Tuesday, August 19, 2014 - It’s Just a Matter of Time

It’s Just a Matter of Time
by Sinclair Noe

DOW + 80 = 16,919
SPX + 9 = 1981
NAS + 19 = 4527
10 YR YLD+ .02 = 2.40%
OIL (sept) = 94.48
GOLD – 2.00 = 1296.20
SILV - .18 = 19.50

The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.4%, but energy costs declined 0.3%; the first drop in energy prices since March. Consumer prices have risen an unadjusted 2% over the past 12 months, down slightly from June. Prices surged in the early spring but have since tapered off. Excluding volatile food and energy prices, the core rate has risen 1.9% in the same span, unchanged from the prior month. Almost all of the increase in consumer prices can be traced back to housing costs, or shelter prices; over the past year, shelter prices are up 2.9%.

Hourly wages have risen about 10% overall since June 2009, to $24.45 an hour. But over the same span they’ve slipped 0.3% in “real” or inflation-adjusted terms. Since the Great Recession ended five years ago, the amount of money Americans earn each hour after adjusting for  inflation has actually fallen. And that largely explains why the economy is growing so slowly.

The Federal Reserve should be in no hurry to raise interest rates because there is no serious threat from inflation, at least not now.

According to the US Travel Association and GfK, a market research firm, you might not take a vacation this year. About 40% don't plan on using all of our paid time off. The share of American workers taking vacation is at historic lows. In the 1970s, about 80 percent of workers took a weeklong vacation every year. Now, that share has dropped to a little bit more than half. The declining popularity of vacation has wide-ranging effects not just on workers, but also on their employers and indeed the overall economy. Studies have found that taking fewer vacations is correlated with increased risk of heart disease; other research has shown that workers who take vacations, or even a small break during the workday, are more productive when they return. This vacation aversion is a North American phenomenon; the US is the only “advanced” economy that doesn’t require companies to give paid vacation days.

Housing starts rose to an eight-month high in July. Groundbreaking for new housing jumped 15.7% last month to a seasonally adjusted 1.09-million unit annual pace; this follows 2 straight months of declines. Groundbreaking for single-family homes, the largest part of the market, increased 8.3% in July to a seven-month high. Starts for the multi-family homes segment, such as apartments, jumped 33%.

Home Depot reported quarterly profit today. Profit rose 14% to $2.05 billion. Sales rose 5.7% to $23.8 billion. The number of transactions rose 4.2%. Home Depot said it expects same store sales to grow faster in the second half of the year, as more people take on remodeling projects. However, Home Depot maintained its full-year sales growth forecast of about 4.8%. Lowe's, the world's second-largest home improvement company, is scheduled to report results tomorrow.

Back in 2006 bust, when the housing market went bust, Phoenix was one of the first cities to get hammered with lower prices; in 2011, Phoenix was one of the first cities to snap back; prices, off by nearly 60% from peak, then rebounded sharply; home prices are up nearly 46% from the 2011 low. The number of homes in some stage of foreclosure has fallen to about 4,300 homes today from more than 50,000 four years ago.

Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. Investors accounted for nearly 15% of homes bought in June, down from about one-quarter last year and one-third of sales in June 2012. The market is moving away from from bargain-hunting investors, who typically pay cash for distressed properties, to traditional buyers with mortgages. The Phoenix market is slowly moving back to normal, but there is still a long way to go.

Employment in Phoenix, after expanding at an average annual pace of 2.6% and 2.8% in each of the last two years, is up just 1.5% so far this year. When people don’t have a job or are not secure in their jobs, they don’t buy houses. The sluggish local economy is compounded by consumers still too battered from the bust to think about getting a loan. Some don't have sufficient equity to turn a house sale into an adequate down payment on their next purchase. Others suffered credit blemishes or income hits that make banks reluctant to lend.

Reuters reports Phoenix based PetSmart is exploring a potential sale of the company. Jana Partners, which has reported a 9.8% stake in PetSmart, has been calling on the company to pursue a sale after what it calls years of financial underperformance. There is no guarantee the review will lead to a deal and PetSmart could still determine that it would be better off on its own.

Today marks the ten year anniversary of Google. The company went public August 19, 2004 at a price of $85 a share; and it’s gone up 1,304% since then. A few stocks have done better over that time, but only a few, and of those, only Apple was in the S&P 500 10 years ago when Google went public. Today, Google’s revenue tops $65 billion, more than all but 40 US companies. Net profit margins exceed 20%, higher than all but three. Ten years ago, Google had a forward PE of 52; today, the forward PE is 20. So as share prices have constantly moved higher, valuation has constantly moved lower; which is a neat trick.

Over the past 10 years, or you could say over the past 25 years, a great deal of wealth has flowed to the tech giants of Silicon Valley; which means that the wealth has flowed away from Wall Street. And the techies have finally figured out they don’t need Wall Street bankers to make a deal. According to data from Dealogic, approximately 70% of the tech deals completed in early August have been sealed without a Wall Street bank consultant helping the buyer identify the transaction. And over the past two years, the trend has been growing, with more than half the tech deals in 2012 occurring without a banker working on behalf of the buyer. This M&A consulting shift highlights a subtle but growing divide between fee-eager bankers and the tech giants of today.

Maybe the problem is that the banks just have a hard time remembering who their clients are. Case in point: you may remember the story of Standard Chartered, the British bank, which back in 2012 paid about $667 million to settle charges that it had engaged in money laundering by making transfers for clients in Iran and other countries that were covered by American sanctions. They had to add compliance monitors. A few months later the bank’s chairman denied any wrongdoing, which was a direct violation of the settlement; and he was forced to quickly recant. Today, it seems that all of those new legal staffers and crime-fighting committees also didn’t get the memo about what they are meant to be doing. New York’s financial regulator slapped another $300 million fine on Standard Chartered for “failures to remediate anti-money laundering compliance problems as required” in its previous settlement.

Part of the bank’s 2012 agreement included hosting an independent monitor permanently installed by regulators on-site to vet anti-money laundering procedures. This monitor was back-testing the bank’s processes and found them lacking, particularly when it came to flagging suspicious dollar transfers from its Hong Kong and United Arab Emirates affiliates.

In a statement, Standard Chartered said that it “has already begun extensive remediation efforts and is committed to completing these with utmost urgency.” And this time they really, really mean it; not like last time. So, this raises the question of how many times a bank can break the law, and get away with a slap on the wrist. What does a bank have to do before they forfeit their charter?

The New York State regulator, Benjamin Lawsky, said: “If a bank fails to live up to its commitments, there should be consequences. That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”

So, the penalty is nearly $1 billion in fines over the past couple of years, but actually works out to about 12% of bank profits over the same time.

You might also remember last month when Attorney General Eric Holder announced the $7 billion settlement with Citigroup for its role in packaging troubled mortgages into securities and selling them as investments in the years before the crisis, even though a bunch of Citigroup bankers knew better and did it anyway. And last November, there was a settlement with JPMorgan. And there is a chance that later this week we will see a settlement announced with Bank of America.

It all falls in line with the “too big to fail” idea known as the Holder Doctrine, which stems from a 1999 memo, when then Deputy AG Holder included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern. Holder was thinking of the collapse of Arthur Anderson after the collapse of Enron. So, now Holder holds to the idea of settlement over prosecutions.  Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong.

The problem is, of course, that these settlements allow for the Wall Street bankers to get away with their bad behavior without being held the slightest bit accountable. And with no real deterrent, as Standard Chartered has just confirmed, it’s just a matter of time until they do it all over again. 

Monday, July 14, 2014 - Clearing Up Outstanding Issues

Clearing Up Outstanding Issues

by Sinclair Noe

DOW + 111 = 17,055
SPX + 9 = 1977
NAS + 24 = 4440
10 YR YLD + .03 = 2.55%
OIL + .22 = 101.05
GOLD – 32 = 1307.80
SILV - .54 = 21.00

The Dow Industrial Average hit an intraday high of 17,088, but couldn’t close above the old closing high of 17,074 from July 2.

I woke up this morning and checked the Euro markets; the headline read: Global Stocks mostly higher as Portuguese debt concerns ease. Banco Espirito Santo’s parent company sold part of its stake in the bank to pay off short-term debt, so everything is cool. Portuguese bond prices popped. Nothing to see here. Move along, move along.

Just to refresh your memory, Banco Espirito Santo is 25% owned by Espirito Financial Group, which is in turn 49% owned by Espirito Santos Irmaoes, which in turn is wholly owned by Rioforte investments, which in turn is wholly owned by Espirito Santo international. What’s the point of owning a bank if you can’t make loans to yourself; and that’s what happened, until last week, when Espirito Santo International, the parent company failed to make a payment on short-term debt. The collective companies under the Espirito Santo umbrella have borrowed several billion from the bank, and then the bank made about 8 billion euros in loans to Angola, and that has a non-performance rate approaching 90%. And I know you’re wondering why you should be concerned about loans to Angola, and it’s because everything in finance is leveraged. No loan lives in isolation.

Panic ensued. The fear was that creditors and/or depositors might be on the hook in the event of a shortfall; no one could be certain because of a lack of transparency. But the bank says they have a cushion; the parent company sold a few assets to come current on the loan. Hopefully, I’ve cleared up the transparency issue. Regulators say there’s nothing to worry about and they should know because they didn’t see this coming in the first place, and so there’s nothing to worry about; the situation in Portugal is contained, and global stocks moved higher.

Here in the US, we know a thing or two about banks behaving badly. Today, as expected, Citgroup agreed to pay $7 billion to settle civil claims the bank misled investors about toxic mortgage backed securities leading up to the 2008 crash. Citigroup admitted it was aware that "significant percentages" of sample loans did not comply with underwriting guidelines but the bank pooled them into securities anyway. In one 2007 deal, a Citigroup trader told colleagues in an email he had reviewed a due diligence report on the poorest quality loans, and that they "should start praying." Many of the loans listed unreasonable borrower incomes or home values below the original appraisals, the trader wrote, saying he "would not be surprised if half of these loans went down." Citigroup still securitized loans from the pool. Quite simply, they knew the mortgage backed securities were full of bad loans, they lied about it to make the sale.

Under the agreement, Citi will pay $4.5 billion in cash and provide $2.5 billion in aid to low-income tenants and struggling homeowners; details of terms of the help and how many will benefit are not yet known, but there’s no indication people they will go back to help make people whole. Some homeowners with Citi mortgages could see the amount of their loans reduced, or could have their interest rates reduced. There will also be down payment and closing cost assistance to future homebuyers. But none of that starts until 2018. I don’t know why.

Last year Citi settled with the FHFA for $250 million. The regulator of Fannie Mae and Freddie Mac had sued the bank over soured mortgage securities sold to the taxpayer-owned entities. The cash portion consists of a record $4 billion civil payment to the Justice Department, double JPMorgan’s penalty in November, and $500 million to resolve claims from five state attorneys general and the Federal Deposit Insurance Corp.

And there is a little gift for Citi; the state AG and FDIC payments would be deductible, along with any costs Citigroup actually incurs in relation to consumer relief, which could be less than the $2.5 billion amount of relief in the settlement.

As part of the settlement, Citigroup “will take a charge of approximately $3.8 billion pre-tax in the second quarter of 2014." Second-quarter earnings results were also posted this morning, and if you exclude the multi-billion dollar settlement, Citi beat expectations. The settlement wipes out the quarter’s earnings, but if you look the other way, it was a kick ass quarter for earnings. Citigroup exceeded Wall Street expectations in the second quarter with adjusted earnings of $1.24 a share. On that basis, analysts had been expecting Citigroup would earn $1.05 a share. Citi posted a 15% drop in trading revenue. Investment banking revenue rose 16% from a year ago. Mortgage originations were down.

This is a civil settlement, not a criminal settlement. Attorney General Eric Holder at a press conference said: “Citi settlement doesn’t absolve bank, employees from criminal charges.” Of course nobody expects the Department of Justice to pursue criminal charges. Citi is also under investigation for possible fraud and money laundering in its Mexican unit. And if you look at all the wrongdoing, you might come to the conclusion that this is just a corrupt organization.

If you’re wondering where the next subprime meltdown will occur, well you can pick from a wide selection of possibilities. Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give. Debt ratios in the developed economies have risen by 20 percentage points to 275% of GDP, since the Lehman crisis. Credit spreads have fallen to wafer-thin levels. Companies are borrowing heavily to buy back their own shares, and 40% of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with fewer protections from loss.

The Bank of International Settlements, the central bank for the central bankers of the world, warned it is annual report two weeks ago that equity markets had become "euphoric". Volatility has dropped to an historic low. European equities have risen 15% in a year despite near zero growth and a 3% fall in expected earnings. The cyclically-adjusted price earnings ratio of the S&P 500 index in the US reached 25 in May, six points above its half-century average. Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally.

Some of you might pick the student loan market, with over $1 trillion in outstanding loans and growing. The deeply indebted college graduate has become a stock character in the national conversation: the art history major with $50,000 in debt, the underemployed barista with $75,000, the struggling poet with $100,000. That’s not really typical of student loan debt. Only 7 percent of young-adult households with education debt have $50,000 or more of it. By contrast, 58 percent of such households have less than $10,000 in debt, and an additional 18 percent have between $10,000 and $20,000.

That’s not to say student loan debt is not a concern, it is, and it is growing. In 2010, 36 percent of households with people between the ages of 20 and 40 had education debt, up from 14 percent in 1989. The median amount of debt, among those with debt, more than doubled, to $8,500 from $3,517, after adjusting for inflation. Student loan debt is a problem, but it isn’t a new problem, it’s just a trillion dollar problem now, but it hasn’t imploded in the past 2 decades and there doesn’t seem to be an immediate catalyst.

How about a bubble in energy? Ambrose Evans- Pritchard writes: Data from Bank of America show that oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building. This has never happened before in US history, even during the Second World War when oil production was a strategic imperative.

The International Energy Agency (IEA) says global investment in fossil fuel supply doubled in real terms to $900 billion from 2000 to 2008 as the boom gathered pace. It has since stabilized at a very high plateau, near $950 billion last year. Output from conventional fields peaked in 2005. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years….

There are, of course, other candidates for the bubble prize of the current economic cycle, now into its 22nd quarter and facing the headwinds of US monetary tightening. China’s housing boom has echoes of the Tokyo blow-off in 1989, and is four times more stretched than US subprime in 2006, based on price-to-income…Emerging markets have racked up $2 trillion in foreign currency debt since 2008. They are a much larger animal than they were during the East Asia crisis of the late 1990s, so any crisis would do more damage.

Yet the sheer scale of “stranded assets” and potential write-offs in the fossil industry raises eyebrows. IHS Global Insight said the average return on oil and gas exploration in North America has fallen to 8.6%, lower than in 2001 when oil was trading at $27 a barrel. What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?

And that’s before we get to another threat to fossil fuel investments that Evans-Pritchard mentions: that governments might get serious about climate change and impose meaningful restrictions, like hefty carbon taxes. Right now, that seems like a tail risk, but the crisis just past was a tail event as well. And much higher energy prices resulting from restriction on fossil fuel production would slow down economic activity markedly, which again could blow back to leveraged investors in unexpected ways.

Thursday, May 22, 2014 - A Heckuva Business Model

A Heckuva Business Model
by Sinclair Noe

DOW + 10 = 16,543
SPX + 4 = 1892
NAS + 22 = 4154
10 YR YLD + .02 = 2.55%
OIL - .31 = 103.76
GOLD + 1.80 = 1294.70
SILV + .10 = 19.59

Yesterday we told you Russia and China had signed a 30 year, $400 billion dollar deal for Russia to deliver natural gas to China. Today, both countries vetoed a United Nations Security Council Resolution seeking to refer Syria to the International Criminal Court for possible war crimes. In the short-term, the Russia-China gas deal won’t have a big impact. The deal will not be in place until 2018 and even then will only see Russia selling a fraction of its gas exports to China every year, exports to the EU could still well be two to four times the size.

The economic links between Russia and Europe will continue to be significant and they will continue to be reliant on each other when it comes to energy; the former to sell the latter to buy, but this link gives an advantage to Russia, especially when the weather turns cold. At least symbolically the deal highlights Russia’s desire to move away from links with Europe. Combine this with Europe’s desire to increase energy security and the relations between the two sides could become increasingly cold and distant. Although, some countries due to geographical proximity, such as Bulgaria or Hungary; or due to long standing economic links, such as Germany - will surely continue to have good relationships with Russia. The entire Ukraine crisis has brought the return of a Cold War, and the gas deal sets up an East and West Economic Bloc.

It also raises questions over future tie ups between Russia and China. Areas such as payments systems, broader financial markets, transportation and machinery have all been touted as sectors for potential cooperation between the two countries. Again while a long term issue, such ties up may concern the West since Russia and China are currently reliant on their exports in many of these areas. Both the EU and US will need to figure a clearer policy for how to deal with such changes.

Unrest continues in Ukraine. BBC reports at least 11 Ukrainian soldiers were killed during an attack on a government checkpoint in eastern Ukraine. The attackers were described as heavily armed terrorists. Russia has claimed that it was pulling back troops from the Ukrainian border, but that has not been confirmed by satellite photos.

Thailand’s army chief went on television today to announce a military coup, after two attempts to negotiate an end to political impasse failed. The country’s Constitution was “temporarily suspended,” and the military said it terminated the caretaker government but said it expected the nation’s Senate, courts and independent organizations to function normally. The military imposed a nationwide curfew, and ordered all street protesters to leave their rallying sites.

In economic news, the National Association of Realtors reports existing home sales increased 1.3% to an annual rate of 4.65 million units, marking only the second gain in sales in nine months. Sales remain down 15% from a peak of 5.38 million units hit in July. Compared to April last year, sales fell 6.8%.The inventory of unsold homes on the market increased 6.5% from a year-ago to 2.29 million in April. That was the highest level since August 2012. The median home price rose 5.2%, the slowest pace since March 2012.

In this cycle we’ve had enormous price increases before we had the demand, which was a function of institutional buying of homes, which pushed prices higher. One thing we should have learned about housing is that when prices start rising, there is a herd mentality that kicks in. It wasn’t just institutional buying, it was a combination of events that swirled around institutional buying. The institutional buyer bought up distressed properties, resulting in fewer distressed inventory, add in people who were locked into their homes by negative equity or low equity;  and for many would-be buyers, it’s just tough to get a decent mortgage, or any mortgage at all.

This doesn’t mean banks aren’t lending – they are; it turns out that banks are ready, willing, and able to lend to small businesses, but you might not like the deal. Typical interest rates are about 125%.  Subprime business lending, the industry prefers to be called “alternative”, has swelled to more than $3 billion a year; that’s twice the volume of small loans guaranteed by the Small Business Administration. Wall Street banks are helping the industry expand by lending originators money. They’re starting to package the loans into securities that can be sold to investors, just as they did for subprime-mortgage lenders. It’s a heckuva business model.

Manufacturing activity picked up in May; Markit's "flash" US manufacturing purchasing managers index rose to 56.2 from 55.4 in April.

New applications for unemployment benefits rose sharply in mid-May, reversing a big drop earlier in the month that put initial claims at a seven-year low. The number of people who applied for new benefits climbed by 28,000 to 326,000 in the week ended May 17. That number might grow in the coming weeks thanks to HP.

Hewlett Packard announced earnings after the close, sales fell, revenue fell, but profits were higher, and they will cut an additional 11,000 jobs, bringing the total for outstanding job cuts to 16,000.  It’s a heckuva business model.

Yesterday, William Dudley, the president of the New York Fed gave a speech to the Regional Economic Press Briefing in New York, and he said: “There have been significant and long-lasting changes to the nature of work. As a result, many middle-skilled workers displaced during the recession are likely to find that their old jobs will never come back. Furthermore, workers are increasingly facing higher skill requirements in order to land a good job. These dynamics in the labor market present a host of challenges for the region to address. However one thing is clear: workers will need more education, training and skills to take full advantage of the types of job opportunities being created in our region, as well as across the nation.”

No doubt education is important. More education and skills will not stop your fall but it might slow it down. And a point that Mr. Dudley failed to grasp, or at least communicate is that a significant percentage of corporate profits have relied upon the widespread loss of worker economic share over the past few decades.

If you have bought or sold on eBay in the past few months, change your password and monitor your financial information. The company says hackers attacked between late February and early March with login credentials obtained from "a small number" of employees. They then accessed a database containing all user records and copied "a large part" of those credentials.

The hackers stole email addresses, encrypted passwords, birth dates, mailing addresses and other information, though no financial data, nor PayPal databases were compromised. The eBay breach would be larger than the one Target Corp disclosed in December, which included some 40 million payment card numbers and another 70 million customer records. Why are we just hearing about the eBay hack now? That is a very good question and so far eBay hasn’t provided a good answer.

We’ve noted many times that bankers have a get out of jail card. This week, Credit Suisse entered a criminal guilty plea in New York for its role in an ongoing tax evasion scheme, but that was a corporate entity, and no actual human bankers went to jail; in fact, the CEO and Chairman get to keep their jobs; but today we note that the handcuffs have been slapped on a banker, the former head of investment banking for JPMorgan Chase, in China.

You may recall the recent allegations against JPMorgan in China. Jamie Dimon had a clever little business development strategy to hire the children of Chinese politicians, to win support for JPMorgan banking activities in China; it’s a heckuva business model, except apparently the SEC’s antibribery unit thinks this might be bribery and thus a violation of the Foreign Corrupt Practices Act; except the SEC was not behind today’s arrest, and we all know that US law enforcement and regulators would never actually arrest a banker. However, finding jobs for the children of China’s elite in exchange for bank underwriting is apparently illegal in China, too.  And in China they have this strange custom of arresting people who break the law, even if work for JPMorgan.

In case you missed it, this week’s criminal settlement with Credit Suisse marked a turning point for law enforcement in dealing with the big banks. The Department of Justice says it proves they will go after the big banks and slap them with felonies convictions, even though they get misdemeanor punishment. Well, the proof is in the putting.

And now we have a new case that will show whether there is really any crackdown on wrongdoing, specifically money laundering; regulators are investigating Charles Schwab Corp and Bank of America Corp's Merrill Lynch brokerage over whether the brokerages missed red flags that could indicate attempts to move money illicitly or to feed proceeds from illegal activities into the financial system. The SEC is probing Schwab and Merrill Lynch for violations of anti-money laundering rules that require the brokerages to know their customers.

Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen began urging regulators two years ago to make sure financial institutions are identifying the true beneficial owners of their accounts. Cohen's exhortations came amid concerns that bad actors, such as drug cartel members and terrorists, are growing more creative in their attempts to secretly transfer tainted funds.

The SEC's investigation so far has found Charles Schwab and Merrill did not pay close enough attention to their clients' true identities, and accepted shell companies and individuals with fake addresses as clients. In both cases, some of the accounts, whose ownership the brokerages did not adequately investigate, were eventually linked to drug cartels. The investigation is not yet complete, and the only thing we know with certainty is that it’s a heckuva business model.

Monday, April 07, 2014 - I Don’t Know, They Don’t Know

I Don’t Know, They Don’t Know

by Sinclair Noe

DOW – 166 = 16,245
SPX – 20 = 1845
NAS – 47 = 4079
10 YR YLD - .03 = 2.69%
OIL - .44 = 100.70
GOLD – 5.40 = 1297.90
SILV - .09 = 19.97

The biggest 3 day drop in the markets in about 2 months. All of the sudden we start hearing the Wall Street stock peddlers waxing enthusiastic about the prospects for a correction or a crash or whatever will scare you. Fear sells; with talk about a 1987-like stock market crash, geopolitical unrest in Ukraine and the risk of a debt crisis in China, investors are starting to get jittery. I don’t know, they don’t know.

The big pullback so far has been in the Nasdaq, and especially biotech stocks. As always, you want an exit plan in place before you ever get into a trade; and if you don’t have an exit plan, get one now. You don’t make money by letting profits slip through your fingers.

Earnings season gets underway this week. Expectations have been ratcheted down; at the start of the year, S&P 500 companies were projected to have grown earnings at 6.5%, now that estimate has slipped to 1.2%. We could see companies beat diminished expectations and start a fresh rally or miss expectations and the markets could get a bit ugly. The simple rule of thumb is that when the trailing P/E ratios hit 10, the S&P 500 is likely undervalued; when the P/E hits 20, the market is likely overvalued and that means the market is vulnerable to pullback. Guess where we are on the scale? Does that mean that stock prices are about to roll over and play dead? Not necessarily. All we have to do is add some earnings to the P/E ratio and …

The S&P 500 recently, as in last week, tested highs, even though fewer than 10% of its components were making new highs individually. Despite the fact that the S&P touched new high territory last week, the average stock in the big index is actually down 7%. Then, you can look at volume; down on up days; up on down days, like today. Toss in the presidential election cycle, toss in the old but true idea of “sell in May”, and there are plenty of reasons for caution.

The past couple of years have been easy; buy the dips; buy good names with momentum and ride that pony to profits. Easy. But easy doesn’t last forever. The momentum names look like they’re rolling over. Investors are rolling over into safer sectors. We’ve gone nearly 2 years without a correction of at least 10%, so it just seems like we’re due. So, while there may be value to be found, this does not seem like a good time to load up when high flyers dip. They may bounce back, but they don’t have to; there is no law that requires a bounce. When a momentum play turns, it tends to turn fast and furious.

This continues to be a tale of two markets. While the high flyers stall, the safety of bonds has been drawing bids, and yields have dipped over the past few days, despite the Fed's clear intention to pull back on Quantitative Easing and bond buying. The utility sector has been outperforming, which might be a signal of future volatility. Emerging markets have seen inflows; maybe this is the idea that the US has been the cleanest dirty shirt in the hamper, but the other shirts aren’t ready to be scrapped; call it a reversion to the mean.

Maybe it’s just time to pause and ask why US stocks have priced in so much optimism. Job growth continues but it is not robust and it is not enough to propel the economy to escape velocity; the taper is underway; fiscal policy remains a mess and there is little hope for stimulus from DC.

Corporate America is sitting on a mountain of cash, somewhere between $1.6 and $1.9 trillion, but it’s offshore; they’re afraid to touch it because they might have to pay tax. They could bring that money back home and put it to work, but that would require innovation and sweat and labor. Much of corporate leadership is short-sighted and lazy, and besides, the offshore cash is still good enough to secure a bonus.

One of the key signs of a true recovery is sufficient business confidence to start investing more into their own operations. Many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks. If you’re waiting for capital expenditures to revive the economy, don’t hold your breath.

Larry Fink is the CEO of Blackrock, the largest money manager, he says: “Companies only have a finite amount of cash to invest. Whatever gets spent on buybacks and dividends is that much less available to be spent on investments in employees, research and development, and capital expenditure. It's basic arithmetic. When will the next round of capital investment begin in earnest? As soon as you figure out the answer to that question, you will have gained significant insight into the direction of the economy as well as the next phase of this stock-market rally.”

Meanwhile, let’s look at banks behaving badly. Private banking is a staple of the Swiss economy and for decades, as wealthy Americans concealed their assets through clandestine accounts, US regulators turned a blind eye.

In 2011, federal prosecutors indicted 7 Credit Suisse bankers for abetting tax evasion, but the investigation into Credit Suisse dragged on. The quirks of international law prolonged the inquiry, requiring Swiss courts to review Credit Suisse documents before releasing them to the Justice Department. Ultimately, the Justice Department gained access to many of the documents and interviewed bank employees.

And by the time the Senate subcommittee convened its hearing in February, the Justice Department was closing in on a case. Bracing for a settlement, the bank announced last week that it had set aside roughly $528 million for legal expenses. In addition to the Justice Department investigation, Credit Suisse paid $200 million to settle a case with the SEC in February. In a separate matter, in late March the bank agreed to an $885 million settlement to resolve claims that it sold questionable loans to Fannie Mae and Freddie Mac. Apparently a slap on the wrist and a fine haven’t served as a deterrent.

Now, Benjamin Lawsky, New York State’s top financial regulator, has requested documents from Credit Suisse and is expected to demand additional records this week to try to determine if Credit Suisse lied to New York authorities about engineering tax shelters. In the Senate subcommittee hearings in February, Credit Suisse executives apologized for the misconduct and they also argued that the problems stopped in 2008 and were contained to a few low-level rogue bankers. The bank, which said it voluntarily adopted a number of controls against tax evasion, reported that there was no evidence that executive management knew of the problems.

Lawsky has also petitioned a Senate subcommittee for internal Credit Suisse documents.  The subcommittee questioned bank executives at a hearing in February, and produced a scathing report exposing “a classic case of bank secrecy.” In late March, the Senate agreed to release the internal Credit Suisse documents.

The escalating Credit Suisse probe, along with some recent shifts in international law, might also provide momentum to the government’s uneven effort to collect taxes and punish the banks involved. Typically the punishment has been a fine and a slap on the wrist, but that has drawn scrutiny from politicians lately, and so maybe this will be something more.

Meanwhile, federal authorities have opened a criminal investigation into a recent $400 million fraud involving Citigroup’s Mexican unit, one of a handful of government inquiries looming over Citi.

The investigation, overseen by the FBI and prosecutors from the United States attorney’s office in Manhattan, is focusing in part on whether holes in the bank’s internal controls contributed to the fraud in Mexico. The question for investigators is whether Citigroup ignored warning signs, as other banks have been accused of doing in the context of money laundering.

Federal prosecutors in Massachusetts have sent subpoenas to Citigroup, to examine whether the bank lacked proper safeguards against clients laundering money. Citi also faces a parallel civil investigation from the SEC. And it was just 2 weeks ago that Citi fell short in the Federal Reserve’s stress test. The Fed rejected Citi’s plan to increase its dividend based upon questions about the reliability of Citi’s financial projections.

And that brings us to the tale of Kenneth Lewis, the former chief of Bank of America. Back in 2008, as the global financial meltdown imploded, Bank of America rushed in to acquire Merrill Lynch. Lewis called it the “strategic opportunity of a lifetime” and he said the Fed did not pressure him into the deal. He later admitted he lied. Merrill Lynch was bleeding cash while paying huge bonuses. Bank of America required 2 bailouts from Treasury plus extraordinary lending from the Fed. It is a crime to knowingly deceive shareholders about the financial condition of your company.

Bank of America has paid several fines related to cases brought by various regulators, and there is still an outstanding suit, but the case of Kenneth Lewis wrapped up last week. Mr. Lewis agreed to pay $10 million, which was provided by Bank of America. He is barred from being an executive or director of a public company, but he already retired with a sizeable golden parachute. He did not have to admit or deny wrongdoing.

Wednesday, March 05, 2014 - Not Much Change

Not Much Change

by Sinclair Noe

DOW – 35 = 16,360
SPX – 0.1 = 1873
NAS + 6 = 4357
10 YR YLD + .01 = 2.70%
OIL – 2.40 = 100.93
GOLD + 2.40 = 1337.80
SILV + .02 = 21.26

ADP, a payroll processing company, reports its own monthly jobs estimate each month, just before the government comes out with its monthly jobs report. Today, ADP said the economy added 139,000 new jobs in February; they revised the January number down to 127,000 from the previously reported 175,000. When the Labor Department reports on jobs Friday morning the best guess is about 150,000 jobs and the unemployment rate holding at 6.6%. So, the ADP report is reasonably close.

Separately, initial jobless claims for the past week did not point to any improvement in the labor market with initial claims up 14,000 in the February 22 week to a 348,000 level.

In other news, the Institute for Supply Management’s non-manufacturing index slipped to 53.5 in February from 54 the previous month.

This afternoon the Federal Reserve published its Beige Book, which is a compilation of reports and observations from the 12 Fed districts. Growth slowed in Chicago and activity was stable in Kansas City. While the other eight districts reported growth, the Fed said it was characterized as "modest to moderate" in most cases, an overall downgrade from its last report on January 15, which showed "moderate" growth in nine regions. Business contacts were still upbeat, and real estate activity picked up in some areas, and travel and tourism remained strong. Retail sales growth softened in most districts, partly due to weather. Factory output and sales were affected in regions including Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, and Dallas, where the weather was blamed for utility outages, disrupted supply chains and a slowdown in hiring.

So, the latest Beige Book still reflects weather disruptions. If you were waiting for clean data, this wasn’t it. We might not get clean data from the Friday jobs report. We may need to rethink our idea of data clean from weather disruptions because it seems we are experiencing bad weather with regularity, whether it be the polar vortex or ice storms or drought or hurricanes or tornadoes. If it’s not one thing it’s another.

The big brouhaha in Ukraine seems to be a bit calmer today. The European Union is ready to provide $15 billion of financial support to Ukraine over the next couple of years by way of a series of loans and grants. The assistance would be delivered in coordination with the European Bank for Reconstruction and Development and the European Investment Bank, and is in part contingent on Ukraine signing a deal with the International Monetary Fund. Yesterday, Secretary of State John Kerry visited Kiev to offer moral support and a $1 billion aid package to a Ukraine fighting to fend off bankruptcy. Money soothes the savage beast. And so, there is no fighting today; that’s good.

In time we will probably find out more and more details about who and how this Ukrainian revolution came to be and why; and the best guess is that it was not quite an organic uprising of the masses; and it was probably not a coincidence that a nostalgic stroll along old Cold War paths coincided with Defense Secretary Chuck Hagel’s proposal to cut back Pentagon spending. This is not to say there are no problems in the Ukraine, there are. Internal divisions in Ukraine are real and enduring. Russian aggression in Ukraine is bad, and there really is no justification for this kind of military intervention. US credibility and security is not at stake and there really isn’t anything we can do anyway, short of a full-fledged return to the Cold War. Some people may want that but I don’t much care for the notion.

It’s a good story to imagine the downtrodden Ukrainian everyman fighting for freedom from the Russian overlords, but there’s a better chance that the real story will be told by following the money trail.

In 1998, Washington state voters raised the state’s minimum wage and linked it to the cost of living. Over the past 15 years, the minimum wage in Washington has climbed to $9.32 an hour, the highest in the country. Payrolls at Washington's restaurants and bars, portrayed as particularly vulnerable to higher wage costs, expanded by 21%. Poverty has trailed the US level for at least 7 years.

According to a Congressional Budget Office report published February 18, increasing the minimum wage would lift 900,000 people out of poverty and add $31 billion to the earnings of low-wage Americans, but it might reduce employment by up to a million jobs; actually that last point is an area where the CBO report was fuzzy, saying it might cost up to a million jobs or it might not reduce  employment; as a result, most people split the difference and say it will reduce employment by 500,000, but that’s not what the report says, and it’s  not what the data from Washington state says.

One possible explanation is that businesses have plenty of ways besides job cuts to absorb the costs of a minimum-wage increase: price increases, reductions in profits and savings from lower turnover can help soak up the shock.

As of January, 21 states and the District of Columbia had a higher minimum wage than the federal floor. Cities including San Francisco and Santa Fe, New Mexico, require even higher hourly earnings than the proposed federal level, at $10.74 and $10.66 respectively.

New Jersey voters in November approved increasing the minimum wage by $1 an hour to $8.25, tying future increases to the consumer price index. In January, after the raise took effect, private employers added 8,320 jobs in New Jersey, according to ADP Research Institute. That was the fastest pace of job growth since December 2012.

Today, the Center for American Progress issued a report showing that raising the minimum wage from $7.25 to $10.10 an hour would reduce federal food stamp spending by $4.6 billion a year. Last year, a report done by researchers at Berkeley and the University of Illinois asserted that taxpayers are spending nearly $7 billion a year to supplement the wages of fast-food workers, many of whom earn the minimum wage or close to it.

Now, let’s get caught up on banks behaving badly. The latest news on this front regards Citigroup which disclosed on Friday that it had been defrauded of $400 million in a scheme involving a financially shaky oil services company in Mexico. And while that was going on, a Citigroup affiliate based in Los Angeles received a grand jury subpoena from federal prosecutors in Massachusetts related to anti-money-laundering compliance. The focus of the subpoenas is unclear.

The affiliate has also received a subpoena from the Federal Deposit Insurance Corporation related to its anti-money-laundering program and the Bank Secrecy Act. The affiliate, Banamex USA, provides banking services to individuals and small businesses in the United States and Mexico. Until recently, it was a large player in transferring money across the border between family members.

Apparently the two issues, one involving fraud and the other involving money-laundering compliance, are unrelated.

In 2006, the bank’s computer systems got fouled up and certain business units failed to process Citi’s foreign transactions to ensure compliance with anti-money laundering regulations for about 4 years until the computer error was fixed. In 2012, Banamex USA entered into a consent order with the FDIC and California Department of Financial Institutions to improve its oversight and tracking systems. In 2013, Citigroup entered into another consent order with the Federal Reserve and agreed to take companywide actions also intended to bolster its compliance efforts. Now we have subpoenas in the case.

Meanwhile, the New York Times is reporting that the Treasury Inspector General believed that JP Morgan had used attorneys to “investigate” its conduct in dealing with Bernie Madoff with the intent of impeding regulatory scrutiny and allowing staff to get away with perjury. In this case it goes back to the idea of what JP Morgan knew about Madoff’s Ponzi scheme and when did they know it.

We know that JPMorgan was Madoff’s banker. JPMorgan hired lawyers to investigate, or maybe they hired outside law firms as a way to put a shield around the questionable activity, to impede regulators from getting to the bottom of criminal or merely potentially costly conduct. This raises the question of attorney client privilege.

Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers’ interview notes, hoping they would open a window into the bank’s actions. The issue gained urgency in 2012, when the comptroller’s office conducted its own interviews with JPMorgan employees and discovered a “pattern of forgetfulness.”

Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan’s lawyers. But JPMorgan, which produced other materials and made witnesses available to the comptroller’s office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege. The inspector general argued that the lawyers’ interviews were essentially “made for the purpose of getting advice for the commission of a fraud or crime.” The reporters also stress that the use of attorneys as an information shield for banks is already troublingly widespread.

But the Department of Justice will not pursue subpoenas of the potential perjury or potential obstruction of justice, because, according to a DOJ letter the action would “risk developing negative precedent that could result in harm to the long-term institutional interests of the United States.”

Just in case you were wondering, too big to fail and too big to jail is still the law of the land. 

Thursday, December 12, 2013 - Three Strikes

Three Strikes

by Sinclair Noe

DOW – 104 = 15,739
SPX – 6 = 1775
NAS – 5 = 3998
10 YR YLD + .03 = 2.88%
OIL - .06 = 97.38
GOLD – 27.10 = 1226.20
SILV - .81 = 19.60

Stocks down for a third day in a row, and except for that big gain on the news of the monthly jobs report, this has been a nasty start to December. Weekly jobless claims jumped to 368,00 from 300,000 the week before. Overall retail sales climbed a seasonally adjusted 0.7% last month, the most since June.  Auto sales jumped 1.8% in November, the most since June. Meanwhile, there were drops in retail sales of 0.2% for clothing and accessories stores, and 1.1% at gasoline stations. Online and other non-store retailers saw sales rise 2.2% in November, the most since July 2012. Over the past year, retail sales have grown 4.7%. Inventories at US businesses rose 0.7% in October. Maybe businesses are expecting a great holiday shopping season but it isn't looking good.

Neither the jobless claims nor the retail sales will move the Fed’s current position on tapering. Markets have been focused on the timing and the slope of Fed bond-buying tapering and not on anything else. Most likely, the Fed will meet next week and not taper, but they will likely communicate clearly their intent to taper.

The just agreed 2014-2015 US budget deal faces a crucial test today when the House of Representatives votes on the bill, with Speaker John Boehner urging skeptical conservatives to back it. The agreement sealed between top Democratic and Republican negotiators is seen as a chance to end the brutal cycle of fiscal crises that have plagued Washington in recent years. The legislation, which sets spending caps at $1.012 trillion for 2014 and $1.014 trillion for 2015, and repeals billions in a package of arbitrary cuts known as sequestration, appears likely to pass the Republican-led House. It would then go to the Senate for a vote, likely next week before the chamber adjourns for the year-end holiday.

Pemex is the pride of Mexico. Part of the reason may be that it is ubiquitous. Every gas station in Mexico has the green and white sign of the state owned oil company. When all else failed, Pemex was the economic lifeblood of the Mexican government. Today, the Mexican Congress passed legislation  declaring that Mexico still owns its oil, but allowing private companies to drill for oil and natural gas in partnership with Pemex, or on their own, returning international oil companies to territory they were kicked out of 75 years ago.

The stated goal is to stimulate Mexico’s sliding oil production and vault the country into the developed world by tapping vast pockets of oil and natural gas deep under the earth and sea. Foreign oil companies have long been eager to gain access to Mexico’s oil and have quietly lobbied the government to open up for years, while Pemex is known for inefficiency at best, and corruption at worst. Mexico’s oil production has declined by 25 percent from its 2004 peak, to just over 2.5 million barrels a day. Pemex is spending more to pump less: investment has more than doubled in the same period to more than $20 billion a year. It may not be the best run oil company but Mexicans tend to consider it their oil company. In a country where controlling oil is often equated with sovereignty and national pride, the plan has set off furious debate.

And it's just part of a bigger plan. President Pena Nieto is also pushing to break up telecommunication monopolies, raise taxes and weaken the teachers union grip on faltering public schools. Two decades after Mexico sold off banks and the telephone monopoly, Mexicans pay more for credit and phones service than other Latin Americans, and they suspect they will pay more for gas under the new law, too.

Five years ago, Bernie Madoff was arrested in New York for running a Ponzi scheme. Madoff's banker was JPMorgan. Federal authorities suspect JPMorgan continued to serve as Madoff’s primary bank even as questions mounted about his operation, with one bank executive acknowledging before the arrest that Madoff’s “Oz-like signals” were “too difficult to ignore.” And so now, the authorities are going after JPMorgan; apparently close to a settlement that would involve about $2 billion in penalties and criminal action, or what passes as criminal action in the world of Wall Street bankers.

The government would use a chunk of the money, probably less than half to compensate Madoff's victims. The settlement would include a deferred prosecution agreement, which would list the bank’s criminal violations in a court filing but stop short of an indictment as long as JPMorgan pays the penalties and acknowledges the facts of the government’s case. The deferred prosecution agreement is expected to fault JPMorgan for a “programmatic violation” of the Bank Secrecy Act, which requires banks to maintain internal controls against money laundering and to report suspicious transactions to the authorities. And just to be clear, this case involves money laundering by JPMorgan.

The government has been reluctant to bring criminal charges against large corporations, fearing that such an action could imperil a company and throw innocent employees out of work. Those fears trace to the indictment of Enron's accounting firm, Arthur Andersen, which went out of businesses after its 2002 conviction, taking 28,000 jobs with it. Ever since, prosecutors have increasingly relied on deferred prosecution agreements, which is a slap on the wrist and allows the bank to continue, as long as they don't continue with their illegal activities. So the basic idea is that JPMorgan can break the law, pay off the government and promise not to do it again. Prosecutors insist that no one is too big to indict or too big to jail. It will be interesting to see if JPMorgan can indeed clean up its business and manage to stop breaking the law; and if they can't keep their nose clean, it'll be interesting to see if the prosecutors actually have the fortitude to enforce the law.

Two years ago JPMorgan entered an “non-prosecution agreement” to settle antitrust charges. I'm sure there is some sort of fine distinction between a “non-prosecution agreement” and a “deferred-prosecution agreement” but they sound similar; no criminal charges as long as they kept to the straight and narrow for 2 years. Then there was that problem of manipulating electricity markets between 2010 and 2012. The head of their commodities trading division, Blythe Masters, was accused of making false and misleading statements to federal energy regulators. No criminal charges were filed.

Pope Francis is at it again. Francis, who was named Time magazine's Person of the Year on Wednesday, has urged his own Church to be more fair, frugal and less pompous and to be closer to the poor and suffering. A couple of weeks ago he published an apostolic exhortation title, The Joy of the Gospel, where he attacked unfettered capitalism, as “a new tyranny” and  condemned the "idolatry of money".

Now in a new message for the Roman Catholic Church's World Day of Peace, marked around the world on Jan. 1, he also called for sharing of wealth and for nations to shrink the gap between rich and poor, more of whom are getting only "crumbs". And he says that huge salaries and bonuses are  symptoms of an economy based on greed and inequality.

Titled "Fraternity, the Foundation and Pathway to Peace", the message also attacked injustice, human trafficking, organized crime and the weapons trade as obstacles to peace.

Francis said many places in the world were seeing a "serious rise" in inequality between people living side by side. He attacked the "widening gap between those who have more and those who must be content with the crumbs", calling on governments to implement "effective policies" to guarantee people's fundamental rights, including access to capital, services, educational resources, healthcare and technology. The Pope says: "The grave financial and economic crises of the present time ... have pushed man to seek satisfaction, happiness and security in consumption and earnings out of all proportion to the principles of a sound economy."

I'm going to take a little vacation time over the next couple of weeks. Don't worry, I'll continue to update the blog on a kind of regular basis.

Wednesday, July 03, 2013 - Independence Day

Independence Day

by Sinclair Noe

DOW + 56 = 14,988
SPX + 1 = 1615
NAS + 10 = 3443

10 YR YLD + .03 = 2.50%
OIL + 1.64 = 101.24
GOLD + 10.10 = 1253.50
SILV + .34 = 19.82

Today is Independence Day. I know; the Fourth of July is tomorrow, but it is Independence Day in Egypt, or Coup Day, or something. They had huge crowds in Tahrir Square and they celebrated with fireworks, so let's called it Independence Day. We're not really sure what it is, but we know a few things. There has been a revolution. The Egyptian army has overthrown President Mohamed Morsi, announcing a roadmap for the country’s political future that will be implemented by a national reconciliation committee.

The head of Egypt's armed forces issued a declaration today suspending the constitution and appointing the head of the constitutional court as interim head of state. Morsi's presidential Facebook page quoted the disposed president as saying he rejected the army statement as a military coup. Morsi was the head of the Muslim Brotherhood and he had served for one year as president, after being democratically elected, following the revolution that overthrew the sort-of democratically elected dictator Hosni Mubarak. Democracy can be messy. And these are messy, noisy, uncertain and unpredictable days for Egypt.

The country is in unchartered territory. The economy is under severe pressure. Most institutions are weak. A credible leader is yet to emerge with widespread support. And, to make things worse, there is no play book. The mood on the street may look joyful but the situation could easily turn violent.

Nobody really knows what will happen next, but the Egyptian people took to the streets to say that what had been happening was not acceptable. They are no longer fearful or ambivalent about their government. With a little luck, maybe something good will come from all this.

Yesterday we talked about the doubling of interest rates on student debt. It shot up to 6.8% from 3.4% for new loans. So, the next time you go to a college graduation, look past the caps and gowns and make sure you notice the ball and chain most graduates are wearing as they march onstage to receive their diplomas. That's student loan debt, which at over $1 trillion tops credit card debt in the U.S. today. The average burden is $28,000, but add in their credit cards and they're graduating with an average of $35,000 in debt. It's no wonder that people who've paid off their student loan debt are 36 percent more likely to own homes than those who haven't.

A growing number of voices, including the Fed, are pointing to the way this debt burden is a drag not just on the borrowers but the wider economy. One survey found that student debt reduces average aggregate car purchasing by $6.4 billion a year. Young people are leaving school with the kind of debt that was once only incurred by the purchase of a first home; not surprisingly, it's depressing home buying too.

According to the Federal Reserve Bank, two-thirds of college graduates leave with some debt, and 37 million Americans are repaying a student loan right now. And the grads who graduate with no debt are the really lucky ones. The grads who graduate with debt are semi-lucky – they get a degree and a chance at emplyment. Lots of students don't graduate but still have debt. And then, about one-third of high school graduates aren't luck enough to go to college.

We shouldn't even call them student "loans," because you can't refinance them, and you can't get out from under them by declaring bankruptcy. It's more like indenture. Thanks to the Bankruptcy Reform act of 2005, there's no statute of limitation on collecting student loans, and lenders can garnish wages, tax refunds and even Social Security checks. Back in 2007, now-Sen. Elizabeth Warren asked: "Why should students who are trying to finance an education be treated more harshly than someone … who racked up tens of thousands of dollars gambling?" Nothing's changed, although Warren is part of a limited number of people in Congress who are trying. Now, Warren has proposed that student loans should get the same interest rates as banksters. You know, the Fed should offer money for education at the same ¼% that they give money to the big banks.

Following World War II, GI's returned home and went to school, and it was financed through the GI Bill. That one thing created more wealth than any other single thing in our nation's history. In theory and to a significant extent in practice, any GI could, if they worked hard enough, get a bachelor's degree from one of the best universities in the country (and, therefore, in the world), almost free of charge. The pronounced social and economic mobility of the postwar period would have been unthinkable without institutions of mass higher education, provided at public expense. The result was a highly educated population, relative to the pre-war years, that went on to productive work. And that in turn led to the greatest expansion of the middle class that we've ever seen.

Once upon a time, states competed to expand their public university systems - and many were free, or close to it. The stellar University of California system was tuition free (though there were fees) until the late 60's; so was the City University of New York system for a long time, and Arizona universities, and plenty of other states. Now, California is one of at least 10 states that now spends more on prison than higher education. I haven't seen any studies that make a direct link, but I'm pretty sure the two are connected.

A federal judge has approved HSBC's $1.9 billion settlement for money laundering. While noting "heavy public criticism" of the settlement, which enabled HSBC to escape criminal prosecution, US District Judge John Gleeson, New York, called the decision to approve the accord "easy, for it accomplishes a great deal."

The settlement was announced last December, but it required approval. The settlement includes $1.25 billion in forfeitures and $665 million in civil fines. The settlement is part of a deferred prosecution agreement, or DPA, that runs for 5 years. That means that the bank has to avoid doing the bad things they did, or they could be indicted. I've never heard of a major bank operating under a DPA that actually has been indicted for violating the DPA, but that's the theory.

And what are the bad things HSBC is accused of doing? Well for years they laundered money on behalf of Colombian and Mexican drug cartels. They laundered money for customers in Burma, Cuba, Sudan, Libya, and Iran, which were all subject to US sanctions. They dealt with drug dealers, murderers, terrorists, and other unsavory types and they made sure the bad guys had money to do bad things. But don't worry, it's not criminal; it's just a civil case.

Judge Gleeson said he had received requests from the public to reject the agreement because it did not hold HSBC criminally liable. He also read numerous editorials and columns suggesting, as one put it, that HSBC was "too big to indict." Gleeson, nonetheless, said "significant deference" was owed to the Obama administration in deciding not to press an indictment. Gleeson said "much of what might have been accomplished by a criminal conviction has been agreed to in the DPA," whose administration he will supervise.

This is not true. The settlement does not accomplish much. What the judge has done is to shred the justice system once again; it seems to be common practice these days. Judgments such as this just create a two-tiered justice system. And we accept it out of ambivalence and fear. One set of laws for the rich and powerful, another set of laws for everyone else. Maybe we should require that judge to recite the Pledge of Allegiance every morning to start the court day. Maybe he could read that segment about “justice for all”; not just punishment for the poor folk; not just an agreement to tie executive bonuses to meeting compliance standards; not just coddling the bag men for murderers and drug dealers and terrorists; not just a slap on the wrist if you hold a wad of money in your hand. Justice for all. What a joke.

Which brings us to our next segment: “Where in the world is Edward Snowden?” We now know he was not on Evo Morales' presidential jet. The president of Bolivia had flown to Russia to meet with Russian President Vlad Putin. President Morales then tried to fly back to Bolivia. Someone, somewhere suspected that he was trying to sneak out with Snowden on board. Portugal, Spain, France, and Italy refused to allow the presidential jet to fly over their airspace. The plane circled around for a few hours and eventually landed in Austria. The plane was searched and they did not find Snowden.

Now, normally a presidential jet, like Air Force One, is considered to be something like an embassy; there is an issue of national sovereignty. So, there is more than a little outrage over a pretty serious diplomatic transgression. Bolivia's ambassador to the United Nations said "the orders came from the United States." From a diplomacy standpoint, one does not normally interfere with diplomats and high-ranking public officials in transit. It is extraordinary to prohibit passage through one's state air space en route to another state. Almost all the nations in South America have condemned the intervention.

So, we spend billions of dollars on high tech intelligence and spy stuff and we still can't figure out whether Snowden is in the Moscow airport or on the Bolivian presidential jet or who-knows-where.

What we have learned about Snowden is that he doesn't have $1.9 billion to pay a civil fine.