Friday, March 14, 2014 - The Circle of Life

The Circle of Life

by Sinclair Noe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Celebrate safely.

Tuesday, April 09, 2013 - Poultice Does Not Cover the Wound

Poultice Does Not Cover the Wound

by Sinclair Noe

DOW + 59 = 14,673
SPX + 5 = 1568
NAS + 15 = 3237
10 YR YLD +.01 = 1.75%
OIL +.60 = 93.96
GOLD + 12.30 = 1586.00
SILV + .68 = 28.08

The Dow Industrials hit a record high close. The S&P 500 was close to a record; not quite.

Yesterday, there was a Statement Issued by the Europe Commission on Portugal. The Statement reads: “The European Commission welcomes that, following the decision of the Portuguese Constitutional Court on the 2013 state budget, the Portuguese Government has confirmed its commitment to the adjustment programme, including its fiscal targets and timeline. Any departure from the programme's objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens.”

Let me clear this up for you; the Portuguese courts ruled that austerity was a bad thing and suggested that the Portuguese governmetn stop with the austerity. By ruling that four government austerity measures, including planned cuts in public-sector pay and state pensions, were in breach of the constitution, the court has blown a 1.3-billion-euro hole in the 2013 budget. It has raised the possibility of another bail-out crisis in southern Europe while the dust is still settling on the rescue of Cyprus’s banks.

Let's look at Portugal:  Portugal is in a recessionary cycle. The economy will shrink by 2.3 per cent this year, more than twice as much as the previous government forecast (and the slowdown of exports to the rest of the eurozone is not helping). The deficit-to-GDP ratio widened from 4.4 per cent in 2011 to 6.4 per cent last year, and is forecast to be 5.5 per cent in 2013. Far above the target of 3 per cent that the government had agreed with the Troika. The budgetary cuts did not boost private spending, and expectations remain gloomy. Portugal has entered a recessionary cycle. People have no reason to believe the future will be any better. So long for the confidence fairy.

For now, the Portuguese government is disregarding the court; and this makes the European Commission very happy. Austerity may be illegal in Portugal, but the government is sticking with it. I'm not quite sure how this is supposed to work in a supposed democracy. And there is no indication that austerity programs are doing anything but destroying the Portuguese economy.

And since this austerity thin has been working so well for parts of Europe, we're giving it a try in the US. Last Friday's jobs report was a big disappointment, but at least it was still showing some gains. The March jobs report was the first since the start of sequestration. It's hard to see any direct connection between those poor job numbers and the sequester. The government has been shedding jobs for years. We are just starting to see the results of sequester, but we are seeing it in bits and pieces; thousands of bits and pieces.

The public schools of Syracuse, New York, will lose over $1 million. The housing authority of Joliet, Illinois, will take a hit of nearly $900,000. Northrop Grumman Information Systems just issued layoff notices to 26 employees at its plant in Lawton, Oklahoma. Unemployment benefits are being cut in Pennsylvania and Utah. Some 1,700 poor families in and around Sacramento, California are likely to lose housing vouchers that pay part of their rents. More than 180 students are likely to be dropped from a Head Start program run by the Cincinnati-Hamilton County (Ohio) Community Action Agency. Two thousand civilian employees at the Army Research Lab in Maryland will be subject to one-day-per-week furloughs starting on April 22, for example, resulting in a 20 percent drop in pay. The Hancock Field Air National Guard Base is furloughing 280 workers.

Over one million federal workers are set to begin unpaid furloughs this month, amounting to pay cuts of anywhere from 20 to 30 percent. Sequestration has also prompted the extension of a pay freeze already in force for federal workers. The cuts will result in the equivalent of 750,000 full-time job losses throughout the economy.

Due to a cut to Medicare reimbursement for expensive chemotherapy drugs, cancer clinics across the country have already begun to turn away thousands of Medicare patients, forcing them to seek treatment at hospitals, which may not be able to accommodate them

The U.S. District Court in Los Angeles announced that it will close its clerk's office for seven Fridays over the next few months. Utah officials said they would limit Friday federal court openings beginning in April. In Nevada and several other districts, federal courts are "going dark" on criminal cases on Fridays, the day that many federal public defenders will be furloughed. No justice on Fridays.

The Federal Aviation Administration has delayed until mid-June the closing of 149 airport control towers, but still plans to go forward with the plan, As the travel industry nears its summer upswing, airlines and hotels are joining other companies in warning about lost revenue due to federal budget cuts that started in March -- and fear they'll lose much more. This week, Delta Air Lines and US Airways Group said reduced last-minute bookings by government workers cut their unit revenue in March, sparking a selloff in airline stocks.

Shares of F5 Networks Inc plunged 18 percent on Friday, after the network equipment maker partly blamed lower government sales for its profit warning - news that also pressured shares of rivals Juniper Networks Inc and Cisco Systems Inc..

It's earnings reporting season. Over the next few days, we'll get reports from a couple of the big banks, including JPMorgan Chase and Wells Fargo. We already know the big banks are likely looking at the best results since 2006. So what are they going to do? They are firing 21,000 workers. Revenue is weak. The business model is changing. Headcounts are being re-aligned. The departures come on top of 320,000 jobs cut by financial companies over the past 5 years. US banks had $141 billion in net income last year, the second-best on record behind the $145 billion total reported for 2006.

It was easy to miss a little story from a few days ago. The Consumer Financial Protection Bureau hit the nation’s four largest mortgage insurers with a total of $15.4 million in fines for “allegedly” paying kickbacks to lenders to steer business their way. There was no admission of wrongdoing.

Back in the summer of 2009, the Inspector General of the Department of Housing and Urban Development handed the Justice Department evidence that laid bare a scheme by lenders, including: Citigroup, Wells Fargo, Countrywide, and so on, to get kickbacks from mortgage insurers for making borrowers who had to buy mortgage insurance, purchase coverage from those companies kicking back profits to lenders.

One estimate of the amount of kickbacks is $6 billion. But the Big Four insurers were only fined a total of $15.4 million. Genworth Financial and AIG’s United Guaranty unit each paid $4.5 million. MGIC Investment Corp. paid $2.65 million, and Radian Group paid $3.75 million. Of course, nobody is actually guilty; nobody will ever go to jail; nobody has to stop doing what they do.

The Federal Reserve and the Office of the Comptroller of the Currency are starting to mail out checks as part of a multi-billion dollar settlement with banks over mortgage foreclosure abuses. The banks were forced to conduct their own review of abuses. The banks hired consultants who worked for the banks and according to the consultants, the banks did abuse homeowners, but they claim they didn't do too much. Of course, the consultants were supposed to review millions of foreclosed loans but that would have taken a long time and been a whole lot of work, so they just reviewed some of the files. Good enough for the regulators.

This round of self-revealed abusive behavior will cost the banks $3.6 billion. The first checks will go to members of the military, about 1,082 service members who were foreclosed on illegally by the banks. Under the settlement, each borrower will receive about $125,000, the largest amount of relief. Most homeowners who will see checks, will see checks for $300 dollars or less. I'm sure that makes everything better. If you seek forgiveness, the poultice must cover the wound.