Wednesday, October 23, 2013 - Rally Fizzles

Rally Fizzles

by Sinclair Noe

DOW – 54 = 15,413
SPX - 8 = 1746
NAS – 22 = 3907
10 YR YLD - .03 = 2.48%
OIL – 1.05 = 97.25
GOLD – 7.50 = 1334.70
SILV - .15 = 22.66

So, after a five day rally we finally got the fizzle. The markets don't go straight up and the market had run quite a bit. The S&P 500 advanced 23 percent this year through yesterday, pulling within a half percentage point of the 23.5 percent gain in 2009. The S&P 500 was valued at 15.9 times estimated earnings as of yesterday, the highest since December 2009. While that’s up 16 percent this year and starting to feel a bit frothy, it’s still below the multiples at the market’s two previous peaks, when the ratio reached 16.5 in October 2007 and 25.7 in March 2000. Of the 169 S&P 500 companies that have reported results this season, 76 percent exceeded analysts’ predictions for profit, while 54 percent beat sales estimates.

And 87% of stocks in the S&P 500 traded above their average prices from the past 50 days. Today, though 7 out of 10 main industries in the S&P 500 declined, with commodity, consumer-discretionary and financial companies dropping at least 0.6 percent to lead the retreat.

Treasury yields fell to their lowest in three months on more bets that the Federal Reserve will maintain its stimulus efforts until next year. The Fed is kind of handcuffed from doing any tapering; the consensus is pushing it out to March. The weak jobs number supports it.

If you're looking for health insurance at healthcare.gov, don't despair. Help might be on the way. Republicans on the House Committee on Energy and Commerce have asked John McAfee to review the HealthCare.gov website. McAfee created the McAfee Anti-virus software company that bears his name. He sold that a few years back. House Committee on Energy and Commerce counsel Sean Hayes wrote to McAfee’s lawyer on Oct. 14. “For three years we have been monitoring the implementation of the law and have been trying to dig into what has happened with the Exchange rollout. Given the failures of Healthcare.gov, and Mr. McAfee’s expertise, I was hoping he might be able to discuss his views with staff on the hill.” McAfee declined to provide assistance. The back story on McAfee involves fugitive flight from a home in Belize following the death of a neighbor, deportation from Guatemala to the US, and some very bizarre behavior. He hasn't been indicted in the US. Meanwhile, or next best hope is that Edward Snowden decides to come home from Russia; don't hold your breath.

There was a strange phone call today; I'm sure it was somewhat awkward. The German government has obtained information that the United States may have monitored the mobile phone of Chancellor Angela Merkel and today Merkel called President Barack Obama to demand an immediate clarification. A spokesman for Merkel said she told Obama that if such surveillance had taken place it would represent a "grave breach of trust" between close allies. "She made clear that she views such practices, if proven true, as completely unacceptable and condemns them unequivocally," the statement read.

White House spokesman Jay Carney, responding to the news in Washington, said Obama had assured Merkel that the United States "is not monitoring and will not monitor" the communications of the chancellor.

The news broke as Secretary of State John Kerry, on a visit to Rome, faced fresh questions about mass spying on European allies, based on revelations from Edward Snowden, the fugitive former US intelligence operative granted asylum in Russia.

French President Francois Hollande is pressing for the US spying issue to be put on the agenda of a summit of European leaders starting on Thursday. He also called Obama earlier this week after French newspaper Le Monde reported that the National Security Agency (NSA) had collected tens of thousands of French phone records in a single month between December 2012 and January 2013. The paper said NSA appeared to be targeting people tied to French business and politics as well as individuals suspected of links to terrorism.

Merkel is not the only foreign leader whose personal communications may have been monitored by the United States. Last month Brazilian President Dilma Rousseff called off plans for an October state visit to Washington because of similar revelations.

We can tap phone calls around the world but we can't figure out how to sell health insurance on a website; go figure.

The Securities and Exchange Commission voted unanimously to propose rules that, for the first time, would allow investors to buy stock in companies over the Internet using a crowdfunding exchange. These rules could reinvent the way that companies raise money by allowing them to bypass the traditional costs of going public, which usually involved hiring costly investment bankers and accountants.

The SEC's vote on so-called equity crowdfunding is in direct response to Title III of the JOBS Act, passed last year, in which Congress is looking for a loophole to allow smaller companies to get an exemption from the strict rules controlling the sale of securities to individuals. Congress is hoping that by using Internet crowdfunding, small and promising companies could gather capital needed to grow and expand from a wide pool of investors. These companies could, in theory, raise money they need to grow well before they could afford the relatively high costs of a traditional initial public offering.

The rules would create a new financial entity, called a funding portal, which would be a Web site that would electronically connect investors with young companies looking to raise money. The SEC's approval is needed since such sites are banned today in order to protect investors. Currently, such Web sites would need to be registered with the SEC as a broker, giving the SEC power to oversee the entity. Furthermore, such private sales could only be offered to "accredited investors," or wealthy investors savvy enough to know the risks. The companies selling stock through portals would also face restrictions. Companies would have to disclose details on any investors or officers owning 20% or more of the company. Financial statements of the company's operating history plus a tax return, not to mention details about certain financial dealings between officers and outside companies would need to be disclosed.

Crowdfunding has drawn wide interest because it will be open to any investor regardless of their income or net worth. Under the proposal, crowdfunding must be done online through an entity that provides investors with forums to ask questions and communicate about a deal. All investors, not just the so-called accredited investors, will have the opportunity to invest in entrepreneurs and their ideas at an earlier stage than ever before. 

Businesses using crowdfunding could raise no more than $5,000 a year from someone whose income or net worth is less than $100,000. Investors with income or net worth greater than $100,000 could contribute as much as 10 percent of their annual income or net worth, to a maximum of $100,000 in one year. The proposal doesn’t require businesses or funding portals engaged in crowdfunding to verify compliance with those restrictions. Instead, a crowdfunding portal must ask investors to disclose their income or net worth as a means of determining compliance.

Even after the SEC vote, equity crowdfunding doesn't become a reality. There will be a 90-day period for the public to issue comments. The SEC will then review those comments and make a final determination.  The process of approving crowdfunding has taken much longer than most expected as the regulator balances the need to help companies raise capital, but protect investors from scams.

Meanwhile, a federal jury in New York today found Bank of America's Countrywide unit liable for defrauding Fannie Me and Freddie Mac by selling them thousands of defective loans. The jury also found Countrywide executive Rebecca Mairone liable for fraud. District Judge Jed Rakoff, who presided over the trial, told lawyers he will determine the amount of any civil penalty later. The government is seeking a penalty more than $848 million, considered the gross loss to Fannie Mae and Freddie Mac. Alternatively, the government argues the penalty should be more than $131 million, the estimated net loss.

After the jury left, Rakoff listened to arguments on whether he should consider the net loss or gross loss when deciding the penalty. He also ordered both sides to submit written arguments on whether there is a cap on the penalties he can impose.

This goes back to a 2007 Countrywide program called the High Speed Swim Lane, or HSSL, which later became known as the “Hustle”; a fast track program for subprime loans. What makes this unique is that this is the first case by the government against a bank over bad mortgages to go to trial. Before the Hustle Case, everything else was swept under the rug or settled without trial. This is the first trial – and Bank of America lost.

We've talked and will continue to talk about the tentative $13 billion settlement between JPMorgan and the Department of Justice. Now comes word JPMorgan is in settlement talks with the bonds’ buyers who are seeking at least $5.75 billion. A group of investors including asset managers Blackrock and Neuberger Berman Group has been negotiating with the bank during the past year to recoup losses incurred when underlying loans soured. This is still in the talking stage and an agreement isn’t imminent and the amount may change.

Monday, September 23, 2013 - Almost Reality

Almost Reality

by Sinclair Noe

DOW – 49 = 15,401
SPX – 8 = 1701
NAS – 9 = 3765
10 YR YLD - .03 = 2.70%
OIL – 1.37 = 103.38
GOLD – 3.30 = 1323.30
SILV - .16 = 21.74

If we remain on our current trajectory, in about one week the government will shut down. It doesn't shut down everything and not all at once, but it is a pretty big deal. Here's how it might affect you:

Many federal workers will be furloughed, and they might even receive pay retroactively. Not all fed workers stay home; air traffic controllers, meat inspectors, and a few others will remain on the job. The post office will continue to deliver mail. National parks will be closed. The military will still report to duty but they will be paid in IOUs ( I still haven't heard if they can cash the IOUs to buy bread but I'm sure somebody is figuring that out). Social Security checks will be mailed more or less as usual. No gun permits will be issued. The IRS will continue to collect taxes. No government loans to small businesses. Trash collection in Washington DC will stop; that's a federal job and not considered essential (give it a couple of weeks and that might change). The Republicans want to defund Obamacare in exchange for funding the government. But the health care act at the center of this storm would continue its implementation process during a shutdown. That's because its funds aren't dependent on the congressional budget process. And finally, both the Senators and the House of Representatives will continue to get a paycheck. Go figure. All the politicians say a shutdown is a bad idea, so I guess that means there's a good chance it will happen.

Of course last week, the market moving news was “no taper” from the Federal Reserve. The Fed is still concerned about a variety of things, including frothy markets, and so since the “no taper” announcement, or actually a non-announcement, the Fed has been talking down the markets. Last Friday, St. Louis Fed President James Bullard said taper could happen in October.

Today, Dallas Fed President Richard Fisher warned that by standing pat the Fed had hurt its credibility and said he had urged colleagues to support a $10 billion reduction in the Fed's bond-buying program at last week's meeting.

At a separate event, William Dudley, president of the Federal Reserve Bank of New York, said in a speech the timeline that Fed Chairman Ben Bernanke articulated in June for scaling back the central bank's stimulus measures is "still very much intact," as long as the economy keeps improving. Dudley says the Fed still needs to push hard against threats to the economic recovery, and fiscal uncertainties in particular "loom very large right now." 

Over the weekend there was an election in Germany. Angela Merkel won – big. Merkel's Christian Democratic Union and its sister party, the Christian Social Union, won 41.5% of the vote, with analysts calling the win a personal victory for the 59-year-old. Merkel is on track to overtake Margaret Thatcher as Europe's longest-serving female leader. The historical dimensions of the election were clear, with Merkel set to become just the third postwar chancellor to secure three election wins, after Konrad Adenauer and Helmut Kohl. She has also bucked the European trend by becoming the only leader in the eurozone, from left or right, to be re-elected since the snowballing of the eurozone crisis in 2010. Out of 17 countries, 12 governments have fallen, indicating how protected Germans feel from the crisis under Merkel's leadership.

Germany is not an island, it has benefited from membership of the euro, presenting it with an in effect undervalued currency, and the fortuitous explosion in demand for its high-quality manufactured goods by China; but Germany also has some real concerns, such as income inequalities, awful demographic projections, faltering investment levels, crumbling infrastructure, and inadequacies in higher education and in research and development. Post-election Germany will have a similar approach to pre-election Germany: legalistic, cautious and resistant to grand plans and gestures, no matter how much its European neighbors are looking to it to act.

Today marks an historic day for entrepreneurship and early stage finance, as Title II of the JOBS Act goes into effect. For the first time in nearly 80 years, private startups and small businesses can raise investment funding publicly, through general solicitation including: radio, TV, print, and internet, including sites like Facebook or Twitter to help spread the word, and taking in investment online via equity crowdfunding sites who power the investment process in a more open and collaborative way.

Before today, publicly advertising the fact that you were raising investment (general solicitation) was against the law for early stage private companies. Fundraising from the general public was the exclusive domain of larger companies who can afford to spend the millions it takes to become listed on stock exchanges like the NASDAQ.

But now, as a result of Title II, early stage investing has become more public, kicking off one of the largest new capital markets in our time. Back in 1933, when the Securities Act was passed, it created a ban on general solicitation (advertising investments to the general public for private companies). At the time, radio was the dominant communication medium, and there was little access to open information, education, or disclosures to help protect investors.

While these laws passed in 1933 helped reduce fraud at the time, they also had unintended consequences that hurt honest everyday small business owners and entrepreneurs, restricting them in their efforts to attract potential investors and critical seed and growth capital.

The world has changed since 1933, and early stage investing has been long overdue to catch up. Today, as these laws finally roll out, we now have clarity and a path for open and public fundraising for startups and small businesses. In short, companies who file Form D with the SEC prior to doing so can generally solicit to the public. Within 15 days from soliciting they must disclose additional information about the solicitation.

To simplify the details down for you, here are the basics:

For Startups & Small Businesses:

You can now generally solicit and advertise publicly; only accredited investors can actually invest in generally solicited companies; file Form D with the SEC before you begin soliciting, letting them know you will; disclose details about your general solicitation to the SEC within 15 days from first solicitation; strict verifications done by companies are required to confirm that each investor is accredited; the penalty for not adequately meeting and following general solicitation requirements with the SEC is being banned from fundraising for a full year.

For Investors:

Only accredited investors can invest in companies who generally solicit; qualifying as accredited means having $1 million in net worth, or making over $200,000 a year for the past 3 years; investors will need to prove accredited investors status, which can be done through written confirmation by a CPA, attorney, investment advisor, or Broker-Dealer, or income-related IRS forms.

 For companies fundraising, the growth of these capital markets and the movement towards online systems and investment crowdfunding is going to bring much greater potential access to capital and opportunity. Most early stage entrepreneurs don’t have an existing network of wealthy potential investors, and fundraising is hard.

Now that the general solicitation ban is lifted, within a matter of days startups and small businesses can leverage the internet and other marketing tools for their fundraising, to reach potentially thousands of potential investors. Prior to this, reaching a targeted audience of 20 or more active investors often took 4 to 6 months.

According to current regulations, businesses may not raise money with non-accredited investors. Title III of the JOBS Act will create rules and a path for non-accredited investors to begin investing in companies, but the SEC has yet to finalize any rulings. The timing of Title III is expected to include a proposal and a commenting period coming this Fall, and for finalized rulings and a vote in early 2014.

It's a brave new world, and as always, caveat emptor. Some people think the JOBS Act will lead to fraudulent activity by startups, but we don't need the JOBS Act for that. Today we learn the Justice Department is preparing to sue JPMorgan on civil violations of securities laws in offering mortgage bonds from 2005 to 2007 that were backed by subprime and other risky residential mortgages. The bank disclosed in August that federal prosecutors in California were conducting criminal and civil investigations into the bank's mortgage securities.

Five years after the financial crisis, sparked, at least in part by banks and mortgage lenders who claimed that toxic loans were in fact AAA-worthy -- wiped out trillions of dollars of wealth and led to demands for accountability. There had been widespread fraud, after all, and somebody had to pay. And so federal prosecutors teamed up with three other federal agencies to launch and execute a major criminal investigation. And finally they have a high profile indictment.

Teresa and Joe Giudice, (I'm not sure about the pronunciation. Judy-Chay?) stars of Bravo's "Real Housewives of New Jersey." Their crime? Lying to banks on mortgage applications. U.S. Attorney Paul J. Fishman said, "Everyone has an obligation to tell the truth when dealing with the courts, paying their taxes and applying for loans or mortgages. That’s reality." Get it? The prosecutor told a funny; that's reality, because they are on a reality TV show. While the federal prosecutors were cracking jokes and patting themselves on the back for taking down the Giudices, the leaders of the Wall Street firms actually responsible for doing catastrophic damage to the financial system remained free to enjoy the money they made while overseeing the near-collapse of the global economy. That's reality.