Tuesday, September 03, 2013 - Welcome to September

Welcome to September

by Sinclair Noe

DOW + 23 = 14,833
SPX + 6 = 1639
NAS + 22 = 3612
10 YR YLD + .10 = 2.85%
OIL + .89 = 108.54
GOLD + 15.70 = 1413.20
SILV + .75 = 24.38

Well, we still haven't started the war, yet. Congressional leaders from both sides of the aisle lined up in support of military intervention. The Senate Foreign Relations Committee opened a hearing and grilled Secretaries Kerry and Hagel. Tomorrow, Kerry and Hagel are scheduled to appear before the House Foreign Affairs Committee. The debate is shifting away from “Did Assad use chemical weapons?” to “What should be done about it?”

Clarity of objectives seems to be a work in progress. Maybe all the talk will eventually consider the possible consequences of a military attack on Syria. Is it really possible to bomb a country and avoid deeper involvement? So far, the politicians are trying to work it out in a logical progression; if A, then B. That's not always how it happens in war. Logic gets thrown out the window.

At this time of crisis, it is worth remembering another time, 30 years ago in October, 1983 when US warships bombarded Lebanon, the country located next to Syria. Within weeks, the US Marine barracks in Beirut was blown up by a massive truck bomb that killed 241 American servicemen: 220 Marines, 18 sailors and three soldiers. The truck driver/suicide bomber was an Iranian national whose truck contained explosives that were the equivalent of 21,000 pounds of TNT. Two minutes later a second suicide bomber drove a truck filled with explosives into the French military compound in Beirut killing 58 French paratroopers. France is the only country standing with the Obama administration on a military strike on Syria, and they might put that support to a vote of parliament.

Mr. Obama has invited the Republican and Democratic leaders of the House and Senate defense, foreign affairs and intelligence committees to the White House this afternoon. Later, he'll fly to Russia for the previously scheduled G-20 economic summit, a forum that will put him across the table from Vladimir Putin of Russia.

August is finally behind us. No more excuses for the market. No more low-volume rallies and corrections. The Dow was red-hot at the beginning of the year. Its components were easily besting the broad market, delivering gains usually reserved for popular growth stocks. However, the summer was far from kind to the Dow. It began to slip in early July relative to the S&P 500. As of right now, the Dow has yet to find its footing. Even today's modest gains were well off session highs.

So, we head into September to the rhythm of the war drums. It promises to be an interesting month. If the major market indices can't catch a meaningful rally now, it is hard to imagine how the indices could sustain a meaningful rally later in the month. September has earned its reputation as the worst month of the year for the broader market, with the S&P down an average of 0.5% over the past 70 years. Not every year is negative; seven of the past ten years have seen positive September returns.

This Friday we get the monthly jobs report. Expectations are for a slight uptick from July's 162,000 headline result with no change to the unemployment rate from the prior reading of 7.4%. Remember good news is bad news for the markets, fearful of losing their spot at the trough of the Fed's easy money. This morning, the ISM report popped up to 55.7 as the manufacturing sector continued to expand for a third straight month; and the yield on the 10-year Treasuries popped to 2.88% In two weeks, the Fed FOMC will meet and consider slowing the flow of easy money, a cutback or taper of QE3. Toss in ongoing speculation about a replacement for Bernanke, and let the fireworks begin.

Congress will officially reconvene next Monday and they will be focused on the Syrian war, but don't forget the battles over taxes and spending, regulations and safety nets, and how to get the economy out of first gear. Which means more gridlock and continual showdowns over budget resolutions and the debt ceiling. They still haven't figured out exactly what is being cut as part of the sequester. Earlier this year, the House and the Senate passed spending bills for the 2014 fiscal year, which begins on Oct. 1, that were about $90 billion apart, but never settled on a final figure. Congress is expected to pass another stopgap bill, known as a continuing resolution, financing the government for a few more months, but it is unclear whether such funding will stay at current levels or shrink. This is actually important because if they fail to come to a deal before October, many parts of the federal government could shut down. Not a complete government shutdown, but death by a thousand cuts.

We're emerging from the depths of the worst downturn since the Great Depression but nothing fundamentally has changed. Corporate profits are up largely because payrolls are down. Cost cutting has limits, and we've started to see those limits in the revenue numbers from second quarter earnings reports. Businesses need customers, and the customers are holding tight to the purse.

While the debate rages over Syria, American workers have been taking to the streets to demand a bit more pay. So as Congress reconvenes and the battles resume, be clear about what's at stake. The only way back to a buoyant economy is through a productive system whose gains are more widely shared. One of the totally unanswered questions about Syrian military intervention is how we're going to pay for it. It's not cheap to park five destroyers in the Mediterranean; it's not cheap to lob a few hundred cruise missiles over the waves; it gets real expensive, real fast if anything goes slightly askew.

Where does the money come from? It won't be coming Detroit or San Bernardino. In July, Detroit filed for bankruptcy. Last week, San Bernardino filed for BK. Two of the biggest municipal bankruptcies in US history.

After kicking the can down the road, with increasing desperation, for many years, the end of the line has been reached. The city is finally admitting that far too many financial promises have been made, and that the majority of these simply cannot be kept. It does not matter whether the promise-holders have a good case for receiving services or needing payments, or even if they have legal protections. If the promises can be broken, they will.

Strange as it may seem, the bankruptcy filings don’t appear to have unnerved the $3.7 trillion municipal bond market. The momentum defies predictions that the muni market would go into a deep freeze following the Motor City’s financial collapse and Detroit Emergency Manager Kevyn Orr’s plan to impose losses on some bondholders. There’s not a lot of evidence to show this has been the death knell for GO [general obligation] bonds.

Everyone thinks it’s just Detroit, but Detroit is not unique. It’s the same in Chicago and New York and San Diego, San Jose, Stockton, and San Bernardino. It’s a lot of major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems. Detroit is merely the first of many municipalities to hit the wall, where the realization dawns that far too many promises have been made, and nowhere near all of them can be kept. Different classes of stakeholders are still assuming that their claims will somehow be protected. They are typically thinking of those claims in isolation, without considering the implications for other groups whose rival claims would have to be subordinated. It has been clear for a long time that we would reach this crunch point

Investors in municipal bonds are typically looking for a dependable income, stable bond prices and shelter from taxes. They have generally come to regard these investments as risk-free, even as the obvious problems faced by municipalities have been mounting. The bankruptcy of three cities in California last year seems not to have been interpreted as the warning signs that they were, and so far, relatively speaking, neither does the bankruptcy of Detroit. This complacency is highly unlikely to last, however, as the extent of the inevitable losses in Detroit becomes clear. The clear risk is that bond prices will crash on spiking yield, and that this will precipitate a rush for the exits. A move in this direction has begun, and concern is rising, but as yet it remains a muted response.

Public pensions are also a major stumbling block; supposedly protected by Michigan state law; the law might not protect retirees. What and who will be protected by the law? Under both the Dodd-Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured. In a major derivatives fiasco, derivative claimants could well grab all the collateral, leaving other claimants, public and private, holding the bag.

Welcome to September. 

Tuesday, July 09, 2013 - What's It All About?

What's It All About?

by Sinclair Noe

DOW + 75 = 15,300
SPX + 11 = 1652
NAS + 19 = 3504

10 YR YLD -.01 = 2.63%
OIL + 1.38 = 104.52
GOLD + 13.40 = 1251.70
SILV + .18 = 19.36

It's earnings reporting season. The stock market is feeling happy for the moment. Second quarter earnings are expected to be soft, but expectations have been ratcheted down, so there is potential for upside surprises. That's the game that's played on Wall Street to siphon a little bit of trading profit. Anywhere else, they'd call it price fixing.

But this game of diminished expectations may have some basis in reality. The top line numbers more than likely suck. Analysts expect the 30 companies in the Dow Industrial Average to see revenue growth of just 0.7%; that number could be ratcheted down into negative territory; that follows a 0.6% drop in revenue in the first quarter.

What do you call it when there are two consecutive quarters of economic contraction? Recession. That's a bit of a non sequitur, but the logical conclusion is not too far removed from the premise. After all, we're talking about 30 of the biggest, most powerful companies in the world and they are struggling to grow sales. They're still reporting profits, but that comes from cost cutting, which tends to fall on the labor force. There are limits to cost cutting as a business strategy for growing profits.

No worries. The S&P 500 closed above 1650 and looks poised to make a run at those record highs of May; remember the days of milk and cookies, before Bernanke started talking about taper. Well tomorrow the minutes of last month's FOMC meeting will be released, and we'll see if they're still talking taper, and we'll see if the markets can remain exuberant if the Fed is still talking taper.

Of course the Fed looks at more than just the headline unemployment rate, even if they have set a target of 6.5% based upon that rate. They also look at broader views of the labor markets. After all, the Fed will make its decision based on the outlook for labor markets, not what happened a month ago. One such report, know as “Jolts” looks at job openings and labor turnover. In May, businesses posted more job openings and gross hiring also picked up. But the rates remain well below those seen before the most recent recession.

May also saw a small increase in job separations. A sizeable part of the gain in separations came from people quitting their jobs. That’s a positive for the labor market outlook since workers tend to give notice only when they are confident they will quickly land another job.

Before you think that is overly optimistic, the Conference Board employment trend index, a compilation of job indicators designed to foreshadow changes in nonfarm payrolls, edged up a mere 0.05% in June. Its growth rate for the second quarter moderated. The report said that suggests “acceleration in the employment growth is unlikely in the near future.”

Part of the problem is that for every job opening, there are 3 people looking for a job, and since people aren't really leaving their current jobs, because of the tight labor market, that means people aren't moving up; they aren't leaving a job for a better job. The ratio of unemployed workers to job openings is the highest in the 13 years the BLS has been collecting the data. Not coincidentally, most of the industries with the highest numbers of job openings in May, according to the JOLTS data, were lower-paying sectors, including health-care services, retail sales and restaurants.

Another consideration in the jobs market is that one of the most consequential effects of the sequester began just this week: weekly unpaid furlough days for more than 650,000 civilian workers at the Defense Department, who will effectively see their pay cut by 20 percent for the  final 11 weeks of this budget year. A little back-of-napkin math shows 20% of 650,000 jobs is kind of like losing 130,000 jobs.

All the commissaries at domestic military installations will be closed every Monday through the end of September. (Most agencies within the department have decided to salve the economic sting a tiny bit by setting the furloughs on Mondays and Fridays, so that workers might at least enjoy a series of long weekends.)

But the visuals of closed cafeterias, equipment maintenance sheds, supply warehouses, payroll offices and the like will have absolutely no effect on the pace of congressional effort toward untangling the budget morass. Whatever work is taking place on that score is totally out of view. And none of the congressional leadership is suggesting this will change before Congress returns from its August recess a full week after Labor Day, when there will be 23 days left before this fiscal year gives way to the next.

Some agreement on spending will need to get done by then to forestall a partial government shutdown, which is in neither party’s political interest to permit. Odds are that the first month or so, at a minimum, will be covered by a temporary patch in the form of a continuing resolution that keeps agencies spending at their across-the-board budget cut levels.

But any longer-term agreement already seems destined to be delayed until the end of the year, by which time the debt ceiling will also be nearing. And if they can't find agreement, then the budget would require layoffs – probably a mix of civilian, active-duty military, National Guard and Reserves.

As expected, the IMF cut its forecast for world economic growth for the third time this year. The IMF now expects global output to expand by 3.1%, down from 3.3% forecast in April, and down from 3.5% forecast growth back in January. The revision means the global economy will have failed to pick up pace over the past two years, although the IMF expects a slight acceleration in growth in 2014 to 3.8%, subject to revisions, of course.

The IMF said: "While old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies." They pointed to the slowdown in China which is also affecting emerging markets such as Brazil and South Africa; also, the ongoing slowdown in the Euro-zone. One country that is expected to show growth – Japan, which should see growth of 2%, up from earlier forecasts of 1.6%, due to the success of Abenomics.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency are proposing raising the leverage ratios on the largest US banks to 5% from the 3% agreed upon by international regulators as part of Basel III. The insured bank subsidiaries of those firms would be subject to a 6% leverage ratio to be considered well-capitalized. That basically means the banks would have to hold a little more in the way of reserves.

While the proposed changes would not take effect until 2018 if finalized, the rules as proposed represent the latest attempt by regulators to address lingering concerns that certain large, complex banks remain too big to fail. Of course, that still leaves a 5 year window, and considering the extreme leverage, it is doubtful that a 5% cushion could save us from a bank crash, but it's a start I suppose.

FDIC staff said market perceptions that certain banks would be protected by the government poses a threat to the financial system, allowing these firms to obtain cheaper funding and eliminating checks on excessive risk taking by the banks. The banks don't want to be forced to hold more reserves, even if it would mean they are a bit safer. And the reality is that it would not make them much safer. If we really have concerns about too big to fail, we could start by regulating derivatives trading and reinstating Glass-Steagall.

Yesterday, Fortune released its list of the world's 500 largest corporations, ranking them by revenue for the fiscal year ended on or before March 31. In total, the 500 largest global corporations reported $30.3 trillion in 2012 revenue, nearly a 3 percent increase from the year before, with profits of $1.5 trillion. There are 132 US companies on the Global 500 list; China had the second most with 89 companies. Seven of the top ten companies by revenue were in the energy business. Royal Dutch Shell topped the revenue list with $481 billion, followed by Walmart with $469 billion and Exxon Mobil with revenue of $449 billion. Exxon Mobil was the most profitable at $44.9 billion, followed by Apple at $41.7 billion.

Oil closed at $104.52. Fill up the gas tank now.

Thousands of people gathered in Prescott Arizona today to honor the 19 members of the Granite Mountain Hotshot squad who died fighting the Yarnell fire. Vice president Biden lead a list of dignitaries on hand. Biden referred to an old saying: “All men are created equal - then a few became firefighters.”

Over the years I've raised a question from time to time on this program: “What's the economy for?” Why do we get up each day and do the work we do? What is the purpose of our labors? Well, for the Yarnell 19 their mission was to save lives and protect property, and their jobs weren't jobs, but a duty to their fellow citizens. Sometimes I wonder about the purpose of our labors, but I'm quite certain the Yarnell 19 had figured out the right answer. 

Friday, April 26, 2013 - The Fix is In

The Fix is In

by Sinclair Noe

DOW + 11= 14,712
SPX – 2 = 1582
NAS – 10 = 3279
10 YR YLD - .05 = 1.66%
OIL - .86 = 92.78
GOLD – 5.30 = 1463.90
SILV - .36 = 24.14

The initial guesstimate of first quarter gross domestic product shows the economy growing at a 2.5% pace. Consumer spending increased by 3.2%, the strongest increase in consumer spending in 2 years. Defense spending fell at an annual rate of 11.5 percent in the first quarter, on the heels of a 22.1 percent decline in the last three months of 2012.

This is the initial report on GDP and it is subject to revisions. The initial fourth quarter GDP number came in at a negative 0.1% and was revised up to 0.4%; the first quarter estimate of 2.5% is well below expectations, and it certainly isn't showing enough strength to indicate a solid recovery.

Personal disposable income, today’s report shows, actually fell by $140 billion in total from the fourth quarter. Reversion of the payroll tax to its normal rates at the beginning of 2013 will continue to drag on the disposable income of middle-class consumers throughout the year. Business investment in productive equipment and IT — a driver of productivity, innovation, and employment — slowed markedly to 3% growth in the first quarter, relative to nearly 12% in the prior quarter. Residential investment maintained strong growth, however, expanding 13% as housing markets in many areas of the country seem to be turning up. exports grew 2.9% in the first quarter. Imports grew even faster at 5.4%, much of that due to an increase in oil prices.

The quick and easy is that cuts in government spending is acting as a drag on economic growth. Government spending fell at an annual rate of 8.4 percent, after a decrease of 14.8 percent in the fourth quarter of 2012 — with both declines happening before the March start of the sequester. Fiscal policy is not enough to get the economy to cruising speed, and monetary policy has only been effective at delivering below-target inflation.

The sequester cuts haven't yet hit the economy, at least it wasn't reflected in the first quarter GDP numbers; the sequester has hit; maybe you haven't felt it yet, unless you were in an airport the past week. Washington politicians are frequent fliers; they are feeling the sequester.

The original theory was that the specter of sequestration would be so threatening that Republicans and Democrats would agree to a budget deal rather than permit it to happen. That theory was wrong. The follow-up theory was that the actual pain caused by sequestration would be so great that it would, in a matter of months, push the two sides to agree to a deal. That theory was wrong. The reality is that the pain of the sequester doesn't matter if it hits the general public, but if it inconveniences politicians; then they will change the parts they don't like.

Today, the Congress decided that the part of the sequester that resulted in furloughs for air traffic controllers, which resulted in delays at airports; they decided that was just too painful, so they are coming up with the money to prevent the air traffic controller furloughs.

Former Labor Secretary Robert Reich correctly observed that most of the pain of the sequester is invisible.

Brandeis University in Waltham, Massachusetts, for example, is bracing for a cut of about $51m in its $685m of annual federal research grants and contracts. The public schools of Syracuse, New York, will lose over $1m. 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.

Taken together, these cuts are significant. But they're so localized, they don't feel as if they're the result of a change in national policy.

A second reason the consequences of the sequester haven't been obvious to most Americans is that a large percentage of the cuts are in programs directed at the poor – and America's poor are often invisible.

The Salt Lake Community Action Program, for example, recently closed a food pantry in Murray, Utah, serving more than 1,000 needy people every month. The Southeast Alaska Regional Health Consortium is closing a center that gives alcohol and drug treatment to Native Alaskans. 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.

All across America, food pantries and community centers catering to the poor are laying off staff, reducing services, or closing. But most Americans don't know anything about this because the poor live in different places than the middle class. Poverty has become ever more concentrated geographically in America.

A final reason much of the sequester is invisible is that many employees are being "furloughed" rather than fired. "Furlough" is a euphemism for working shorter workweeks and taking pay cuts.

Two thousand civilian employees at the Army Research Lab in Maryland, for example, are being subject to one-day-per-week furloughs starting this week, resulting in a 20% drop in pay. The Hancock Field Air National Guard Base is furloughing 280 workers. Many federal courts are now closed on Fridays.

Furloughs arguably spread the pain. Mass layoffs would be far harder to swallow.

For all these reasons, the sequester hasn't been particularly visible.

But the politicians couldn't deal with flight delays. Sequestration will continue because there is no more pain to push for overturning the whole policy. Well, there's no more pain for the politicians; there's going to be plenty of problems for people who don't have political clout. Air travelers get bailed out; cancer patients; food pantries, schools – all that other stuff is still grounded.

The jobless rate in Spain is now 27.2% for the first quarter; the highest since they have been recording unemployment there going back to the 1970's. In France, more than 3.2 million are unemployed, the highest jobless rate since 1997.

So, things are kind of lousy but there is a little bit of growth in the US economy, thank goodness we're not in Spain, or Greece, or Cyprus, or heaven forbid – Syria; it's okay, we'll just kind of slog along.

It would be great if we lived in a world where there were enough air traffic controllers for all the planes in the sky, and money for cancer research, and money for food pantries, and enough economic growth to create jobs for all the people who want to work. That would be great, but that's not the world we live in. The reason is not because we can't live in prosperity and abundance; the reason is because the banksters are skimming; they are siphoning off profits, at the expense of well, everybody else.

Now, let's move our attention to a story that has been building slowly and received almost no attention in the mainstream media. I'll provide a couple of links. (go to Eatthebankers.com) and click here (Matt Taibbi) and here (Bloomberg Businessweek)

First, let's get in the way back machine. Remember the Libor rate rigging scandal? Libor is the London Interbank Offered Rate, it's where 18 of the big banks get together each day and submit interest rates that the banks would be charged if borrowing from other banks. They take the numbers and average them together, and Libor is then used as the benchmark interest rate for almost everything that uses an interest rate. The Libor is used to calculate how much interest you pay on a credit card, a mortgage, a car loan, financial products, bonds, and derivatives; all together, about $500 trillion dollars worth of financial instruments. And the whole thing was rigged.

The banksters were submitting false numbers to try to look better during the financial crisis and they were also front-running trades based upon the rates, and sometimes they were getting the people who submitted the numbers to submit fake numbers to manipulate trades based on the Libor interest rate.

Taibbi:

Yet despite so many instances of at least attempted manipulation, the banks mostly skated. Barclays got off with a relatively minor fine in the $450 million range, UBS was stuck with $1.5 billion in penalties, and RBS was forced to give up $615 million. Apart from a few low-level flunkies overseas, no individual involved in this scam that impacted nearly everyone in the industrialized world was even threatened with criminal prosecution.

Two of America's top law-enforcement officials, Attorney General Eric Holder and former Justice Department Criminal Division chief Lanny Breuer, confessed that it's dangerous to prosecute offending banks because they are simply too big. Making arrests, they say, might lead to "collateral consequences" in the economy.

The relatively small sums of money extracted in these settlements did not go toward reparations for the cities, towns and other victims who lost money due to Libor manipulation. Instead, it flowed mindlessly into government coffers.

So, the government won't prosecute, but some private investors did, and in March a case went before federal judge Naomi Buchwald in the Southern District of New York and the judge basically said there was no collusion by the banks because the banks weren't competing against one another. So the judge dismissed most of the claim against the banks.

But the case did open up another investigation because if the banks were rigging $500 trillion in interest rates, maybe they were rigging other markets as well.  So, regulators have subpoenaed as many as 15 banks and about a dozen current and former brokers at ICAP, a London based brokerage, with trading desks in New Jersey. ICAP is short for Intercapital. ICAP's website says they are the world’s leading voice and electronic interdealer broker and provider of post trade risk and information services. Among other things, the company collects the data submitted by 13 banks to set ISDAfix prices. ISDA is the International Swaps and Derivatives Association; and the ISDAfix is the benchmark for interest rate swaps, which is about a $379 trillion dollar market.

In their simplest form, swaps are used by investors to exchange a fixed interest rate for a floating one, or vice versa. They affect everything from pension annuities to commercial real estate investments, to more complex derivatives.

And now regulators, including the Commodity Futures Trading Commission, are trying to determine if they’re colluding to manipulate quotes.

The ISDAfix works the same way as the Libor did. Banks submit rates and an average is compiled every day. About 15 banks and about a dozen brokers set the rates on a $379 trillion dollar market. An April16 report by the International Organization of Securities Commissions found that benchmark setting is a process with “opportunities for abusive conduct,” through submission of “false and misleading data” or attempts to buy off the people who physically enter submissions.

In other words, the ICAP brokers may have been gathering the information and then holding on, delaying publication of the rates to allow the banksters to slip in a trade ahead of the public.

It's not like these guys would have to cheat in really big and obvious ways; just a tiny fraction of a percent of a $379 trillion dollar market is enough to pay, one-one hundredth of one percent would be enough to pay for air-traffic controllers, cancer centers, Head Start, food pantries – you know – everything in the sequester.

But wait, there's more.

Given what we have seen in Libor, we’d be foolish to assume that other benchmarks aren’t venues that deserve review, and that means more than just Libor and ISDAfix. So, what other markets carry the same potential for manipulation?

In all the over-the-counter markets, you don't really have pricing except by a bunch of guys getting together and setting prices.

That includes the markets for gold, where prices are set by five banks in London every morning and afternoon (it's called the AM and PM fix); and silver, whose price is set by just three banks; as well as benchmark rates in numerous other commodities – jet fuel, diesel, electric power, coal, you name it.

The problem in each of these markets is the same: We all have to rely upon the honesty of companies like Barclays (already caught and fined $453 million for rigging Libor) or JPMorgan Chase (paid a $228 million settlement for rigging municipal-bond auctions) or UBS (fined a collective $1.66 billion for both muni-bond rigging and Libor manipulation) to faithfully report the real prices of things like interest rates, swaps, currencies and commodities.

All of these benchmarks based on voluntary reporting are now being looked at by regulators around the world. And after they're done investigating, they will be too afraid to do anything because the banks are to big to jail. And so the banksters will continue to skim off the top of everything, and that means that the rest of us will just kind of slog along.

Wednesday, April 24, 2013 - God Bless the Child

God Bless the Child

by Sinclair Noe

DOW – 43 – 14,676
SPX +.01 = 1578
NAS +0.32 = 3269
10 YR YLD un = 1.70%
OIL + 2.43 = 91.61
GOLD + 17.90 = 1432.50
SILV + .22 = 23.26

Them that's got shall get; them that's not shall lose; so the Bible said, and it still is news. The Pew Research Center has analyzed the most recent date from the Census Bureau, and it turns out the rich got richer and the poor got poorer. During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%. From the end of the recession in 2009 through 2011 (the last year for which Census Bureau wealth data are available), the 8 million households in the US with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.

Because of these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009. On an individual household basis, the mean wealth of households in this more affluent group was almost 24 times that of those in the less affluent group in 2011. At the start of the recovery in 2009, that ratio had been less than 18-to-1.

God Bless the child that's got his own.

But it's getting tougher. A new Frontline documentary aired last night and if you didn't see it, it's available online; it's called “The Retirement Gamble”. The basic premise is that even if you try to save for the future, Wall Street is stripping your retirement funds clean with fees and bad performance. The documentary spends a lot of time on a 2012 research paper by Robert Hiltonsmith of the think tank Demos, which found that a median-income, two-earner family will pay a staggering $155,000, all told, in 401(k) fees. That cash represents about 30 percent of the total retirement savings this hypothetical family would have had, if it had paid no fees.

Once upon a time, American workers were far more likely to work for a company that offered a defined-benefit pension plan, the cost of which was covered by the employer. Today, we are instead encouraged to invest in a 401(k) or similar retirement plan, which offer limited investment choices. Most of those choices are "actively managed" funds that try to beat the stock market, but charge higher fees for the privilege. It is often difficult to see what sort of investments these funds have made and the kinds of fees they are charging.

The first draft of first-quarter 2013 GDP is due on Friday, but it should be clearly noted that Friday's number is only an estimate; an initial guess; there will be revisions; the revisions might be substantial. Over the past week or so, there has been a big brouhaha over the revelation that economists Ken Rogoff and Carment Reinhart's research was wrong. They had determined that when a country's debt to GDP level reaches 90%, the result is that economic growth slows – it goes negative. Their research had a Microsoft Excel coding error, and a few problems with assumptions. And so the argument for austerity now has more holes than Swiss cheese. Unfortunately, the austerity theory was enforced and it has backfired, and there are consequences.

But if the idea of debt causing slow or no growth has been discredited, where does that leave us? Is it possible that slow economic growth causes more debt? And is economic growth really a good measure of economic performance? Can an economy be growing and still be lousy? Maybe.

Economic growth measures the increase in the gross domestic product. Economic growth only shows how much more wealth the country has as a whole. We've seen growth in GDP for about 4 years but we've also seen the gap between rich and poor growing wider and wider. Growth is not creating an equitable society; it is creating inequality. If you've ever played the board game Monopoly, you know that when one player gets all the properties and all the hotels and all the money, the game is over.

We've had growth but we haven't seen jobs; well, we've seen some jobs, just not enough. And the jobs that have been created are often in low paying fields. We're not seeing good solid job growth.

So, on Friday, we'll watch the report on GDP, but we'll watch with a skeptical eye.

Remember the sequester? When seven weeks ago the deadline to find a federal budget compromise came and went, there was much handwringing in Washington. In the event that no agreement was found there were to be cuts to public spending so severe and painful that no one would dare fail to agree. To deter Republicans from holding out, half the immediate spending savings of $85.4 billion was to be found from the defense budget, and, to ensure Democrats would work to find a deal, half from annually funded federal programs. Despite these encouragements to fiscal discipline, the March 1 deadline came and went.

We all grew sick of hearing about the sequester. This week the sequester broke surface when it began affecting air travel, causing long delays at airports, which is to be expected when you send 1,500 air traffic controllers home without pay. One in 10 controllers will stay at home on unpaid leave every day until October. With the vacation season looming, crowded airports full of frustrated passengers will become commonplace.

You may not see it but there are other problems with the sequester. Air traffic controllers are not the only federal employees being told to take the week off.

So far, the sequester appears to have pleased no one, except perhaps those fiscal hawks who agree to anything so long as the federal government is shrunk. The cuts are blind, irrational, hastily arranged, uncaring, arbitrary and dangerous. Few doubt that federal expenditure is too high, but even if one is persuaded that cuts need to be made right now – which, as we remain stuck in a stagnant economy, flies in the face of macroeconomic reason – the sequester is the wrong way to make cuts and is already cutting the wrong things. The Congressional Budget Office estimates that the sequester alone will cost 0.6 percent in GDP this year. The cuts are not merely the enemy of good economic management but an automatic depressant upon the nation’s economic health.

A government watchdog warned that regulators need to be more aggressive in reducing exposure among major Wall Street firms if they want to eliminate concerns about "too-big-to-fail" banks. Christy Romero, special inspector general for the $700 billion Troubled Asset Relief Program, said in a report that not enough has been done by government overseers to address the interconnected nature of the largest and most complex financial companies. The ties among major Wall Street firms that posed a challenge at the height of the 2008 financial crisis remain a problem.

The special inspector general's report comes amid a continuing debate over whether Washington has truly eliminated the chance a large financial firm on the verge of collapse would need to be rescued by the government. It's pretty clear that the market is saying too-big-to-fail is still a problem, that these huge Wall Street banks are too complex, too interconnected, too large. Romero suggested regulators use the detailed structural plans they are receiving from the largest banks, known as living wills, to identify and eliminate potential problem areas among major firms. Obama administration officials have stressed that the 2010 Dodd-Frank financial overhaul means no financial firm would again enjoy a government bailout. But not everyone is convinced. While current law prevents bailouts to specific institutions, there could still be a demand to use taxpayer dollars in the face of a future financial crisis.

Last week the International Monetary Fund hosted a conference of some of the world’s top macroeconomists to assess how the most intense crisis to have shaken the industrialized economies since the Great Depression has changed the profession’s collective understanding of how the world economy works. After five years of coping with the consequences of the disaster, there is still so much uncertainty about what policies are needed to prevent another financial shock from tipping the world economy into the abyss again a few years down the road.

In determining what is a sustainable level of government debt, or whether central banks should focus on anything other than inflation, or what should be done to prevent further bubbles from destabilizing economies, we still don't have the answers, even if we have learned that some of the answers we thought might work have been disproved.

If you are one of the nearly five million American workers who have been unemployed for over six months, or one of the six million Spaniards, three million Italians or 1.3 million Greeks without a job or a clear prospect of finding one, this amounts to a tragedy.

Considering that the large and complicated financial institutions that set off the crisis five years ago have only gotten bigger, too big to fail has grown even bigger than ever and if it's too big to jail, it probably its too big to be allowed to fail; and that means that the gap in knowledge is downright scary.

Some things never change. Them that's got shall get; them that's not shall lose; so the Bible said, and it still is news.

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.

Tuesday, March 26, 2013 - Miles to Go

Miles to Go

by Sinclair Noe

DOW + 111 = 14,559
SPX + 12 = 1563
NAS + 17 = 3252

10 YR YLD - .01 = 1.91
OIL + 1.40 = 96.21
GOLD – 5.90 = 1600.50
SILV - .09 = 28.86

The Dow Industrial hit a record hit close today, taking out the March 14 closing high. The S&P 500 came within a couple of points of the high close; it is having a hard time breaking through the ceiling; you just have to content yourself with the idea that the index has more than doubled from the lows of March 2009.

The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines, fell 7.1 percent to 12.77. The gauge has tumbled 29 percent for the year. It is a reflection of complacency.

We have many things to cover today.

Home prices were up in January and the year over year improvement in prices was the fastest in 6 years. The S&P Case Shiller Index of existing home sales was up 0.1% in January, and the year over year gains were 8.1%. On a year-over-year basis, all 20 cities measured by the Case-Shiller index improved, led by a 23.2% surge in Phoenix, with New York bringing up the rear with a 0.6% advance.

Sales of new U.S. homes fell 4.6% in February to mark the biggest drop in two years, though poor weather likely played a big role. Sales slowed to an annual rate of 411,000, down from a revised 431,000.

The consumer confidence index dropped to 59.7 in March, down from 68.0 in February. Most of the drop came from a decline in the expectations index, which slumped to 60.9 from 72.4, though the present situation index also fell, to 57.9 from 61.4. Consumer fears about the sequester are believed to have hurt the confidence numbers. We have nothing to fear but fear itself. It still holds true.

Orders for long-lasting goods surged in February largely because of gains in the volatile aircraft and defense segments, but demand was mixed for other manufacturers. Durable-goods orders climbed 5.7% last month to a seasonally adjusted $232.1 billion after a revised 3.8% drop in January. Orders outside of transportation fell 0.5% to mark the first decline in six months.

There has been a great deal of attention focused on the Dow Industrial Average back to new record highs; less attention on the Dow Transportation Average. The Transports include railroad companies. Shale-energy production exceeds pipeline capacity, and this will continue to be the case for many years ahead. Eventually, new pipelines will be built, but it takes time, and the production of shale oil is just getting started, and it's unlikely that the new pipelines will be enough. Railroad systems are already in place. Energy companies have invested over $1 billion dollars in new rail terminals near the shale operations. They have also put 20,000 new tank cars in service, which is an investment in the billions of dollars

There had been plans to reopen the banks in Cyprus today. Not gonna happen. Maybe Thursday. And when the banks open, there will be capital controls in place, meaning there will be restrictions on withdrawals. Larger depositors could see 40% confiscations. And that is just to raise the money for Cyprus to earn the dubious right to a bailout; the terms of which will likely drive the economy into a depression. Yes, there are protests in the streets of Nicosia.

A state-appointed emergency manager has taken control of the Detroit city government and started a drastic restructuring of its finances and operations. The first order of business was to extend an olive branch to the city government. The manager, Kevin Orr made clear that he alone would be responsible for decisions on how to stem the city’s mounting cash shortfall and reduce an estimated $14 billion in long-term liabilities.

“The statute spells out some pretty clear powers,” he said, referring to the state emergency-manager law that allows him to sell city assets, renegotiate labor contracts and possibly recommend a bankruptcy filing.

There were protests in Detroit, just a few dozen.

Another day, another mind-blowing fact about the staggering difference between the haves and the have-nots. Incomes for the bottom 90 percent of Americans only grew by $59 on average between 1966 and 2011 (when you adjust those incomes for inflation), according to an analysis by Pulitzer Prize-winning journalist David Cay Johnston for Tax Analysts. During the same period, the average income for the top 10 percent of Americans rose by $116,071.

The Federal Reserve has cited Citigroup for failure to comply with federal law requiring banks to establish protections against money-laundering. They did not impose a fine. The Fed's action follows up on a similar order issued against Citigroup last year by two other bank regulators, the Office of the Comptroller of the Currency and the FDIC, which cited it for "deficiencies" in its compliance with the Bank Secrecy Act. The Fed said that Citigroup lacked effective systems of governance with respect to its Bank Secrecy Act and anti-money-laundering compliance programs. Citigroup has 60 days to submit a plan explaining steps the bank has taken to boost its compliance efforts. Some day, some day.

As it did before the financial crisis, Wall Street is bankrolling academics to bolster its case against regulation. Back then, the research gave warm tongue-baths to the virtues of derivatives. This time, the beneficiary is high-speed trading.

A highly publicized research paper from Columbia University claiming that high-frequency trading benefits society and shouldn't be regulated too much was paid for by -- surprise -- a high-speed trading firm.

Unlike most academic papers, this one, by Columbia Business School economics professor, was announced to the world last week and turned into an op-ed headlined "The Reality Of High Frequency Trading."

The argument is that high-speed trading bolsters that magical market stuff known as "liquidity," pushing stock prices higher and making companies richer and more willing to spend money, making us all wealthier. None of that has actually happened yet, of course, with markets and the economy flat since the advent of high-speed trading a decade or so ago. Never mind all that, though: Regulate high-speed trading too much and the liquidity could go away; so says the new research paid for by high speed traders. And bad things happen when the liquidity goes away.

A derivative is a financial product derived from another financial product” (for example, a futures contract tied to a stock index) — in practice, the term applies to a whole world of financial products that are written on a one-off basis between two entities called “counterparties,” as opposed to products that are traded on a broad, well-regulated market. Futures contracts are gambling — I can bet on the Dow to go down or up, for example — but trading in futures contracts is regulated gambling, in which winners are protected from losers, and in many cases, losers protected from themselves.

Not so, derivatives, in the usual meaning of the word. Derivatives in that sense are contracts between parties who want to trade risks, but they aren’t market-traded. They aren’t standardized. And counterparties aren’t vetted by any controlling institution.

It is now estimated that derivatives market has been growing. One of the biggest risks to the world’s financial health is the $1.2 quadrillion derivatives market. It’s complex, it’s unregulated, and it ought to be of concern to world leaders that its notional value is 20 times the size of the world economy. But traders rule the roost — and as much as risk managers and regulators might want to limit that risk, they lack the power or knowledge to do so. A quadrillion is a big number: 1,000 times a trillion.

That refers to the notional value. For example, if I bet on a basketball game, say $24 on the Lakers and $26 on the Clippers, I don't really have $50 of risk, just $2 dollars at risk, or $2 notional value. But the derivatives market is so big that the notional value is now $12 trillion, give or take; a much smaller number, but almost the size of the US GDP, and about 20% of the world economy.

Those numbers about the size of the derivatives markets are just guesses, because the market is unregulated, zero controls. Nobody knows the true size or the true dangers.