Tuesday, January 08, 2013 - Thank You, America

Thank You, America

DOW – 55 = 13,328
SPX – 4 = 1457
NAS – 7 = 3091
10 YR YLD -.03 = 1.87%
OIL +.06 = 93.25
GOLD + 13.20 = 1661.10
SILV + .24 = 30.50

Some people have debated what we should do if the banks get into trouble again; should they be bailed out? The Too Big to Fail Banks of 2008 are even bigger today, and if one collapses, then there would likely be a cascading effect through the global financial system. So, if a big financial institution gets into trouble, should there be a bailout, or do we just say “tough luck”? You probably have an opinion, and reasonable people can debate the issue, or at least there could be room for reasonable debate, until now. As of today, there is no more debate.

If you go to Webster's Dictionary and look up the word “ingrate”, you will find a picture of Maurice “Hank” Greenberg; the guy who founded American International Group, AIG, the huge insurance company that in 2008 accepted a $182 billion dollar bailout from the Treasury. Hank Greenberg, the former CEO of AIG is contending in a lawsuit that the government treated the company’s shareholders too harshly when carrying out its 2008 rescue of the insurance giant. AIG is weighing whether to join the lawsuit, filed by Mr. Greenberg’s investment firm, Starr International Company, which owns about 12% of AIG. In addition to founding AIG, Greenberg gained notoriety for a high profile fraud case in 2005 that pushed him out of his CEO role at AIG. Greenberg was accused of using sham transactions to mask the company's financial position.

So far, AIG has not joined in the suit with Greenberg. The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr. Greenberg could challenge its decision to abstain. Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. In other words, the board of directors may have a fiduciary duty to sue the government.

One of Starr International’s major arguments is that AIG’s bailout terms were far tougher than those granted to other large financial firms. Greenberg has accused the New York Fed of using the rescue to bail out Wall Street banks at the expense of shareholders, and of being a "loan shark" by charging exorbitant interest of 14.5 percent on the initial loan. 

The Treasury did force AIG to do things which were against their very nature. AIG was forced to pay full settlement on credit default swaps; one-hundred cents on the dollar, to the tune of more than $12 billion to Goldman Sachs alone. Now remember these credit default swaps were a form of insurance but they weren't insurance, and they were and remain largely unregulated. CDS is not like insurance in that it does not require reserves be held to pay off claims. The whole idea behind CDS was to collect premiums without ever paying claims. To force AIG to make full payment on a CDS claim was unprecedented and now Greenberg claims it was cruel and unusual punishment.

AIG’s cash needs and internal failings were in many ways far more serious than those of other institutions. In fact, the company was in such dire straits after the rescue that the government eased up on the terms. The concessions were considerable.

In early 2009, the Federal Reserve cut the interest rate on a big loan to AIG, saving the company about $1 billion a year in interest. Then the Treasury exchanged $40 billion of preferred shares for new ones that effectively paid no cash dividends to taxpayers. If it had paid the originally agreed 10 percent dividend on all these and other preferred shares, the insurer would have paid roughly $20 billion from the beginning of 2009 to the end 2012. Instead, the preferred shares were converted into common stock, which the government later sold, purportedly turning a profit of about $22 billion.

The bailout eventually worked out for AIG. After losing half its value in 2011, the stock rose more than 52 percent in 2012, tripling the gains of the broader S&P insurance index. Things worked out so well for AIG that they are now running a television ad campaign called “Thank You, America” in which it offers its gratitude for the bailout.

Mark Twain was right; truth is stranger than fiction because fiction is obliged to stick to possibilities.

Seriously, thank you, America.

There has been a lot of talk about breaking up the big banks, cutting them down into smaller banks that don't threaten the global financial system. The Dallas Federal Reserve has called for breaking up the biggest banks. Texas Republican Jeb Hensarling, the new Chairman of the House Financial Services Committee has expressed concern about the Too Big to Fail banks. Elizabeth Warren was elected in Massachusetts and she will sit on the Senate Banking Committee. Even Sandy Weill and John Reid, co-founders of Citigroup, which originally pushed through legislation which destroyed Glass-Steagall; they are now proposing that Glass-Steagall be reinstated and the biggest banks be broken up. The timing would seem to be right. Don't hold your breath.

The bank lobby will fight any attempts to break up the banks. Eventually, we will come back around to a big bank or insurance company on the verge of collapse and begging for a bailout; it's inevitable; the banksters continue to gamble in the derivatives markets, and eventually all gamblers lose, and when they lose.., please, please remember the story of Hank Greenberg and AIG.

Alcoa has kicked off the fourth quarter earnings reporting season by posting a profit of $242 million, or 21 cents per share, compared with a net loss of $191 million, or 18 cents per share, in the year-ago period. Excluding one-time items, net income was $64 million, or 6 cents per share, in line with average analysts' expectations of 6 cents.

Alcoa is supposed to provide clues about earnings, but I've never found a good correlation. Instead the earnings season has become little more than an exercise in obfuscation. Take the phrase “excluding one-time items”; that means the cost of doing business. Lucy Kellaway at Financial Times has come up with what she calls the Golden Flannel Awards, a mock celebration of corporate malarkey. Here's an example from one annual report: “In the wholesale channel, Burberry exited doors not aligned with brand status and invested in presentation through enhanced assortments and dedicated customised real estate in key doors.” I don't know what that means, but it might surprise you to learn that Burberry sells raincoats and they don't manufacture doors. Another company, called Record, does manufacture doors, which they call “entrance solutions”.

Sometimes companies create new words, such as: solutioneering, sustainagility, or innovalue. Sometimes, companies say things that are just designed to hide reality; for example, Citigroup issued a press release that talked about “optimizing the customer footprint across geographies,” which means they fired 1,100 workers. Citigroup also got the top prize by declaring that from now on they would offer “client-centric advice”. Sounds good until you think about what they've been offering up to now.

I still think it will be hard to top AIG's “Thank you, America.”

Anyway, welcome to earnings reporting season.

So, I was away on vacation over the holidays, but I'm catching up on the fiscal cliff deal. It has some interesting provisions; lots of little and not so little special deals, especially in the form of tax breaks. For a bunch of lawmakers who were supposedly so busy and so involved in "negotiations," they were remarkably productive when it came to special interests.

There's $9.7 billion over the next 10 years on additional subsidies for student loans or $5.6 billion for adoptions, although both those figures seem like a lot considering that employer-provided childcare is getting only $209 million. More money is at stake in subsidies for various businesses, $46 billion, and $18 billion for alternative energy. 

There's a special 50% tax credit for maintaining railroad tracks is projected to cost $331 million over the next two years.

Tax benefits for certain motorsport racing track facilities, such as Nascar, will cost more than $100 million over the next seven years.

Business property on Indian reservations will receive $660 million in tax breaks over the next three years. Indian employment tax credits will total $119 million over the next four years. Tax breaks for Alaskan Natives receiving trust income will add up to $46 million over 10 years.

More favorable deductions for contributions of food to charities will cost $314 million over two years. For contributions of property, the benefit will be $225 million over a decade.

Film and television production got the last-minute extension of tax write-offs worth $430 million over the next two years.

Businesses in Puerto Rico will receive $358 million over the next two years. In addition, a temporary increase in the excise tax rebate on rum production will give Puerto Rico and the U.S. Virgin Islands $222 million, much of which will go to benefit local rum distillers.

Regulated Investment Companies, such as mutual funds and real estate investment trusts, are to receive $211 million in tax benefits over the next two years. Some of that pertains to dividends paid to foreign investors.

Over the next two years, additional economic development credits for American Samoa will cost $62 million.

Over the next three years, $7 million will go to expand credits for plug-in electric vehicles to include motorcycles. That's a 10% rebate, up to $2,500 for buying an electric scooter.

$59 million in credits for fuel made from algae and expanding benefits for certain other biofuels.

Tax credits for renewable diesel fuel and small agricultural producers of biodiesel will total $2.2 billion over the next five years.

Asparagus growers will get $15 million.

There’s a provision that allows workers to convert conventional 401(k)s into Roth 401(k)s at a cost of $12.2 billion over the coming decade.

There were big breaks for private equity firms and hedge funds, including the

the continuation of the “carried interest” which in effect allows sophisticated investment managers to postpone their earnings from a deal and then often pay taxes at capital gains rates that are lower than the rates for fee income.

And a $9 billion tax break for big banks and manufacturers related to "active financing." Active financing is a special transaction tax break that specifically allows multinational companies to avoid paying US taxes on foreign earnings if those profits resulted from "actively" financing a deal or activity on foreign soil. Not surprisingly, big businesses claim it helps them be more competitive abroad.

Thank you, America.

Monday, January 7, 2013 - I Went on Vacation and Not Much Changed

I Went on Vacation and Not Much Changed

by Sinclair Noe

DOW – 50 = 13,384
SPX – 4 = 1461
NAS – 2 = 3098
10 YR YLD -.01 = 1.90%
OIL + .21 = 93.30
GOLD – 9.90 = 1647.90
SILV - .02 = 30.26

Forty years ago, Yale Hirsch at the Stock Traders Almanac, created the January Barometer. The idea was simple: as the S&P 500 goes in January, so goes the year. This market prediction tool has been correct 89% of the time since 1950, suffering only seven major setbacks. Since 1950, stocks have finished lower for the year only three times after posting gains in January. When the Dow is positive in January, then the rest of the year is positive 83% of the time, averaging additional gains of 9.59%. Compare that to the Dow’s performance when January is negative. In those years, the February-December returns are positive just half of the time, with an average gain of 2.04%.

As with the full-year results, a positive January typically leads to a positive February. When the Dow closes higher in January, February goes on to average a return of 0.57%, and is positive 63% of the time. When January is negative, February is negative more than half the time, and averages a loss of more than 1%. However, an outsized return in January has not necessarily translated into a bigger return for February. If January is up more than 3.5%, the average February gain is not as big as if January is simply positive.

Price movement in January is also a pretty good predictor of price movement in February for individual stocks; not a perfect predictor but usually moving in the same direction about 80% of the time.

Many investors look to the first five days of January as a gauge of where the markets are going for the rest of the year. During the last 40 years when those five first days were gainers, the markets were up for the entire year 85 percent of the time. For example, last year the S&P 500 Index gained 1.2 percent in the first five days of January. As a result, the S&P 500 Index was over 13 percent. That was close to the historical average. Over the last 39 years, the markets gained an average of 13.6% when the first five days of January were gainers.

Conversely, when the first five days are negative the markets were down for the year, but only 47.8% of the time. The indicator therefore, does not work as well on down periods. You should be aware that, in general, during post-election years the markets have not done well. Only 6 out of the last 15 post-election years saw gains in the first five days of the year. It looks like 2013 will be an exception. Maybe, maybe not. That's why they play the game.

The fiscal cliff is behind us, sort of; there are still the actual implications of the implementation of the changes. Then, we have the debt ceiling, which will be the next catastrophic, OMG, here comes another massive economic sky-is-falling event, they'll shut down the government if they don't get cookies for lunch, political tantrum. Before we move to the next news cycle, let's review briefly the fiscal cliff calamity that was narrowly averted, specifically $205 billion in corporate tax breaks, subsidies and tax loopholes. One of the most egregious giveaways included in the New Year's Eve fiscal cliff deal is an extension of a loophole that allows corporations to book US profits in overseas, tax-free accounts. US companies have about $2 trillion in these offshore accounts.

Another corporate tax benefit included in the fiscal cliff deal is a provision known as bonus depreciation, which allows companies that invest in costly equipment to account for depreciation expenses much faster than they otherwise could. In other words, companies can deduct more in expenses now, lowering their taxable income.

Congress has extended the provision each year since 2008 in an effort to spur business investment during the economic downturn. Bonus depreciation is expected to cost $35 billion this year, according to the Joint Committee on Taxation, and those costs are predicted to rise significantly if Congress keeps extending the benefit. The Congressional Research Service issued a report saying that accelerated depreciation is a “relatively ineffective tool for stimulating the economy.”

I guess that avoiding the fiscal cliff is a good thing; it shows the politicians can do something; even if it's the same old, same old.

New Year, things change, but not much. Let's see what the banksters have been up to. Once again the banks are body slamming the banking regulators. The banks have beaten down the tough parts of Basel III bank-capital standards. The global liquidity standards were designed to ensure banks had sufficient capital on hand to survive another Lehman-like crisis, as well as require that capital be high-quality and liquid. There was a lot of fanfare from regulators when the regulations were first announced in 2010, and then the banks started to chip away at the regulations which might require a little cushion against a downturn. The regulators succumbed to pressure. We're all shocked, shocked I tell you. The new capital rules have been expanded to change the definition of what constitutes safe bank capital to include stocks and AAA rated mortgage backed securities.

Now, you're probably asking yourself, “Self, weren't stocks and mortgage backed securities really dangerous and excessively risky investments that were a big part of the financial crises of the recent past?” And of course the answer is – yes. “Self, didn't those risky gambles lead to a freeze on the credit markets and the near collapse of the global financial system?” And again, the answer is – yes. And then you ask: “Self, does this mean we'll see Hank Paulson getting down on his knees to beg Nancy Pelosi to save him from his errors?” And the answer is no; that's not going to happen again, but clearly we haven't learned our history lessons.

In a world of Too Big to Fail banks that have only gotten bigger, the regulators decided that if the banks were to face a crisis, like the recent crisis, the banks would only have to prepare for a world in which they lose 3 percent of their retail deposits, down from 5 percent originally proposed. Complete amnesia when it comes to Northern Rock or IndyMac. And then the banks have four years to gradually phase in the new, scaled down 3-percent requirements, down from the 2-year requirement originally proposed. The banks argued that if they were forced to provide a 5-percent cushion and do so within two years, it would be too much of a burden and they wouldn't be able to do any lending, which might actually help the global economy.

Meanwhile, federal bank regulators announced an $8.5 billion settlement with 10 large mortgage companies in a deal that will end a near worthless foreclosure review program in favor of a new program that authorities say will distribute aid to homeowners "significantly more quickly."

Under the deal, announced by the Office of the Comptroller of the Currency and the Federal Reserve, the mortgage companies will make $3.3 billion in direct payments to "eligible borrowers" whose foreclosures were handled improperly, and will make $5.2 billion available in other assistance to struggling borrowers, such as loan modifications.

This new deal is separate from the $25 billion mortgage settlement to which five large banks agreed earlier this year, though many of the allegations of misconduct are the same. Homeowners have complained for more than five years that the mortgage companies made widespread errors in the management of their home loans, and that in some cases those errors pushed them into foreclosure.

This new settlement replaces a deal struck in April 2011 that established the Independent Foreclosure Review; that program was supposed to give homeowners an unbiased third-party review before the banks could foreclose, and might even determine if homeowners qualified for a cash payout because of mortgage related bank abuses. So, that program never really happened, and today's announcement is basically saying the Independent Foreclosure Review was a complete failure.

What went wrong? Part of the problem is that the third-party independent reviewers actually worked at the banks' beck and call. So, ten different banks will pay out $8.5 billion to end the foreclosure reviews.

But wait, there's more!

Bank of America announced today that it will spend $10 billion to settle mortgage claims resulting from the housing meltdown. BofA will pay $3.6 billion to Fannie Mae and buy back $6.75 billion in loans that the bank and its Countrywide banking unit sold to the government agency from Jan. 1, 2000 through Dec. 31, 2008. That includes about 30,000 loans.

Bank of America said that the loans involved in the settlement have an aggregate original principal balance of about $1.4 trillion. The outstanding principal balance is about $300 billion. Fannie Mae and Freddie Mac, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses. So, all in all, BofA gets off really cheap.

Fannie Mae issued a statement saying they had “diligently pursued repurchases on loans that did not meet our standards at the time of origination, and we are pleased to have reached an appropriate agreement to collect on these repurchase requests."

And so, there is $8.5 billion for ten banks, and $10 billion in fines for BofA, and you might think that's real money, and it almost is, but keep it in perspective. The six biggest US banks are expected to pay employee bonuses of $38 billion for the past year.

Bank stocks led all other major stock sectors in 2012. The KBW Bank Index rose more than 30% compared to just over 13% for the S&P 500, and Bank of America shares surged 109%--more than doubling in price. And according to a new report from ProPublica, many banks are still trading below book value, despite the gains in share prices, and much of the gain is due to hedge fund speculation.

And so, you're probably asking yourself: “Self, wasn't hedge fund speculation a big part of the near meltdown of the global financial system? Isn't this just part of the multi-trillion dollar derivatives casino? Isn't this the same sort of risky stuff that the London Whale was betting on and which led to $2 billion in trading losses, or $5 billion, or $6 billion in gambling losses?” And the answer is – yes.

A funny thing is happening in the copper markets. The SEC has paved the way for investors to take a direct stake in commodities, rather than through commodities futures. The agency gave the green light to JP Morgan to launch a fund whose shares would be backed by warehoused copper. In practical terms, the SEC handed traders at JP Morgan control over 20 to 30 percent of the copper available for immediate delivery from the London Metals Exchange — the commercial market where companies that use copper go to procure last-minute supplies.

The investors purchasing shares in J.P. Morgan’s fund won’t be buying copper to use, but to store. The intricacies of the fund are complex, but its underlying rationale is straightforward: the more shares investors buy, the more copper is taken off the market. And the more copper that is taken off the market, theoretically the more valuable the copper and the shares become.

Moreover, it’s a no-brainer that this JP Morgan “innovation” will lead to the creation of copycat fund in other markets, most troublingly those for agricultural products.

The SEC asserts that its own study showed that changes in inventory levels at the LME did not have a price impact. If you've ever heard a little theory known as supply and demand, you might reach a different conclusion than the SEC.

The question regarding the LME would be to define what a normal level of inventory would be (a certain level is necessary to handle routine transactions); amounts in excess of this buffer level would be seen by economists as proof that prices were above the true market clearing price unless you had a good explanation as to why not.

Companies that use copper strongly oppose the new fund, and argue that allowing investors to hoard the metal will lead to supply shortages, create substantial price volatility, and distort the market. A group of copper users wrote to the SEC in August, saying: “The implications of this practice would be grave for our companies, our industry, and, indeed, for the U.S. Economy.”

The SEC is undermining provisions in Dodd Frank calling for the CFTC to rein in undue speculation in critical commodities. You might remember that commodities prices moved up in a coordinated manner in 2008. Remember when oil prices jumped up near $150 a barrel? It looked like a speculative bubble, and was, since prices collapsed in the second half of the year. Well, there was similar behavior in other commodities.

Here, you’re allowing investors to intervene with physical supplies. BlackRock has petitioned the agency to launch its own copper fund, one that would be twice as large as JPM’s and will get an answer by February 22. Given that its proposal is identical to JPM’s, it is well nigh certain to be waved through. If the nay sayers are correct, that hoarding by investors will drive prices up, we should see the impact, although the mere announcement of the JPM approval, particularly in light of the pending BlackRock application, may have led speculators to bid up prices in anticipation of the funds’ launch. That too should be measurable, but if the next few months proves the SEC analysis to be wrong, you can bet the agency won’t admit its error and halt the creation of more funds.

Same old, same old. 

Tuesday, December 18, 2012 - Blame It On Whatever You Want

Blame It On Whatever You Want

by Sinclair Noe

DOW + 115 = 13,350
SPX + 16 = 1446
NAS + 43 = 3054
10 YR YLD +.06 = 1.83%
OIL + .79 = 87.99
GOLD – 27.20 = 1671.90
SILV - .64 = 31.74

The markets rallied on news the fiscal cliff negotiations are closer to a resolution. No, no, wait a minute; the markets experienced a Santa Claus Rally. No, no, wait a minute; just make up whatever excuse you want.

No, no, wait a minute; the Federal Reserve announced QE4 last week, even though we're not supposed to call it QE4, and they are just printing money like banshees, although I'm not sure banshees know how to print money, but the point is they are juicing the economy to the tune of $85 billion a month, and you know that has to have some sort of effect.

Why sure; all this money just has to end up in the stock market eventually. You might also expect the dollar to fall. You might also have expected additional strength in the government bond market, because $85 billion pretty much covers all of the expected new issuance going forward, plus many entities still need to buy U.S. bonds for a variety of fiduciary reasons. With little product for sale and lots of bids by various players; one of which, the Fed, has their own printing press and so money is no object in the move to drive prices higher and yields lower; that's a recipe for rising prices. Then you might expect sharply rising commodity markets because nothing correlates quite so well with loosey-goosey monetary policy as commodities.

Last week, when the Fed made it's announcement, stocks initially climbed but then closed red. Gold was mysteriously sold in the overnight markets and again right after the announcement in big HFT blocks. Treasury bonds actually sold off on the news and yields have continued to inch higher. The dollar hardly budged. Commodities were mixed across the board but more or less flat on the day, with the exception of the metals, and especially the precious metals, which were sold vigorously. And since the announcement, stocks have started to climb, but it doesn't seem to correlate to the Fed's announcement.

Go figure.

Maybe QE4 really is a different beast. The Fed tied their monetary policy to specific targets for the unemployment rate (6.5%) and the inflation rate (2.5%). So, in a way, the monetary policy is also fiscal stimulus, meant to keep stock prices moving higher and residential homes sales climbing at a robust pace. The goal is certainly to drive economic activity, and we can expect it to continue for at least a couple of years, depending upon targets and who knows what.

We know the unemployment target will be tough to hit because as the labor market gets better, all those people who disappeared from the government statistics are likely to re-emerge; they'll jump back into the labor pool and try to find a job. A lot of people have vanished from the official statistics. So, it looks like we are going to have a long run of Fed stimulus.

Meanwhile, the fiscal stimulus gang can't seem to shoot straight. Obama made a concession to Republicans by offering to limit tax increases to incomes exceeding $400,000 per household. That is a higher threshold than the $250,000 he had sought earlier. Boehner, the top Republican in Congress, said he planned to move a "Plan B" bill to the House floor, possibly this week, but there is no clear indication he has his party's support. The Obama-Boehner talks have largely overcome stark ideological differences and are focused increasingly on narrower disagreements over numbers. It might happen, but don't count your chickens until ...

The December reading of Morgan Stanley's proprietary Business Conditions Index is out and the results are a bit counter-intuitive, but overall they appear to be bullish. The headline index jumped 15 points to 51% in December, which makes up for much of the 20 point slide over the past two months. The tumble in October and November had been attributed to elevated uncertainty caused by the fiscal cliff. Morgan Stanley's economic team says, "reports of uncertainty created by the fiscal cliff jumped dramatically in December to another new high.

Given that fiscal cliff uncertainty is up and hiring plans deteriorated, it’s unclear what drove the year’s largest increase in expectations."

I assume this is big business confidence, since small business confidence plunged last month. The hiring plans index particularly suggests that (as in it points to an improvement in hiring plans, when the small businesses, who drive employment, said the reverse).

Businesses are apparently shrugging off the fiscal cliff and they believe a deal will get done. What is difficult to understand is how these businessmen think a contraction in the Federal deficit, which is what a budget deal will presumably produce for 2013, will lead to better business conditions. But I guess we’ll have to go a few months into 2013 for the delusion to wear off.

One element of the coming budget pact that is not getting the attention it warrants is a quiet and slightly sneaky effort to gut military benefits by privatizing them. Privatization has rarely delivered on its promise of delivering better performance and/or lower costs.

The manufactured fiscal cliff crisis means that more profiteering is coming to the military. The cash flow bonanza for privatizers is the healthcare and pension budgets: Instead of using the current government-contracted HMO/PPO model, called TriCare, military personnel and their families would receive health care vouchers allowing them to either purchase whatever health care plan they chose from an array of private sector providers. Instead of earning defined retirement benefits, also known as pensions; soldiers, sailors, airmen and marines would each pay into privately held 401K programs, or simply take a lump sum of cash.

In a win-win for corporate advocates, cuts to what they call the “excessive” and “burdensome” human side of the military will simultaneously fund greater spending on expensive weapons and communications systems. And under the pretext of providing “choice” to military personnel, the programs decrease total benefits and increase private sector access to government funds and the money of military personnel.

On the healthcare side, this is simply an excuse for the medical industrial complex to get its blood suckers into the huge military budgets, for the VA system is vastly more efficient than private sector providers.

Government health care is often characterized as wasteful and inefficient. But here too the VA’s experience suggests otherwise. In 2007, the nonpartisan Congressional Budget Office (CBO) released a report that concluded that the VA is doing a much better job of controlling health care costs than the private sector. After adjusting for a changing case mix as younger veterans return from Iraq and Afghanistan, the CBO calculated that the VA’s average health care cost per enrollee grew by roughly 1.7% from 1999 to 2005, an annual growth rate of 0.3%. During the same time period, Medicare’s per capita costs grew by 29.4 %, an annual growth rate of 4.4 %. In the private insurance market, premiums for family coverage jumped by more than 70%, according to the Kaiser Family Foundation.

The VA delivers high quality medical care at a more favorable cost than the private sector, meaning veterans will get a double whammy if the privatizers succeed: lower health care allotments by virtue of spending reductions, with the impact made more severe by the use of vouchers rather than relying on the established, effective VA system.

The national average pump price of regular gasoline fell 9.2 cents a gallon last week to $3.248 a gallon today, the lowest price since December 2011. Prices have fallen each day this month and are down 16% since mid-September. Missouri posts the lowest average price in the country at $2.955. Hawaii has the nation’s highest price at $3.979. All 50 states have gas below $4 for the first time this year.

Declining oil prices, coupled with a series of encouraging economic figures, have helped ease prices at the pump for American drivers in time for the busy holiday season. This year saw seasonal anomalies brought on by hurricanes, refinery outages and geopolitical issues. The Christmas miracle of cheap gasoline, however, was anticipated by the U.S. Energy Department early last month, suggesting it’s no miracle at all.

Factory output in the United States remains below rates from early this year, though November figures suggest there's been a sharp increase as the east coast recovers from Hurricane Sandy. The Federal Reserve said the manufacturing sector saw its biggest gain in about a year with a 1.1 increase in November. While characterized as modest, the U.S. Labor Department said the consumer price index dropped 0.3 percent.

The SEC has approved plans for JPMorgan Chase to offer the first US exchange-traded fund backed by physical copper. BlackRock and ETF Securities Ltd. also have said they plan to start physically backed ETFs for industrial metals in the US. Some industrial users of copper are concerned because they fear the ETFs will disrupt the market. The SEC dismissed worries that the ETFs would result in all available copper being scooped up and warehoused, pushing civilization back into the Stone Age.

Private-equity firm Cerberus Capital Management LP said it is seeking to sell the company that manufactures a gun used in last week’s shooting at Sandy Hook Elementary School in Newtown, Conn. “We have determined to immediately engage in a formal process to sell our investment in Freedom Group…We believe that this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so,” No official word on the asking price, but there is speculation that it could sell for as little as 30 pieces of silver.

Monday, December 17, 2012 - Unconnected Dots

Unconnected Dots

by Sinclair Noe

DOW + 100 = 13,235
SPX + 16 = 1430
NAS + 39 = 3010
10 YR YLD +.05 = 1.76%
OIL +.71 = 87.44
GOLD + 1.90 = 1699.10
SILV -.03 = 32.38

President Obama and House Speaker Boehner met at the White House today. Aides from both parties said they were optimistic that a deal could be reached in the coming days to avert the "fiscal cliff," as lawmakers set the stage for action before a year-end deadline.

A senior Republican aide said: "There's been too much progress at this point and neither guy wants to go over the cliff." Although both sides still had major differences, investors were cheered by signs of progress. Major market indices moved higher in the afternoon, and some of that was the feel good part of the news cycle; we certainly need some good news. Now, we sit back and see whether it was yet another rumor.

Boehner, the speaker of the Republican-controlled House of Representatives, has edged closer to Obama's demand to raise taxes on the wealthiest Americans. In return, Obama is considering a measure that would slow the rate of growth of Social Security retirement benefits by changing the way they are measured against inflation.

Boehner has put forward a tax increase for those earning over $1 million annually, while Obama wants that threshold set at $250,000. Republicans could probably stomach a tax hike on incomes above $500,000. Boehner could float the broad outlines of a deal with rank-and-file members on Tuesday. If there are no strong objections, he could try to finalize the deal on Wednesday, the Republican aide said.

Votes could be held in Congress next week. Both sides declined to say what Boehner and Obama discussed at the meeting, which was also attended by Treasury Secretary Timothy Geithner.

However, the White House said Boehner's latest proposal doesn't meet its standards. Republicans want substantial spending cuts in return for increased tax revenue, but any proposal to trim popular benefit programs like the Medicare health insurance plan for seniors will face fierce resistance. Obama could also face strong opposition from Democrats if he agrees to Boehner's proposal to slow the growth of Social Security benefits by changing the way the cost-of-living increases are measured against inflation, an approach that could save $200 billion over 10 years. Obama also wants to head off another confrontation over the government's debt limit, which will need to be raised in the coming months. Republicans insist that any increase in the government's $16.4 trillion borrowing authority must be paired with an equal reduction in spending. Apparently jobs were not a big talking point in the negotiations.

The National Credit Union Administration , the regulator of credit unions has sued JPMorgan Securities and Bear Stearns over $3.6 billion in mortgage securities the bank allegedly sold to credit unions that collapsed because of losses from the securities.

The lawsuit by the National Credit Union Administration is its second against JPMorgan involving losses to credit unions. In June 2011 the agency sued it over some $1.4 billion in securities in which JPMorgan was the underwriter and seller. That suit is still pending. The actions add to a growing list of cases JPMorgan fighting over conduct by Bear Stearns, which JPMorgan acquired in 2008. The New York Attorney General sued JPMorgan in October alleging that Bear Stearns deceived investors buying mortgage-backed securities in 2006 and 2007.

In today's lawsuit, the NCUA alleged that Bear Stearns made misrepresentations in connection with the underwriting and subsequent sale of mortgage-backed securities to U.S. Central, Western Corporate, Southwest Corporate and Members United Corporate federal credit unions. The lawsuit, filed in federal court in Kansas, is the largest such lawsuit the regulator has filed to date. A JPMorgan spokeswoman declined to comment.

In the past two years the agency has brought similar actions against Barclays Capital, Credit Suisse, Goldman Sachs, RBS Securities, UBS Securities, Wachovia and others. Most of the cases are pending, but it has settled claims against Citigroup, Deutsche Bank Securities and HSBC for around $170 million.

The credit union regulator has been trying to recover losses related to the failure of five institutions that it seized in 2009 and 2010 after they ran into trouble due to the crumbling housing market. The wholesale credit unions have experienced more troubles than their retail counterparts because they did not face the same restrictions on permitted investments, leading to big losses during the financial crisis.

UBS will pay around $1.5 billion to settle charges that a group of traders at its Japanese unit rigged Libor interest rates. The fine, to be imposed by the United States and Britain, would be the latest blow to UBS after a $2.3-billion rogue trading loss in London last year, a $780-million fine after a U.S. tax investigation in 2009 and its near collapse in 2008 under the weight of losses on U.S. sub-prime mortgage lending.

UBS will admit that roughly 36 of its traders around the globe manipulated yen Libor between 2005 and 2010. The settlement talks are reportedly now centering on a fine in the region of $1.5 billion - somewhat higher than geusstimated last week and three times the $450 million levied on British bank Barclays Plc in June for similar manipulation of benchmark interest rates.

The fine against UBS would be the second-largest ever levied against a bank for wrongdoing, after Britain's HSBC last week agreed to pay $1.92 billion to settle a probe in the United States into laundering money for drug cartels.

UBS earned $4.6 billion in net profit last year and the bank has spent much of this year and last bolstering its capital. Paying $1.5 billion to settle the Libor probe would shave 50 basis points off UBS's capital ratios, but even after the fine, UBS would still be better capitalized than other banks.

UBS is expected admit to criminal wrongdoing by its Japanese arm, where one of its traders manipulated yen Libor and euro yen contracts. Admitting to criminal wrongdoing can be fatal for a bank, as it can lose its license. But by admitting to wrongdoing only at its Japanese subsidiary, where UBS employs 1,000 staff, it effectively ring-fences the damage, sparing its bigger units.

Individuals are also being targeted, mainly lower-level traders, offered up as sacrificial lambs. The UBS investigation centers on former UBS trader Thomas Hayes, but also includes other UBS bankers. Hayes, who joined Citigroup after leaving UBS in 2009, is one of three British men arrested last week by London police but later released on bail.

More than a dozen banks have been caught in the international inquiry into Libor rates, with most of the focus being on how rates were set between 2005 and 2008.

Royal Bank of Scotland is also expected to shortly reach a settlement on Libor manipulation. The bank will receive a penalty of more than $564 million.

Morgan Stanley, the lead underwriter for Facebook's initial public offering, will pay a $5 million fine to Massachusetts for violating securities laws governing how investment research can be distributed.

Massachusetts' top securities regulator charged that a top Morgan Stanley banker had improperly coached Facebook on how to disclose sensitive financial information selectively, perpetuating an unlevel playing field between Wall Street and Main Street.

Morgan Stanley has faced criticism since Facebook went public in May for revealing revised earnings and revenue forecasts to select clients before the media company's $16 billion initial public offering. This is the first time a case stemming from Morgan Stanley's handling of the Facebook offering has been decided.

Facebook had privately told Wall Street research analysts about softer forecasts because of less robust mobile revenues. A top Morgan Stanley banker coached Facebook executives on how to get the message out.

A Morgan Stanley spokeswoman said the company is "pleased to have reached a settlement" and that it is "committed to robust compliance with both the letter and the spirit of all applicable regulations and laws." The company neither admitted nor denied any wrongdoing.

The investigation into the Facebook IPO is far from over and other banks were involved. Goldman Sachs and JP Morgan also acted as underwriters. The underwriting fee for all underwriters was reported to be $176 million.

The state said a Morgan Stanley banker helped a Facebook executive release new information and then guided the executive on how to speak with Wall Street analysts about it. The banker rehearsed with Facebook's Treasurer and wrote the bulk of the script Facebook's Treasurer used when calling the research analysts. A number of Wall Street analysts cut their growth estimates for Facebook in the days before the IPO after the company filed an amended prospectus. Facebook's treasurer then quickly called a number for Wall Street analysts providing even more information.

The banker "was not allowed to call research analysts himself, so he did everything he could to ensure research analysts received new revenue numbers which they then provided to institutional investors." The consent order also says that the banker spoke with company lawyers and then to Facebook's chief financial officer about how to prove an update "without creating the appearance of not providing the underlying trend information to all investors."

The banker and all others involved with the matter at Morgan Stanley are still employed by the company.

Retail investors were not given any similar information, just in case you ever wondered whether the market is rigged against you.

In light of the HSBC money laundering settlement last week it is worth reading a report I found in the Guardian entitled Arizona funnels business to CCA through its school-to-prison pipeline

Wednesday, December 12, 2012 - Life is Beautiful and Easy

Life is Beautiful and Easy

by Sinclair Noe

DOW – 2 = 13,245
SPX +0.64 = 1428
NAS – 8 = 3013
10 YR YLD +.05 = 1.70%
OIL +.99 = 86.78
GOLD + 1.20 = 1712.60
SILV +. 45 = 33.55

And now, the DC Players present: The Grinch Who Stole Christmas, starring John Boehner.

Speaking to reporters this morning, Boehner said: “We’re going to stay here right up until Christmas Eve, throughout the time and period before the New Year, because we want to make sure that we resolve this in an acceptable way for the American people.”

Yesterday, we told you reporters in Washington were optimistic a deal could be reached; and we told you that story literally dripping with sarcasm, because we were fairly certain it was just idiot reporters projecting their own fantasy that they could spend the holidays with family and people posing as friends; it was a last gasp hope to shame inept and incompetent politicians to get a deal done. It didn't work.

Republicans and the White House appeared no closer to a deal, as both sides pressed each other to cede ground. Republicans want to extract spending cuts from the White House while the Obama administration is demanding that taxes go up for the wealthiest 2% of Americans.

Wow, I just had a feeling of deja vu. It's almost like I've heard this before.

Washington has a way of diverting the nation's attention on tactical games over partisan maneuvers that are symptoms of a few really big problems, but we almost never get to debate or even discuss the big problems because the tactical games overwhelm everything else. The bigger debate is over whether we should be embracing austerity economics and reducing the budget deficit in the next few years (which has been tried in Europe with alarming failure) or, alternatively, using public investments to grow the economy and increase the number of jobs, which increases demand, which forms a virtuous circle.

Even this larger debate is just part of of a bigger debate; why we still have poverty, why median wages continue to drop at the same time income and wealth are becoming ever more concentrated at the top, and what can and should be done to counter the trend.

With a shrinking share of total income and wealth, the middle class and poor simply don't have the purchasing power to get the economy back on solid footing. The wealthy don't spend enough of their income or assets to make up for this shortfall, and they invest their savings wherever around the world they can get the highest return. As a result, consumer spending, 70 percent of economic activity, isn't up to the task of keeping the economy going. This puts greater pressure on government to be purchaser of last resort.

So why are none of our political leaders looking beyond the cliff, planning for what happens next? Far from having a debate about how to grow the economy, all they're currently talking about is how to preserve the status quo; and as we all know, the status quo is that life is beautiful and easy. I'm sure we can all agree.

Why is life so beautiful and easy? Because there is a man, a jolly old man with a white beard; yes Virginia there is a Federal Reserve Chairman, and today he promised that he will fly in a sleigh, all across the land, throwing out gobs of money until the unemployment rate drops to 6.5%. Yes, the jolly old elf himself, Ben Bernanke announced QE4, but don't call it that. Whatever you're not calling it, the Federal Reserve sent its clearest signal to date that it will keep interest rates super-low to support the economy even after the job market has improved significantly. The Fed said it plans to keep its key short-term rate near zero until the unemployment rate reaches 6.5 percent or less – as long as expected inflation remains tame. Unemployment is now 7.7 percent.

That plan adds detail to what the Fed had said before: that it expects to keep the rate low until at least mid-2015. For the first time, the Fed is making clear to investors and consumers that it will link its actions to specific economic markers. Bernanke said, "This approach is superior" to setting a timetable for a possible rate increase, "It is more transparent and will allow the markets to respond quickly and promptly to changes" in the Fed's economic outlook.

Bernanke made clear that even after unemployment falls below 6.5 percent, which will probably happen in 2015; at least that is the guess. It is kind of a gloomy guess. It means all the stimulus doesn't really kick in like a V8 motor, more like a MoPed. And that means the economy is so weak that even a boost of $85 billion a month isn't enough to get us rumbling down the highway. Or maybe it means that the $85 billion a month isn't going to the right places to stimulate the economy. Undeterred, the Fed might decide that it needs to keep stimulating the economy well past 2015 or well past 6.5% unemployment. Other economic factors will also shape the Fed's monetary policy decisions.

Surely, one consideration is whether any of the Fed's machinations can actually get money to start moving through the economy with a little more velocity than a poorly tuned scooter. Part of the idea behind suppressing interest rates is to spur lending, but if you're not borrowing now, nothing from today's announcement will get you to borrow; the other motivator is to force investor cash off the sidelines and into the stock market, or into anything.

The Fed updated its forecasts anticipating unemployment to remain at least 7.4 percent next year and 6.8 percent by the end of 2014. The earliest it sees unemployment dropping below 6.5 percent is the end of 2015. The Fed predicts the economy will grow no more than 3 percent next year before picking up to as much as 3.5 percent growth in 2014 and as much as 3.7 percent in 2015. Now, we all know the Fed's prognosticating abilities are roughly on par with the bicycle riding abilities of a fish, but let's look on the bright side. They have a printing press and they are not afraid to use it.

In a statement after its final policy meeting of the year, the Fed said it will also keep spending $85 billion a month on bond purchases to drive down long-term borrowing costs and stimulate economic growth. The Fed will spend $45 billion a month on long-term Treasury purchases to replace a previous bond-purchase program of an equal size. And it will keep buying $40 billion a month in mortgage bonds.

The latest bond-buying program would replace an expiring program called Operation Twist. With Twist, the Fed sold $45 billion a month in short-term Treasurys and used the proceeds to buy the same amount in longer-term Treasurys. Twist didn't expand the Fed's investment portfolio, it just reshuffled the holdings. But the Fed has run out of short-term securities to sell. So to maintain its pace of long-term Treasury purchases and to keep long-term rates low, it must spend more and increase its portfolio. So, the Twist is being replaced by out-and-out purchases. So, in a way, it is just a continuation of the Twist; the level of bond buying remains the same, just that the Fed's portfolio looks a little ugly, but when you have a printing press, you really don't have to worry about aesthetics.

With its new purchases of long-term Treasurys, the Fed's investment portfolio, which is nearly $3 trillion, will swell to nearly $4 trillion by the end of 2013 if its bond purchase programs remain fully in place. Plus everyone gets cookies and oranges in their Christmas stocking because life is beautiful and easy.

As long as we don't go over the cliff.

If the politicians go over the cliff, Bernanke says there will be pain; sharp tax increases and government spending cuts cannot be overcome by misdirected stimulus. Just the thought of the fiscal cliff threatens economic well-being and a possible recession.

So clear your mind of all negative thoughts, it just drags down the economy. Remember, life is beautiful and easy.