people on a budget. And both Wal-Mart and Costco said sales of higher-ticket items such as electronics and games have been soft. Several companies have said shoppers are waiting longer to buy back-to-school items, suggesting they are waiting for deals and that they see no urgency to hit stores. This week's results may presage more of the same next week, when big chains like Target, J.C. Penney and Sears report earnings.

Consumer spending may not account for 70% of the economy but the consumer is weary these days. If there really is a recovery, it hasn't made it to Main Street, and without demand, there won't be growth. And for now, the beatings will continue until morale improves.

Friday, July 26, 2013 - Notes from the Favela

Notes from the Favela

by Sinclair Noe

DOW + 3 = 15,558
SPX + 1 = 1691
NAS + 7 = 3613

10 YR YLD - .01 = 2.56%
OIL - .82 = 104.67
GOLD - .30 = 1334.80
SILV - .26 = 20.09

Earlier in the week, the Dow and S&P hit record highs but the markets slipped; earlier today the Dow was down 150 points. For the week, the Dow rose 0.1 percent, the S&P 500 was flat (even as it hit a record) and the Nasdaq rose 0.7 percent.

It's Friday, and I have a bunch of notes and scraps that have been piling up, so we'll clean the desk, in no particular order.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment climbed to 85.1 from 84.1 in June, topping expectations for 84. It was the highest level since July 2007 and was also an improvement from July's initial reading of 83.9. Of course, if you paid a premium subscription, you could have had that information before the rest of the market.

Yesterday, I mentioned former Fed Chairman Paul Volker's remark that the only real financial innovation in the past 20 years was the ATM, which is actually about 30 years old now. And Volker wasn't quite right; the banks haven't done any real innovation but the hackers have. For nearly a decade, a band of cybercriminals rampaged through the servers of a global business who's who: Among the victims were 7-Eleven, Dow Jones, Nasdaq, JetBlue and JC Penney. Prosecutors say the hackers stole "conservatively" 160 million credit card numbers, and the dollar value of the crimes they helped facilitate is enormous; just four of the victims are out $300 million. The prosecutors say it's the largest data heist case ever and the suffering caused to identity theft victims was "immeasurable".

On Thursday, five of the gang's members were indicted. One is in custody in the US, a second is awaiting extradition in the Netherlands, and three more are still at large. Maybe if the banks paid more attention to providing a safe place to store money and a safe way to facilitate digital transactions, and if they spent less time trying to trade derivatives; maybe there could have been some financial innovation that actually was innovative.

The Federal Housing Finance Agency says the Swiss bank UBS has reached a settlement and will pay $415 million to the government-sponsored housing enterprises Fannie Mae and $470 million to Freddie Mac to resolve claims of misrepresenting the quality of collateral backing securities sold to Fannie and Freddie between 2004 and 2007.

The bank has already paid out $612 million to settle allegations of manipulating interest rates. UBS is now the third bank to settle with the FHFA after Citigroup and General Electric did so for undisclosed sums. UBS is just one of 18 banks the FHFA pursued in 2011 for allegedly lying about the quality of the collateral backing securities; essentially packaging subprime loans and selling them as a better quality.

 Home Affordable Modification Program or HAMP has been something of a disappointment nearly from its inception. After loudly touting the program’s ability to help 4 million borrowers, the administration was forced to concede it had barely helped a fraction of that number, or roughly 1.2 million mortgage modifications; and some advocates and administrators in the program actually came right out and declared the thing a failure. However, in recent months, we’ve been hearing a lot about how HAMP is finally getting going and hundreds of thousands of borrowers are getting the loan modifications that they need. What we haven’t heard until now, though, is just how many of them are re-defaulting on those loan modifications just months or years later; the number is now at 306,000.

I can see why many people think the HAMP program is a dud, but just to maintain perspective the Hope For Homeowners plan initiated by President Bush set aside $300 billion to refinance toxic loans and in 3 years time it managed to modify 71 loans; and the FHA-Secure plan managed to refinance 4,100 mortgages over a 3 year span. As far as the high number of re-defaults, the modification programs never dealt with the underlying problems, and for many, relief was just too little, too late.

One year ago today, Mario Draghi, the president of the European Central Bank spoke at an investment conference and he said:  "the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." The speech seemed to revive markets and stave off what looked like an impending collapse. A few weeks later, Draghi introduced OMT, or Outright Monetary Transactions, a conditional bond buying program. Spanish and Italian bond yields stabilized, even though the ECB hasn't actually used OMT to actually buy bonds. Germany’s constitutional court is due to rule later this year on OMT’s legality under German law. The ECB hasn't exactly managed to forge a solid plan, and so the financial improvement has not been accompanied by a meaningful change in what matters most: namely, the ability to generate economic growth, create jobs and arrest excessive income and wealth inequalities.

Earlier this week we marked the 3 year anniversary of the Dodd-Frank Act. Which is to say it was passed onto law, although less than half of the Act has been enacted. Mainly, it's been a battleground for bank lobbyists trying to tear out the entrails.

A federal grand jury indicted Steven A. Cohen's hedge fund SAC Capital Advisors on fraud charges. The hedge fund was charged with wire fraud as well as four counts of securities fraud, and the government is seeking to force SAC to surrender any fraud-related profits. According to the indictment from roughly 1999 to 2010, SAC obtained and traded on inside information to boost returns and fees and that the scheme involved a number of portfolio managers, research analysts and dozens of publicly traded companies.

The government has also filed civil money-laundering charges against the firm, which call for fines and penalties to be determined at a trial, the date of which hasn’t been set. Those civil charges pose the greatest threat to Cohen’s fortune because prosecutors allege that if the fund reinvested the proceeds of illegal insider trading into its capital pool, then the entire pool is tainted and subject to forfeiture, but it's expected that prosecutors won't try to go after the entire amount.

SAC oversaw $6 billion for outsiders at the start of this year, but have since withdrawn about $5 billion. The big question for those folks is whether they will face clawbacks. SAC is almost like Cohen's personal hedge fund; he has about $7.5 billion in SAC’s funds and employees account for $1.5 billion of assets. And the fund is conducting business as normal, or somewhat normal. Cohen wasn't named in the criminal indictment and faces no threat of prison time. In the corporate criminal world, avoiding indictment is the key battleground.

What does it take to be considered wealthy? A new survey finds the majority of people with a net worth of between one and five million dollars do not consider themselves wealthy; 28 percent of people worth between $1 million and $5 million call themselves wealthy. For people worth more than $5 million, just 60 percent of them say they’re rich. Of those surveyed, 50 percent said they’d consider themselves rich if they had no financial constraints on activities. So, it's not really a number.

Tell that to Eike Batista; he's the Brazilian oil tycoon who started 2012 as the eighth richest person in the world; net worth estimated at $34 billion; now that has dropped to $200 million. You might think that $200 million is a lot; if you had that money, you might think you were wealthy, but I'm not sure if that's how Batista feels. So, it's not really a number.

A few months ago, a Senate committee grilled Apple CEO Tim Cook over the company’s creative accounting strategies, accusing it of cheating the U.S. Treasury by stashing away billions of dollars that live in no tax jurisdiction at all. The company didn’t dispute the truth of the accusations, but blamed the United States for building a tax system that makes bringing overseas earnings back to the United States very expensive, and proposed simplified rules that would make it cheaper to do so.

The Organization for Economic Cooperation and Development has been working on the problem; in February they issued a report. The G20 held a meeting last weekend and they said they want a more globally uniform tax system, and they want the OECD to finish up a a concrete plan to crack down on tax cheats, and they want that plan within the next 2 years.

More problems for Boeing's troubled 787 Dreamliner today; one was grounded, an oven overheated in another and damage was found in wiring on two other planes. It's turning out to be like a flying cruise ship.

Halliburton Co has agreed to plead guilty to destroying evidence related to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, which killed 11 workers and left a horrific mess. The guilty plea is the third by a company over the spill, and requires the world's second-largest oilfield services company to pay a maximum $200,000 statutory fine; that's about how much Halliburton earns every 23 seconds, based on 2012 revenue numbers. Halliburton also made a separate, voluntary $55 million payment to the National Fish and Wildlife Foundation, plus 3 year probation.

Meanwhile, another Gulf of Mexico drilling rig caught fire this week off the coast of Louisiana. The blaze broke out Monday on a natural gas platform. The rig partially collapsed, but then sand and sediment covered up the spill and the fire is out or nearly out; and because it is natural gas it dissipated quickly in the ocean water. No one was injured.

Meanwhile, TEPCO, the Tokyo Electric Power Company finally admitted today, what had been suspected for quite some time; the Fukushima Dai-ichi nuclear power plant, the one damaged in the 2011 eathquake and tsunami, has been leaking contaminated water into the ocean. They don't know how much damage has been done by the leaks; they don't have a plan to clean it up and they don't seem to have a plan to stop it.

The northeast of Brazil is largely poor and rural. Years ago, there was a migration to the South, to the major cities of Rio de Janiero and Sao Paolo. The migrants were looking for jobs, industrial jobs. There were more people looking than getting. The migrants camped out. In Rio, they camped out in the hills surrounding the city. Eventually the encampments turned into shacks, the shacks turned into homes, but the entire process was haphazard. The homes lacked modern conveniences, and so the residents strung up illegal lines, they built illegal plumbing. The shacks turned into homes turned into small cities; slum cities known as favelas. The houses were built close together, the roads often not more than a tight alleyway, difficult for police to patrol. Poverty and unemployment were high. Gangs soon became a stronger authority figure than police; crime was pervasive; hope was not.

The favelas grew over time. In Rio, a city of more than 11 million people, it is estimated that more than 4 million live in favelas, or slums. The largest favela, Rocinha, is home to more than 500,000. Last year, the government sent in police with machine guns and armored vehicles to clean up the favelas in advance of the World Cup Soccer tournament next year, and the Olympic Games in 2016. You would probably not feel safe walking through a favela.

There is a favela in the north part of Rio, known as Varginha; it is very poor and violence is common. Built on swampland, Varginha is one of several favelas that have been "pacified," meaning the drug lords who once ran the place have been ejected or subdued by authorities. The government has allocated money for community centers, libraries and a train station. But residents say they have received more broken promises than actual help, and basic services such as sanitation remain woefully unavailable. They also complain that police are abusive and treat everyone like a criminal.

Pope Francis is visiting Brazil. He is not meeting with Brazil's president; the Pope instead headed to Varginha, telling residents of the notorious slum that their leaders must do a better job of helping them. The Pope said public authorities and "those in possession of greater resources" must "never tire of working for a more just world, marked by greater solidarity!" He told the crowds that "No one can remain insensitive to the inequalities that persist in the world!"

It was the most political message yet in the pope's pilgrimage to Brazil, and for many it echoed the enormous protests that erupted last month among Brazilians angry over government corruption, excessive state spending on upcoming international sports events, and lack of basic services such as education and healthcare.

And then after visiting the favela, he went to another favela, known as the City of God and he visited with recovering drug addicts, saying , “It is necessary to confront the problems underlying the use of these drugs, by promoting greater justice, educating young people in the values that build up life in society, accompanying those in difficulty and giving them hope for the future.”

And along the way, the Pope opened the windows of the Popemobile and even got out to walk with the crowds of people and kiss babies and give hugs and blessings to the crowds of people; he visited a little speck of a Catholic chapel; he just walked up to the modest home of a local family and was welcomed like a long lost brother. The security detail must have freaked out, but even in the most dangerous and violent slums of South America, there was not even the hint of a problem.

He stressed to the people of the favelas that he is on their side, saying: “The church offers its collaboration on all initiatives that lead to the development of all people. The church is with you. The pope is with you.”

Hours later, speaking under a rainy sky at the beach in Copacabana, the pope’s message to the more than one-million faithful was to shake up the church and make a “mess” in their dioceses by going out into the streets to spread the faith. He was less political and more centered on the importance of believing in Jesus. “He is a friend who does not defraud. ”

There has been revolution in the Middle East – the Arab Spring, and the n the Arab Spring-Part2. And throughout much of Europe there have been protests, especially in the periphery. It seems that we have forgotten what is important. How much real-world difference the papal visit might make remains to be seen. John Paul II visited the favelas of Rio in 1980, and obviously the underlying problems hardly disappeared in the intervening 33 years, but the Pope is the spiritual leader of more than one billion souls. And even if he can't change the reality on the ground, maybe he can make us consider how we keep score. He said, "The measure of the greatness of a society is found in the way it treats those most in need, those who have nothing apart from their poverty."