Tuesday, July 01, 2014 - The Good, the Bad, and the Depressing

The Good, the Bad, and the Depressing
by Sinclair Noe

DOW + 129 = 16,956
SPX + 13 = 1973
NAS + 50 = 4458
10 YR YLD + .05 = 2.56%
OIL - .13 = 105.24
GOLD - .80 = 1327.10
SILV + .02 = 21.08

Record high closes for the Dow and the S&P.

The record setting bull market run refuses to stumble. The S&P 500 has not seen a correction, a drop of 10%, for 1,002 days, and counting. This marks the fifth longest stretch without a correction since 1928. The average time between corrections is about 18 months; we’ve now gone 33 months without a 10% pullback.  

The Institute for Supply Management said its manufacturing index registered 55.3% in June, down slightly from May’s reading of 55.4%. Any number above 50% signals expansion. Separately, the research firm Markit said its final reading of US manufacturing conditions in June totaled 57.3, compared with a preliminary reading of 57.5; still the highest reading since May 2010. So the manufacturing sector has expanded for 13 consecutive months, but it wasn’t a month over month increase, and we have to remember that manufacturing was expanding in the first quarter as the broader economy was contracting by 2.9%. Today’s reports were decent news for manufacturing, but hardly great.

The Commerce Department reports construction spending increased 0.1% in May, following a 0.8% increase in April. Construction activity totaled $958 billion at a seasonally adjusted annual rate in May, up 6.6% from a year ago. Single-family home construction was down 1.4% while apartment construction dropped 0.6%. The hotspot for construction was a 4.3% rise in construction of power generating facilities.

The upshot is that the economy is continuing to improve from the deep freeze of old man winter, even if the recovery is tepid. Most economists and analysts had called for 3% growth in the first quarter, not a 2.9% contraction. Now that the weather and the economy have thawed, we’re hearing talk of 3% growth going forward.

The strongest S&P 500 sector this year has been Utilities, up 17%. The S&P 500 Energy sector is up 13%, with the following subsectors: Oil & Gas Equipment and Services rising 28%, Oil & Gas Storage and Transportation up 25% and Oil & Gas Exploration up 22%.The weakest S&P 500 sector so far this year has been Retailing.

June auto sales beat expectations with Chrysler, Nissan, Toyota and Hyundai all posting healthy gains compared with the same month a year earlier. General Motors had a small increase and Ford’s sales declined. June new car sales approached 1.4 million, about the same as a year earlier. Most analysts were forecasting a 2% to 3% decline for the month. GM recalled an additional 8.5 million cars yesterday, which means that GM has now recalled 29 million cars since the start of the year, more than the total number of vehicles it sold in 2011, 2012, and 2013 combined. It’s also more than the 22 million vehicles recalled by all automakers last year.

AAA predicts that nearly 35 million Americans will take a road trip of 50 miles or more on the Independence Day weekend. The current national average price for a gallon of regular gasoline is $3.68, compared with $3.48 a year ago. According to AAA, gasoline prices are 20 cents a gallon higher due to “market fear about Iraq”.

Sunnis and Kurds walked out of the first session of Iraq's new parliament after Shi'ites failed to name a prime minister to replace Nuri al-Maliki; so, the prospects are poor for a new unity government that might prevent Iraq from collapsing. Meanwhile, the ISIS rebels continue fighting; they control suburbs  just west of Baghdad; they have been waging fierce battles in Tikrit, north of Baghdad, and there have been clashes to the south of the capital, leaving the city surrounded on three sides. The United Nations says more than 2,400 Iraqis had been killed in June alone, making the month by far the deadliest since the US "surge" offensive in 2007.

Geopoltical hotspots continue to flare up. Ukrainian forces struck pro-Russian separatists bases in eastern Ukraine with air and artillery strikes. The ceasefire came and went, and won’t be renewed. Russian president Putin accused the Ukrainian prime minister of shunning the road to peace; while Russian foreign minister Lavrov warned of a “new round of bloodshed”.

 A follow-up on yesterday’s Supreme Court ruling in the Hobby Lobby case, which dealt with a closely held corporation’s objection to paying for contraceptives in employees’ health care under the Affordable Care Act mandate. The Supremes said corporations are people, my friend, and they have religious beliefs, and so they are exempt from the mandate. There had already been exemptions for churches and non-profit organizations; in those situations the government determined that contraceptives would be paid by the government. This was the solution put forth in 2012, and revised in 2013, whereby taxpayers could pick up the tab for contraceptive coverage, instead of religious employers, as a solution to the First Amendment issues in question.

Writing for the majority in the Hobby Lobby case, Justice Alito wrote: “[the White House] could extend the accommodation that HHS has already established for religious nonprofit organizations to non-profit employers with religious objections to the contraceptive mandate. That accommodation does not impinge on the plaintiffs’ religious beliefs that providing insurance coverage for the contraceptives at issue here violates their religion and it still serves HHS’s stated interests.”

In other words, while the government can’t compel Hobby Lobby to finance contraceptives, it can compel taxpayers to do so. Another name for taxpayer funded healthcare is “single payer”. I’m not sure if the Supremes intended this, but they just justified the government to establish a single payer health plan, at least for contraceptives.

There was a time when a majority of Americans were confident in the Supreme Court, but according to a new Gallup poll just 30% say they are confident in the highest court. That’s the good news; people have more confidence in the Supremes than in any other arm of government, but that may not be saying that much when confidence in the presidency stands at 29% and in the Congress at 7%. Which means Congress is even less popular than head lice, or T-Mobile, or Facebook.

The Federal Trade Commission says T-Mobile made money the old fashioned way, by charging customers hundreds of millions of dollars in bogus charges. The practice is often referred to as "cramming"; businesses stuff a customer's bill with bogus charges associated with a third party. In its complaint filed in federal court, the Federal Trade Commission claimed that T-Mobile billed consumers for subscriptions to premium text services such as $10-per-month horoscopes that were never authorized by the account holder. The FTC alleges that T-Mobile collected as much as 40% of the charges, even after being alerted by other customers that the subscriptions were scams.

Facebook has its own little scam. It modified hundreds of thousands of users' accounts by prioritizing 'positive emotional content' to see if it could make them happier or sadder, without telling them what it was doing.

Researchers from Cornell University and the University of California filtered information going into the news feeds of 689,000 users; that includes the constant flow of links, videos, pictures, and comments by friends. When positive emotional content from friends was reduced, users would post more negative content themselves, essentially becoming unhappier. The opposite happened when negative emotional content was reduced. The process has been dubbed “emotional contagion”.

The study, published in the journal “Proceedings of the National Academy of Sciences of the USA”, concluded: “Emotions expressed by friends, via online social networks, influence our own moods, constituting, to our knowledge, the first experimental evidence for massive-scale emotional contagion via social networks.”

A spokesman for Facebook said the research was conducted over a single week and none of the data was associated with a specific person's account. Instead, they said the site wanted to make its content more “relevant and engaging”.

Just to be clear, another name for emotional contagion is empathy, something that is in short supply at Facebook. What we really learned from this experiment is that the people at Facebook have spent so much time staring at a computer screen that they have become disconnected from emotional reality, and have to rely on scientists to run secret experiments on hundreds of thousands of lab rats, I mean customers, to discover that people get upset when their friends are unhappy. Even worse, the experiment confirms that social networks now have the power to change the emotional well-being of millions of lab rats, I mean customers, on a whim; just to see what happens; devoid of empathy.

Now that’s depressing.

Friday, June 20, 2014 - Wall Street’s Midsummer Night’s Dream

Wall Street’s Midsummer Night’s Dream

by Sinclair Noe

DOW + 25 = 16,947
SPX + 3 = 1962
NAS + 8 = 4368
10 YR YLD un = 2.62%
OIL + .83 = 107.26
GOLD – 5.60 = 1315.70
SILV + .12 = 20.98

Both the Dow and the S&P closed at new records, with the Dow hitting an intraday high of 16,978. For the week, the Dow was up about 1 percent, the S&P 500 was up 1.4 percent and the Nasdaq was up 1.3 percent.

Today is the last day of spring. The solstice will occur tomorrow morning at 6:51 AM Eastern time, so tomorrow is technically the first day of summer, and the longest day of the year, or at least the day with the most daylight. For the western states, we’ll have solstice at 3:51AM, so there really will be some Midsummer Night’s Dreams. The markets have been drifting in and out of fantasy and reality this week.

On Wednesday, Federal Reserve Chairwoman Janet Yellen said the Fed would keep doing what the Fed does, and all the markets heard “buy, buy, buy.” Wall Street traders opened their eyes from a Midsummer Night’s Dream and fell in love with the first trade they saw.

Yellen said inflation was just “noisy” and interest rates could stay "well below longer-run normal values at the end of 2016." Yellen nonetheless cited reasons for optimism about the economy, including resilient household spending and an improving jobs market, even as the Fed lowered some of its economic forecasts. This is a recurring theme. The Fed’s forecasts for economic growth in 2014 have resembled a downward slope. They cut their forecast on Wednesday from the range of 2.8% - 3.0% down to 2.1% -2.3%. Back at the start of 2012, the Fed thought this year, we would see 4% growth. At the start of this year, they expected 3.5% growth.

Meanwhile, the IMF is warning government officials around the world to prepare for the time when the Fed and other advanced economy central banks do raise interest rates. Not that rates will rise soon or fast, but eventually they will rise, and the IMF hopes to prolong that time, even if it risks fueling asset price bubbles. The long lead time before Fed rate increases should give governments around the world more time to get their economic houses in order. However, it also may encourage undisciplined governments to put off reforms. The IMF believes disruptive market volatility is one of the biggest risks in the years ahead.

And then there’s the question of how the Fed will actually exit QE. At the beginning of 2007 the Fed held assets totaling about $880 billion. Today, the balance sheet stands at about $4.3 trillion, including $2.4 trillion in treasuries and $1.7 trillion in mortgage backed securities. This was the Fed’s attempt to drive down actual rates on actual loans to people and businesses, with the idea that lower rates would stimulate demand. The Fed can set a target for the Fed funds rate, but that’s just a target.

Anyway, all those bond purchases worked, sort of; long term rates dropped relative to short term rates and risky obligations. The best guess is that long term interest rates dropped about 25 basis points for every $600 billion in bond purchases. And buying mortgage backed securities helped push down mortgage rates, which was helpful in putting a floor under housing prices, and likely spurred some construction, although the housing market seems to be stalled right now.

The Mortgage Bankers Association yesterday lowered its forecast for combined new and existing home sales in 2014 to 5.28 million; a decline of 4.1% that would be the first annual drop in four years. The group also cut its prediction on mortgage lending volume for purchases to $595 billion, an 8.7% decrease and the first retreat in three years. The big housing rally wiped itself out because prices increased too quickly for buyers to keep up. The pool of eligible new buyers is collapsing because of stagnant incomes and lack of credit. This revealed one of the biggest problems for the Fed’s stimulus plan; they could indeed lower rates, but they couldn’t direct distribution.

Could the Fed get back to pre-crisis balance sheets? Probably not, but they can just hold the bonds to maturity. There really doesn’t seem to be any viable option, and if the Fed continues to hold those securities, it’s a safe bet they won’t be trying to push rates too high too fast. At the same time, however, the Fed reinvests billions of dollars from maturing securities, about $16 billion each month this year, to maintain the size of its holdings.

The Fed once planned to stop reinvesting, allowing its holdings to dwindle, soon after it ended the expansion of the portfolio. In 2011, the Fed said this would be its first signal that it was winding down the stimulus campaign. But there is growing support among Fed officials to preserve the portfolio’s size instead.

Fed officials generally argue that the effect of bond buying on the economy is determined by the Fed’s total holdings, not its monthly purchases. In this view, reinvestment would preserve the effect of the stimulus campaign. Not everyone agrees with this assessment; some people believe the flow of funds is more important than the size of the balance sheet. The Fed in recent years has almost completely replaced its inventory of short-term government debt with longer-term securities that do not begin to mature until 2016.

And the composition of the balance sheet means that the Fed will have a whole bunch of paper maturing in early 2016. What they do then will be important. Reinvesting will have a fairly significant jolt for the economy. Many in the Fed have come to accept the bond holdings as a fact of life. In 2011, when the Fed first described its exit plans officials believed that reducing the Fed’s bond holdings was a necessary step to maintain control of inflation. Maybe that’s why Yellen can dismiss inflation as being nothing more than noise. So, even as the Fed reduces purchases, the overall balance sheet remains large, and reinvestments will be significant, and their feeling is that raising the target on interest rates will only provide flexibility with monetary policy.

It all sounds good on paper, but I still think the process will be a bit painful, with unintended consequences.

Let’s get you up to date on the situation in Iraq. Ayatollah Ali al-Sistani, an Iraq cleric considered one of Shia Islam's leading voices, has called for creation of new government that avoids past mistakes; so it looks like prime Minister Maliki is in trouble. Sistani called for national unity. The Pentagon says it has seen evidence of "small numbers" of Iranian troops in Iraq but no sign of a major deployment by Tehran.

Obama said yesterday he was prepared to send up to 300 military advisers to help the Iraqi security forces. The special forces troops will work in teams of around 12 and be based mainly at the headquarters of the Iraqi military, with some deployed to individual brigades. The Pentagon said today that the first couple of teams will be made up US troops already in Iraq at the embassy but that as of now no additional units had been sent.

UN Secretary General Ban Ki-moon has effectively endorsed Barack Obama's decision to hold off from ordering air strikes in Iraq, saying that any such action would likely be futile or could even backfire: "Military strikes against ISIS might have little lasting effect or even be counter-productive if there is no movement towards inclusive government in Iraq."

The oil refinery in Baiji, in the north of Iraq, has reportedly fallen to the ISIS rebels. And fighting continues, with most of the battles being won by the rebels. If you are still unclear about the events on the ground in Iraq, you are not alone. According to a Newsweek report, US intelligence has lost virtually all its local assets to be left effectively blind in the country:

“The “surprising” collapse of the Iraqi army and the defection of key Sunni tribal leaders to al-Qaeda-inspired insurgents has largely stripped the CIA of spies in … country. As a result, according to a US intelligence official, the CIA is mostly relying on “technical means”—electronic intercepts of all kinds—and the support of friendly regional secret services, like Jordan’s, to monitor the rapidly deteriorating situation.

Oil prices have inched up but not as much as some feared they would, considering that Iraq is the second largest producer in OPEC. If its supply was completely disrupted, it would take all of the world’s surplus production capacity to replace it.

Gasoline prices typically fall in the weeks following Memorial Day, after supplies increase enough to fill up the cars of the nation's vacationers as summer approaches. This year, drivers are paying more. The national average price of $3.67 a gallon is the highest price for this time of year since 2008, the year gasoline hit its all-time high.

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.

Monday, February 04, 2013 - Brouhaha As Excuse

Brouhaha As Excuse

by Sinclair Noe

DOW – 129 = 13,880
SPX – 17 = 1495
NAS – 47 = 3131
10 YR YLD - .04 = 1.97%
OIL – 1.61 = 96.16
GOLD + 6.80 = 1675.40
SILV - .08 = 31.86

With all the brouhaha over the fiscal cliff and the debt ceiling and the inauguration and the Super Blackout, it would be easy to forget the problems in Euro-land, but today, those problems have jumped back onto center stage, again. In Italy and Spain the prospects of stable government are slipping.

First in Italy, an election is scheduled for later in the month. The technocrat-slash-PM Mario Monti will exit, stage right, and the race is on. The second and third place contenders are a comedian named Beppe Grillo and another comedian, Silvio “Bunga-Bunga” Berlusconi; it appears unlikely either will win, but they are looking like they can splinter the vote for front-runner Pier Luigi Bersani. The running theme of the campaigns is anti-austerity and anti-German authoritarianism.

In Spain, the economy is contracting, again. Fourth quarter GDP shrank by 0.7%; the steepest decline in more than 3 years. Also, last week a new report showed unemployment at more than 26% in the fourth quarter. They are still calling it a recession but it is clearly a depression, and it is exacerbated by spending cuts and tax increases. Toss in a slush fund scandal involving the Prime Minister Rajoy, alleging kickbacks from construction firms; add in the Catalonian secessionist movement, and massive street protests.

Italian and Spanish bond yields jumped higher today. Implied default probabilities in Italy and Spain that were at 50 percent last July are still as high as 20 percent.

Toss in a $3 billion dollar fourth quarter loss for Deutsche Bank, and similar writedowns for Credit Agricole, the number 3 French bank; and last week the Dutch government nationalized the fourth largest bank in the Netherlands. The banks are still a weak link in any Euro-recovery. They haven't written off enough of their losses; they continue to hold toxic assets; they have tightened lending as capital gets swallowed up in the black hole of their impaired balance sheets.

Meanwhile, Royal Bank of Scottland is expected to announce tomorrow that has a settlement agreement with US and British authorities to pay $780 million in fines for manipulating Libor, the London Interbank Offered Rate, which is the key benchmark for interest rates.

Today, the British finance minister announced plans for what they are calling an electric ring fence around retail banks. The idea is to break up British banks that fail to guard their day-to-day banking from risky investment activity. The idea is that there would be repercussions to mixing deposits with the gambling money. We used to have a law that prevented those problems. It was called Glass-Steagall, and the Brits are slowly returning to the wisdom of that separation. And in announcing the new regulations, the British head of the Exchequer, George Osborne, (no relation to Ozzy), said: “America and elsewhere, banks found ways to undermine and get around the rules.” In the U.S., three out of the four biggest banks are bigger than they were before the financial crisis. Which is true, but he failed to mention that in the US and Europe, the big banks get bigger and bigger and operate with impunity from prosecution for things like Libor rate rigging or money laundering.

This is not to say that US banks have it easy. According to Brian Moynihan, the CEO of Bank of America, the acquisition of Countrywide was like climbing a mountain with a “250-pound backpack.” An article in the NY Times over the weekend says that so far, BofA has set aside some $40 billion to settle claims of mortgage misconduct that occurred before it acquired the fast and loose Countrywide. And to hear BofA tell it, all those bad mortgages sprang from the muddy waters of Countrywide. But according to documents from three Federal Home Loan Banks and a state Supreme Court in Manhattan, BofA continued shoddy mortgage practices well after the Countrywide acquisition.

Among the new details in the filing are those showing that Bank of America failed to buy back troubled mortgages in full once it had lowered the payments and principal on the loans — an apparent violation of its agreements with investors who bought the securities that held the mortgages.

The filings show that Bank of America had modified more than 134,000 loans in such securities with a total principal balance of $32 billion. Even as the bank’s loan modifications imposed heavy losses on investors in these securities, Bank of America did not reduce the principal on second mortgages it owned on the same properties. The owner of a home equity line of credit is typically required to take a loss before the holder of a first mortgage. By slashing the amount the borrower owes on the first mortgage, Bank of America increases the potential for full repayment of its home equity line. Bank of America carried $116 billion in its home equity loans on its books at the end of the third quarter of 2012.

This new information is part of a suit that alleges BofA's $8.5 billion dollar settlement of shady mortgage practices back in the summer of 2011, that settlement was letting BofA off far too easy (about 2 cents on the dollar), and it was made without proper analysis of all the wrongdoing by BofA. So, the acquisition of Countrywide offered BofA a scape goat, an excuse for nasty behavior. The only problem is that they kept running things the same way as Countrywide.

Meanwhile, the Justice Department, along with state prosecutors, plans to file civil charges against Standard & Poor's Ratings Service, accusing the firm of fraudulently rating mortgage bonds that led to the financial crisis. A suit against S&P would be the first the government has brought against the credit ratings agencies related to the financial crisis. Up until last last week, the Justice Department had been in settlement talks with S&P, but negotiations broke down after the Justice Department said it would seek a settlement in excess of “10 figures,” or at least $1 billion, essentially wiping out a full year of profits for the S&P parent company, McGraw Hill.

During settlement negotiations, the Justice Department held out the threat of a criminal case against S&P. Ultimately, the government plans to bring a civil suit, which has a lower burden of proof than a criminal case. And we all know the Justice Department hates to work hard to insure fair and equal justice under the law.

So you're probably saying: “Hey, this whole Euro-zone dysfunction is nothing new. So what if another Euro-bank gets fined for being sleazy scum bags? So what if there's a corruption scandal in Spain? So what if I haven't even mentioned Greece or Cyprus? So what if the austerity measures are grinding the life out of the Euro-economy like a jack-boot on the throat? What does all that have to do with a downturn in the US stock market?

And the answer is – it's a good excuse.

We have a couple of big, juicy round numbers serving as resistance; the Dow is staring down 14,000 and the S&P is pushing 1500. And then we have record highs to consider. And then we have to pause and consider that the move in January looked nearly parabolic. And that forces us to ask some questions. Has the economy actually improved? Can the average investor continue to ignore stocks or can the markets find greater fools to step up to the plate and donate their money?

Why worry; the markets always go up; except when they don't.

With the stock market up more than 100 percent from those scary days in early 2009, it seems we’re in danger of repeating the same old cycle of swearing off stocks forever during scary markets, missing a huge rally and then deciding it’s time to buy when stocks are high again. Or maybe it's time to sell. Actually, the thing to do right now is to make sure you have a plan in place which covers scenarios such as February 2013, and probably the first question to be answered when creating a plan is: Why are you investing this money in the first place?

And what this really tells us is that the US and Euro-zone economies are a bit stronger and more resilient than than we imagine. And when black swan events are predicted and discussed, they rarely happen; they are instead avoided.

The Energy Information Administration says Americans spent a record amount on gasoline last year, with more of their income going toward motor fuel costs than at any time since the 1980s. The average household expenditure on gasoline hit $2,912 in 2012, or just under 4 percent of pre-tax income, as higher prices at the pump canceled out the effect of more efficient vehicles.

This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008. The previous record amount was just below $2,750 in 2008, as crude oil prices spiked toward $150 a barrel in the first half of 2012. Global crude oil prices averaged around $111 in 2011 and 2012. The average cost of a gallon of gasoline in U.S. cities was $3.70 last year, up more than 30 percent since 2010. And although prices are down from 12 months ago, prices are moving higher; up 4 cents last Friday alone.

On February 3, 1913, the 16th Amendment to the Constitution was ratified; the reason that's important is because it marks 100 years of federal income tax.

And finally, there's one thing I think we all learned from yesterday's Super Bowl: don't forget to pay your electric bill on time. 

Monday, Ocotber 22, 2012 - What's the Over-Under on a Thank You Note?

What's the Over-Under on a Thank You Note?

by Sinclair Noe

DOW + 2 = 13,345
SPX + 0.63 = 1433
NAS + 11 = 3016
10 YR YLD + .03 = 1.80
OIL – 1.79 = 88.26
GOLD + 9.00 = 1730.50
SILV +.38 = 32.55
PLAT – 9.00 = 1614.00

I never knew that you could do these things but apparently you can. How many times do you think you will hear the word China or Chinese in tonight's debate. The over/under on China is 7. You can actually bet on how many times you'll hear a particular word or phrase. The over /under on Benghazi is 25. A year ago, I didn't even know where Benghazi is; now it will probably be all over the debate. The over/under on terror/terrorists/terrorism or some other form of the word; the over under is 37 and this includes both candidates and the moderator. The over/under on Federal Reserve is one. Who knew? I'm not advising you actually place a wager on this. In fact, I think it would be a bad idea; but this is what it's boiled down to: bread and circuses, a chicken in every pot and cheap entertainment for all. The winner tonight could very well determine which man will be what was once called without irony The Leader of the Free World. There is a good chance that the winner tonight will be the one who convinces us that foreign policy actually matters to your wallet. If it happens overseas it impacts us here both in security and our pocketbooks.

While gas prices have little to do with decisions made by politicians, the issue was center stage in the second presidential debate between Mitt Romney and President Obama. Certainly, lower gas prices are helpful in terms of consumer spending by increasing disposable income, and if prices come down at a rapid rate in the next three weeks, that would tend to help the incumbent. It may not be logical, but if people see problems with the high cost of food or gas, it’s the president who tends to get the blame.

After some regions around the country reported record-high gas prices, the shock of high gas prices is set to lessen a bit. This past summer's high gas prices have lasted unusually long into autumn, but the decline has finally begun, with some states reporting their average price for a gallon of gas falling beneath $3. Gas prices are set to fall at a rate of about 50 cents per gallon, a welcome sign for Americans paying a national average of $3.86 in recent weeks. The average price for gas now sits at $3.69 a gallon, but that number is expected to decrease to $3.35 by Thanksgiving.

Earlier this month, Californians saw $4.65 leave their wallet for every gallon of gas they bought, a four-year record (not when adjusted for inflation, though). An Exxon Mobile refinery was knocked out by a power outage in the early days of October, leading to a price spike at gas stations. Some station owners stopped selling gas altogether, refusing to shell out money at the expensive wholesale prices. You may find it hard to believe, but prices are coming down. Unless something happens to push prices higher.

Crude oil prices remained steady in European trading today ahead of the IMF meeting later this week. Tensions between Turkey and Syria and tighter sanctions against Iran on its nuclear development continued to support prices. Concerns over oil supply shortage reemerged as President Obama approved a framework for tighter sanctions on Iran. Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei stated that "these sanctions are barbaric. This is a war against a nation... But the Iranian nation will defeat them". Sounds like the ayatollah is feeling the pinch from sanctions. This, adding to the recent conflict between Turkey and Syria, boosted Brent crude oil more than WTI crude oil. Spread between WTI and Brent crude oil prices widened to as much as 22.5 on Monday.

European exchanges were, however, weighed down by the IMF's comments that "downward spiral of capital flight, breakup fears and economic decline".

In IMF's latest Global Financial Stability Report, the world lender signaled concerns over the situation in Eurozone and anticipated as much as US$ 4.5 trillion is needed through 2013 so as to achieve the fiscal target. It stated that "intensification of the crisis has manifested itself in capital outflows from the periphery to the core at a pace typically associated with currency crises or sudden stops". Meanwhile, the ESM and OMT ( the bailout funds) "must be regarded by markets as real, not ‘virtual' and should be coupled with credible conditionality". According to the IMF, "restoring confidence among private investors is paramount for the stabilization of the Euro area".

French and German leaders have been meeting to put together a plan to prevent a downward spiral in the Euro-zone; they held a two-day-all-night summit. Apparently they didn't get much sleep. Apparently that created some confusion. Early reports were mostly optimistic that Europe’s top politicians had found a breakthrough in negotiations surrounding the creation of a pan-European banking union. Or not. Later there was a statement released by the summit leaders that they simply agreed on the “need to move towards an integrated financial framework” and set the bar at “agreeing on a legislative framework” where that could happen. It also did not mention if the framework would be for all of the euro zone’s banks or simply the several dozen deemed as “systemically-important,” a huge bone of contention surrounding the issue.

French President Hollande said “there was an agreement, a good agreement”; and then German Chancellor Merkel said: “We shouldn't disappoint markets by changing short-term announcements again and again.”

And while the summit went washed out in a downward spiral, we learn the true cost of the economic policy in the Euro-zone. Austerity cuts by the Greek government have forced local health officials to curtail anti-mosquito spraying programs, and this has led to the re-emergence of a once-extinct disease – malaria. Global health organizations have also warned travelers to avoid journeying to parts of the country’s south where the disease has been detected, worrying that the capital may soon be afflicted. Greece has not recorded a case of malaria since 1974 – this year, at least 70 people have been acknowledged to have contracted the illness through the first nine months of the year, plus there have been 16 deaths from West Nile virus, another disease spread by mosquitoes.

There was a march against austerity in London over the weekend. I read of a government finance minister justifying the need for austerity in the fiscal plans. One of the arguments is that it is necessary for the sake of the children; you know, the argument about debt being a burden on future generations, or at least the future generations that are left after the malaria outbreak.

So, anyway, tonight is the big debate; the bumper match; it could be a tie-breaker. Right now, it is shaping up to be an extremely close race to election day. One survey last month from the German Marshall Fund found Europeans breaking 75 percent for Obama and 8 percent for Romney. Even conservative leaders have maneuvered themselves to appear closer to the U.S. president, reasoning that they can get their own electoral bump from doing so, although popular enthusiasm for Obama has diminished after a public frenzy in 2008.

Three years into an economic crisis in the euro zone that has threatened to spill into the United States, many European leaders have built alliances with the Obama administration that they worry would reset to zero under Romney. The Republican challenger has pointed to Europeans as symbols of the big-government socialist state that he says Obama wants to build.

In Germany, the bulwark of austerity in Europe, Chancellor Angela Merkel would probably prefer an Obama victory, analysts say, although Ronald Reagan was a hero of her youth. Her center-right Christian Democratic Union has historically aligned with Republicans, but Merkel has focused on a vision of fiscal sustainability that includes high taxes along with lower government spending. A mid-October Emnid poll for the Bild newspaper found that 82 percent of Germans expected Obama to win, compared with 11 percent expecting a Romney victory.

In China, far more people appear to be paying attention to the U.S. presidential race this year than in 2008. Much of the Chinese coverage of the presidential campaign has focused less on who might win than on China-bashing rhetoric from the candidates.

Try keeping track of some of the key phrases when you watch the debate tonight, but it isn't something I would wager on.

Some of you have said that I am a little rough on big banks; what about others? You ask. What about insurance companies? OK.

The US Treasury Department may sell the rest of its holdings in insurer American International Group within the next few months. The government cut its stake in AIG to 16 percent from 77 percent in four share sales this year, most recently in September, after acquiring 92 percent in a bailout during the financial crisis.

The US has recovered, or nearly recovered, its $182 billion commitment to AIG, which included a credit line and the purchase of mortgage-linked securities. AIG sold units in Asia to rivals MetLife and Prudential Financial to help repay the bailout, scaling back in the region. The company is working to improve results at its Chartis property-casualty unit by shunning lower-priced business, as Benmosche seeks to attract private investors.

Robert Benmosche, the CEO of American International Group is still bitter Congress had the gall to question why employees in his bailed-out firm should have received multimillion-dollar bonuses in the midst of the financial crisis.

In a cover story in New York Magazine, Benmsoche is quoted as railing against what he believes is the view creeping into U.S. governing institutions that “there’s such a thing as a free lunch,” pointedly noting the AIG bailout “wasn’t a free lunch” but a loan. Whether AIG's repayment of its bailout loans and the sale of associated investments resulted in a profit for the government is debatable. Benmosche’s dislike for seeing himself or his company in debt to the government has been widely discussed ever since the executive came out of retirement in 2009 to take over the reins at AIG. In an early pep talk with employees, a tape of which was leaked to various financial media outlets at the time, Benmosche was heard belittling the aid given by the Treasury and insulting specific officials who had been critical of the firm. Earlier this year, Benmosche made some waves when he told Bloomberg News “retirement ages will have to move to 70, 80 years old” in the euro zone to solve the fiscal crisis facing some countries.

Benmosche says he feels indignant that no one from the government said “thank you” to his firm when it was able to repay most of the emergency loan provided by Uncle Sam in 2008. Ahhhh....hhhh.

Meanwhile, with a completely different matter...

AIG will pay an estimated $300 million owed on life-insurance claims. That payment will be divided among 39 states and the District of Columbia. American International Group has agreed to an $11 million settlement with a group of states over its claims settlement practices for life insurance policies; this amount will go to the regulators for monitoring costs. AIG is the latest insurer to settle state probes over its use of the Social Security "death master" file, joining companies like MetLife and Prudential.

State regulators have alleged that insurers used the list of recently deceased people to stop making annuity payments to dead customers, but, at the same time, did not use the list to check whether any life insurance policy holders had passed away.

Pennsylvania authorities said AIG had agreed to use the death master file "on a uniform basis" to find dead policyholders and pay beneficiaries. The company said in a statement it began a process of matching policyholder records against the death master database last year to find accounts where no claim had been made yet.

AIG also said it would increase reserves by $55 million in the third quarter to cover potentially accelerated benefit payments under the settlement. In addition to Pennsylvania, the other states listed on the agreement were Florida, North Dakota, California, Illinois, New Hampshire and Texas.

AIG joins a roster of insurance companies that have pledged to change the way they handle life-insurance claims. Last week, Nationwide agreed to pay $7.2 million in a similar settlement with state insurance regulators. MetLife and Prudential have made similar arrangements.

Mr. Benmosche, about that Thank You Note..., we'll check the list.