Wednesday, September 12, 2012 - I Remain Optimistically Antiquated

I Remain Optimistically Antiquated

-by Sinclair Noe

DOW +9.99 = 13,333
SPX + 3 = 1436
NAS + 9 = 3114
10 YR YLD +.07 = 1.76%
OIL - .16 = 96.85
GOLD – 1.10 = 1732.40
SILV -.17 = 33.41
PLAT +42.00 = 1653.00

As we get down to FOMC crunch time, the skeptics come out of the woodwork. The Murdoch Street Journal ran a story saying that economists doubt the benefits of another round of bond-buying by the Federal Reserve. They surveyed 47 people, we don't know how many were just walking through the newsroom, and they generally expect the Fed to start another round of large-scale asset purchases, known as quantitative easing, at its September policy-setting meeting. Another seven expect a move later this year, but not tomorrow. Just five respondents don't believe the Fed will take action this year.

And then there are others who say the economy is horrendous and jobs are not coming back and housing is still weak and all that, but the Fed doesn't necessarily need to do anything to help support the markets. Some economists don't see a large impact from a large bond-buying program. On average, they estimate that $500 billion in purchases would only reduce the unemployment rate by 0.1 percentage points and increase gross domestic product by 0.2 points over a one-year period. They estimate such a program would lift the inflation rate by 0.2 percentage points over 12 months.

Others argue that QE1&2 didn't really get the job done, and QE3 would just extend the misery; there is no exit plan from QE, and we might as well feel the pain now and get it over with. This argument usually comes from someone who thinks they will avoid the pain.

Monetary policy may not be pretty but fiscal policy has been seriously ugly. So, something is going to happen; this is what Bernanke does; the Fed will deliver some sort of QE. What remains to be seen is whether the Fed goes big and bold or weak and meek.

Last week the European Central Bank decided that if a country made a formal application for assistance and promised to abide by very strict terms and conditions, the ECB would buy up as much of that country's short-term bonds as necessary to bring down interest rates and assure a stable market for sovereign debt. The problem is that in the euro-union money comes from Germany and the German constitution basically said it was illegal to bailout the rest of the continent. Constitutionality is subject to interpretation in the light of financial crisis. Today, Germany’s constitutional court allowed a permanent bailout fund to go ahead.

The next issue is for broken down countries to step up and swallow the bitter pill and ask for aid and promised to..., well we don't know what they have to promise. Spain remains coy but the PM has hinted he might consider a half step toward a partial use of unlimited bond buying. Among the bailed-out euro zone countries, Ireland is inching its way back towards the capital markets and Portugal is doggedly implementing a tough austerity program, and has just been granted an extra year to achieve its fiscal targets. Portugal remains the poster child for austerity; the country has tried to cut back but when it does the economy just contracts even more.

After the German ruling there was enthusiastic market reaction; Spanish and Italian bonds rallied, equities moved higher, the euro hit a four month high. The problems in the euro-zone persist but for now the train wreck has been averted, the can has been kicked down the road for yet another day. And there is every indication that when the next wave of financial turmoil hits it will be a little less vicious, maybe.

California Governor Jerry Brown signed on Wednesday a pension reform bill that he said puts into law the "biggest rollback to public pension benefits in the history of California pensions." The legislation raises minimum retirement ages and will reduce pension benefits for new public workers. In addition to raising the retirement age for state employees, the legislation imposes new formulas for calculating pensions for new public sector workers. New hires will also split payments to their pension accounts at least evenly with their employers. Government employers will have greater authority to negotiate similar 50-50 contributions with current employees. The state Senate and Assembly approved the bill on strong bipartisan votes last month on the final day of their session.

The tax measure on the November ballot would increase the state's sales tax and raise income tax rates on the state's highest earners. Revenue would be used to prevent spending cuts to education programs in the near term and bolster the state's finances in coming years. Moody's Investor Services called the pension legislation a positive development for California's credit and for local governments and agencies that manage pension accounts through the California Public Employees' Retirement System and the California State Teachers' Retirement System. Moody's maintained rating for California of A1 with a stable outlook.

As of May, the world was producing 75 million barrels a day of crude oil, not including nat gas, biofuels, and various whatnots. That's up a million barrels a day from where it had been last October. However, all of the gains since October came from the return of Libyan production after the unrest seen there last year. You and I observed 9/11 with our own individual remembrances. In Benghazi Libya, a small group stormed the US Consulate and killed the ambassador and 3 other Americans.

Remember earlier this year, a guy named Greg Smith wrote a newspaper article about why he left Goldman Sachs, basically saying that Goldman was sleazy and he finally just determined that he wanted nothing more than to go home, take a long shower and try to wash away the scum.

The article struck a nerve. Within 24 hours, it had more than three million views online. Publishers clamored for the rights to a book. Grand Central Publishing secured a deal, offering Mr. Smith an advance of close to $1.5 million, and Mr. Smith’s memoir, “Why I Left Goldman Sachs,” is set for publication on Oct. 22. 

To some, an email isn’t complete without the inclusion of :-) or :-(. To others, the very idea of using “emoticons” – communicative graphics – makes the blood boil and represents all that has gone wrong with the English language. Regardless of your view, as emoticons celebrate their 30th anniversary this month, it is accepted that they are here stay. Just in case you want to plan a celebration, their birth can be traced to the precise minute: 11:44am on 19 September 1982. At that moment, Professor Scott Fahlman, of Carnegie Mellon University in Pittsburgh, sent an email on an online electronic bulletin board that included the first use of the sideways smiley face: “I propose the following character sequence for joke markers: :-) Read it sideways.” This weekend, the professor, a computer science researcher who still works at the university, says he is amazed his smiley face took off. Nowadays dozens of variations are available, mainly as little yellow, computer graphics. There are emoticons that wear sunglasses; some cry, while others don Santa hats. But Professor Fahlman isn’t a fan. “I think they are ugly, and they ruin the challenge of trying to come up with a clever way to express emotions using standard keyboard characters.” Alas, some people deliciate to use keyboards to create actual words; a quaint, antiquated mode of communication, so much more than brabble from days of yore. I do not need little smiley faces to jargogle my brain.

Americans are becoming more optimistic about the direction of the country. A new Reuters Ipsos survey showed 39 percent of Americans believed the country was moving in the right direction, while a still-high 55 percent believed it was on the wrong track. The numbers represented a sizable change from August, when 31 percent of those surveyed thought the country was going in the right direction and 64 percent on the wrong track. It was the highest level for the "right direction" rating since April 2010. So I guess we're more optimistic; just don't send me something with that damned yellow smiley face.

:-)

Tuesday, September 11, 2012 - I Woke Up Early Today

I Woke Up Early Today

- by Sinclair Noe

DOW + 69 = 13,323
SPX + 4 = 1433
NAS +0.50 = 3104
10 YR YLD +.01 = 1.70%
OIL - .37 = 96.80
GOLD + 7.70 = 1733.50
SILV + .14 = 33.58
PLAT + 12.00 = 1610.00

Rating agency Moody's says it likely would cut its "Aaa" rating on US government debt, probably by one notch, if negotiations on the federal budget fail. The lower rating by Moody's would be the equivalent of the rating that Standard & Poor's put on the US last year when it downgraded the rating following the debate over raising the debt ceiling. Moody's says that if Congress and the White House don't reach a budget deal, $1.2 trillion in spending cuts and tax increases will automatically kick in starting Jan. 2. House Speaker John Boehner says he's not confident that Congress can reach a deal and avoid a downgrade. No serious negotiations are expected until after the November elections.

The Federal Reserve's FOMC policy making meeting commences on Thursday and the central bank is all but certain to extend its plan to keep interest rates low, moving the possible cutoff to 2015 from 2014. Also, it is widely expected the Fed will launch a bond-buying program targeting the mortgage market, QE3, or some new name to describe the same. The guidance on interest rates is supposed to encourage businesses and consumers to invest and spend, stimulating the economy, while the bond purchases are designed to further lower interest rates. The Fed's economic prescription may be part of the problem; might even be counterproductive. The Fed's actions serve as acknowledgment that the economy is weak and requires help. This approach not only may make consumers and businesses fear a long period of economic malaise, but also suggests that the Fed will start to raise rates if the economy shows signs of recovery.

Fed officials are cognizant that their policies may not have sent as clear a signal as they hoped; they are surely aware of the idea their actions will have diminishing returns. So, look for the Fed to announce something like open-ended bond purchases until such time as the economy recovers. Of course, part of the Fed announcement will surely be influenced by Europe.

The ECB's new unlimited bond-buying program hasn't been enacted and it is already producing some results. The yield on Spanish 10-year government bonds fell below 6 percent for the first time since May. The risk premium, or the comparison of Spanish bonds to German bonds; that gap narrowed to 412 basis points, down 141 basis points on the week. On Thursday, the Germans will decide the constitutionality of the Euro-zone bailout schemes. Italy's Mario Monti, in a delusional outburst of irrational exuberance, says the Italians have averted the worst case scenario of the debt crisis. France, meanwhile, looks like its economy is shrinking after nine months of just stagnating. The Germans may not be happy about a euro-wide bailout but it seems like slow motion karma, and if they don't step up now, they'll just have to pay more later.

Here in the US, the rich aren't just getting richer, they're getting very rich. You're getting poorer. Most of you, anyway. The wealth gap between the richest and the typical family more than doubled over the past 50 years. The Economic Policy Institute report finds that the top 1% had 125 times the net worth of the median household as of 1962; but by 2010, the disparity reached 288 times. The median household saw its net worth drop to $57,000 in 2010, down from $73,000 in 1983. It would have been closer to $119,000 had wealth grown equally across households. The top 1%, meanwhile, saw their average wealth grow to $16.4 million, up from $9.6 million in 1983.

Meanwhile, a new survey from the Pew Research Center finds more Americans consider themselves to be part of a growing lower class. The group of people ages 18 to 29 who consider themselves in the lower class ballooned in 2012 to nearly 40% from 25% in 2008. The percentage shrinks with age – only 20% of Americans of retirement age feel the same.

If you are looking for a way to lift yourself from the lower economic rung, if you would like to lift yourself out of the middle class, we have a case study in quick wealth. The secret is to start by getting a job with a giant Swiss bank, like maybe UBS; help rich Americans to set up phony companies to conceal secret Swiss bank accounts; give those clients credit cards to access their hidden cash. Convert the wealthy Americans' money into diamonds, smuggle the diamonds to Switzerland. This, in and of itself, will only earn you a good salary. If you want the big liquidity event, you have to go a step beyond, and blow the whistle and report your US clients to the IRS.

This is the story of Bradley Birkenfield, and today he was awarded $104 million. UBS's tax avoidance program tried to hide more than $20 billion from the US taxman, but the scheme began to unravel in 2007 after Birkenfield spilled the beans on his former clients. UBS paid a $780 billion fine and agreed to disclose the names of 4,450 US clients. Of course, the story had a few twists along the way. Birkenfield was not exactly an angel, and he was charged with conspiracy related to the case; Birkenfield pleaded guilty and went to jail for a couple of years. He got out last month. To the best of my knowledge, no other UBS banking officials went to jail, just the whistleblower.

Pulling yourself out of the middle class is no easy accomplishment, it takes hard work, risk, and in the case of Bradley Birkenfield, it required conviction. And if you are in the upper class; if you are among the wealthiest Americans, and you think it is a clever idea to move some of your money offshore, the case of Bradley Birkenfield offers 104 million reasons why a tax avoidance scheme might not be so clever after all.

I have a correction. Yesterday, I told you about the problems with GoDaddy, the website domain company. Millions of their websites were shut down, to the great consternation of website owners. There was speculation the highly effective, activist hackers known as Anonymous may or may not have claimed credit for the shutdown. This afternoon GoDaddy said it didn't need any outside help to screw up its operations; it had done so by accident all by itself. So what looked like another in a long line of institutions being taken to task by Anonymous turns out to be just normal, run of the mill, day to day, GoDaddy incompetence.

Monday, September 10, 2012 - When the Crack Pipe Fails to Satisfy

When the Crack Pipe Fails to Satisfy

-by Sinclair Noe

DOW – 52 = 13,254
SPX – 8 = 1429
NAS – 32 = 3104
10 YR YLD +.02 = 1.68%
OIL -.30 = 96.24
GOLD – 10.50 = 1725.80
SILV - .34 = 33.44
PLAT + 2.00 = 1599.00

Consumer credit shrank by $3.28 billion in July; this marked the first declines in consumer credit in nearly a year as Americans reduced credit card debt. Now for the scary part; I read a couple of stories on this today and they described the news as worrisome for the economy. I disagree. It might be worrisome for the credit card companies; it might be worrisome for the payday loan companies; it might be worrisome for the banks and other loan sharks, but I consider it good news for consumers and the economy in general. Consumer debt does not add to productivity; it doesn't manufacture things. It's debt. It's inflationary. It's takes resources which could be applied to greater purpose elsewhere. It doesn't really matter because the Federal Reserve says they revised their earlier estimates for June, and it is likely we'll all be paying with plastic again in August – you maybe, not me.

Credit has been expanding almost continuously since mid-2010 as the country recovered from the 2007-2009 meltdown. The decline in July was the first drop since August of last year. In July, revolving credit, which includes credit cards, shrank by $4.82 billion. The data looks at declining credit as a negative because it is closely correlated to consumer spending. Of course, there is the possibility that people are buying things with something we used to call money; I know that is a farfetched notion, but I'm holding out hope.

The concept of stopping the continuous compounding of debt upon more debt upon more debt; the very idea of someone in a hole, stopping digging – this notion is completely and totally alien to the Federal Reserve. And so the Federal Reserve will almost certainly announce QE3 at the end of the week, or some version of QE3, or some new catchy name for tossing out free money to the banks, while creating mountains of fresh, new debt.

The only surprise would be if the Fed did not announce QE3 and QE to infinity; in which case the market would throw a tantrum and break things, like your 401k. The Wall Street bookies, or analysts, are putting the odds of QE3 at 99%. And then you have to believe that since the market believes the Fed will deliver QE to infinity, they have already baked it into the cake. Accommodative policy is already priced into equity and bond valuations.

We know the markets love free money, but what if the Fed announced QE and the markets were flat or even worse, their response is negative because it's already priced in. And even though the Wall Street types love free money from the Fed, businesses on Main Street aren't making investment or hiring decisions based on the idea that the Fed is holding interest rates near zero. In fact, if you want to spur capital expenditures, you might want to hint that rates will go up in the future and now is the time to make your move. At some point, the Fed's action won't be enough to make a major difference in markets; I don't think we're there yet.

Yale University professor Stephen Roach and Bill Gross, the manager of the world’s biggest bond fund at Pimco say central bank money printing is losing its effectiveness in spurring growth.

Roach says: “I’ve been negative about the U.S. ever since the Fed went to their unconventional monetary policy.”

Gross, who oversees Pimco’s $270 billion Total Return Fund, wrote in the monthly commentary posted on Pimco’s website last week: “Our credit-based financial system is burdened by excessive fat and interest rates that are too low.”

After the Fed’s first round of quantitative easing, the Bank of England announced 75 billion pounds ($120 billion) of asset purchases in March 2009, and the ECB provided 442 billion euros ($565 billion) in one-year loans to the region’s lenders in its Long Term Refinancing Operation, or LTRO, three months later. The Bank of Japan said in October 2010 it would buy 5 trillion yen ($64 billion) of government and corporate debt.

The Fed cut its overnight bank lending rate to between zero and 0.25 percent in December 2008 and has indicated it may keep it there through 2014. The ECB has reduced borrowing costs to 0.75 percent and the BOE to 0.5 percent. The BOJ lowered its target rate to about zero from 0.5 percent.

Fed stimulus has typically debased the currency. The Dollar Index tracks the greenback against six US trading partners; the index dropped 13 percent between the Fed’s announcement of $2.3 trillion in easing in November 2008 through the end of the bond buying in June 2011. That might not happen this time. The index is trading around 80.5, a fairly strong level of support. Also, we’re seeing clearer signs of diminishing returns from success quantitative-easing programs. Also, it's pretty clear that the US recovery is less than robust, you might call it tepid, you might call it a non-recovery, or you might call it something we can't call it on the radio. But the rest of the world isn't in much better shape.

The Euro-zone economies contracted 0.5 percent in the second quarter from a year earlier. Japan is struggling to overcome more than a decade of deflation and the effects of last year’s record earthquake. Bill Gross wrote on the Pimco website that central banks are agog in disbelief that the endless stream of QEs and LTROs have not produced the desired result. Yep, and junkies are amazed when the crack pipe fails to satisfy; why should the debt junkies be any different.

Gross also says new regulations requiring banks to hold more capital and increased saving by households has prevented record low interest rates from sparking the recovery central bankers anticipated. As if banks having enough money to back up their bets is a bad thing, as if households not digging a deeper and deeper hole to finance day to day consumption is a bad thing. Gross is a pretty smart guy but when a man makes his living with a hammer, the whole world looks like a nail.

In addition to the Federal Reserve FOMC meeting we'll be watching the news out of Europe. Stocks declined earlier today as Greek Prime Minister Antonis Samaras was meeting officials from the nation’s creditors after failing to secure agreement from coalition partners on spending cuts. Meanwhile, Greece’s Democratic Left leader said that no decision had been made on the cuts required to obtain further aid for the country’s bailout, and that poorer citizens must be protected from austerity measures.

The German Constitutional Court will rule on the legality of the Euro-bailout fund. Also, Mario Draghi, the president of the European Central Bank still has to sort out exactly what the next steps are for the Euro-zone under his whatever it takes, unlimited conditional support, bond-buying scheme. If nothing else, Draghi has kicked the can into the politicians' court; he can claim he did his part and now it is up to the politicians and the German courts.

George Soros made his fortune betting on currencies in the midst of economic crisis in the UK; Soros says: “Lead or leave: this is a legitimate decision for Germany to make. Either throw in your fate with the rest of Europe, take the risk of sinking or swimming together, or leave the euro, because if you have left, the problems of the eurozone would get better.”

And while the Germans deliver their verdict, the Dutch will also take to the polls for national elections. The Netherlands economy is fairly strong but it has been slowing and the Netherlands is not an island, despite all the canals, it is feeling the slowing effects of the Euro-crisis.

The Dutch and the Germans have been part of the northern countries demanding austerity by the southern or peripheral countries, but now that the Dutch are feeling the slowdown, the idea of austerity becomes less appealing. While the Dutch generally still see the benefit of fiscal responsibility and financial sustainability, more and more people doubt that now is the best time to try to reign in the deficit as it is becoming clear that the cutbacks deepen the crisis rather than solving it.

Since 2008, the internet collective known as Anonymous has hacked the CIA, the Sun newspaper, the Church of Scientology, the FBI, the Arizona Department of Economic Security, Visa, Mastercard, and a host of other large corporations, sparking a global police crackdown last year. For a period in 2011, LulzSec – an offshoot of Anonymous, the internet"hacktivist" collective who came to prominence around the time of the Wikileaks affair – wreaked a trail of chaos across the web. Their actions ranged from the transgressive – they had taken down the CIA's website and hacked into Sony's database and released more than a million user names and passwords. Then they hacked PBS television after they aired a negative documentary about Julian Assange. LulzSec hacked into their website and replaced the homepage with an article about Tupac Shakur, "Tupac Still Alive in New Zealand" (I have long suspected Tupac was living in New Zealand). Then, during the Arab spring, members of the group hacked and defaced Tunisian and Egyptian government sites. One hacker (later discovered to be a 16-year-old London schoolboy), allegedly wrote a webscript that enabled activists to circumvent government snooping.

Thousands and possibly millions of websites hosted by GoDaddy.com went down today, causing trouble for up to 5 million small businesses. A Twitter feed that claimed to be affiliated with Anonymous said it was behind the outage, but this couldn't be confirmed. Another Twitter account, known to be associated with Anonymous, suggested the first one was just taking advantage of an outage it had nothing to do with. Maybe they were hacked, maybe GoDaddy just screwed up on their own. GoDaddy was a target for hacktivists early this year, when it supported a copyright bill, the Stop Online Piracy Act. Movie and music studios had backed the changes, but opponents say they would result in censorship and discourage Internet innovation. And GoDaddy sided with the censors.

The US Treasury Department said it will sell $18 billion of American International Group Inc., slashing its stake in the New York company by more than half and making the government a minority shareholder for the first time since the financial crisis was roaring in September 2008.

At JPMorgan directors are considering lower 2012 bonuses for Chief Executive Jamie Dimon and other top executives in the wake of a multibillion-dollar trading disaster. But they also are grappling with the question of how to do that without drastically reducing the executives’ take-home pay. More than 93% of Mr. Dimon’s $23 million in compensation last year came from either stock- or cash-based bonuses. Citigroup’s board, meanwhile, is expected to decide this fall how to fine-tune next year’s compensation plan to win broader support among investors. One thought is if an executive loses billions of dollars in reckless trades, maybe they don't deserve a bonus.

Transocean Ltd. and the Justice Department have discussed a $1.5 billion settlement that would resolve federal claims over the company's role in the 2010 rig explosion that led to the nation's worst offshore oil spill.

Transocean said in a regulatory filing that several issues, including the possible time period for payment, must be resolved before a deal can be completed. A Justice Department spokesman declined to comment. Transocean owned the Deepwater Horizon drilling rig, where 11 workers died in an April 2010 explosion triggered by a blowout of BP's Macondo well. Transocean also says it rejected settlement offers earlier this year from BP and a group of private attorneys for Gulf Coast residents and businesses.

Transocean was once a US company, but now they're headquartered in Switzerland. They are involved in deep-water ocean oil drilling and apparently Switzerland offered, easy coastal access.

Friday, September 7, 2012 - More Than You Want to Know About the Jobs Report

More Than You Want to Know About the Jobs Report

By Sinclair Noe

DOW + 14 = 13,306
SPX + 5 = 1437
NAS + 0.61 = 3136
10 YR YLD - .01 = 1.66%
OIL +.89 = 96.42
GOLD + 34.00 = 1736.30
SILV + .97 = 33.78
PLAT + 10.00 = 1597.00

The first Friday of each month the Bureau of Labor Statistics reports on nonfarm payrolls for the previous month. While that sounds rather mundane, the jobs report is a pretty big deal. The results attempt to measure some of the most vital data about the economy; who's working and where and how much are they being paid; from this we can estimate how much people will or will not spend, the strength or weakness of businesses, the overall health of the economy. The fates of Presidents and political parties can hang on the results. The Federal Reserve will use the report to determine if they will turn on the printing press. This in turn affects the prices we pay for almost everything. So, it's a pretty big deal.

The economy added 96,000 jobs in August, far below the consensus of 125,000 to 150,000. In addition, July's tally was revised down to 141,000 from 163,000. The unemployment rate unexpectedly fell to 8.1% from 8.3% and the "real" unemployment rate (U6) fell to 14.7% from 15%, but the unemployment rate came down for the wrong reason; a sharp drop in the size of the labor force. The labor participation rate fell to 65.3%, its lowest level since September 1981. In other words, people have given up, and 368,000 people stopped looking for a job, and 5 million Americans were classified in August as "long-term unemployed." Meanwhile, teenage joblessness rose to over 24%; that should make your nervous.

At the same time, the report marks the 30th straight month of private-sector job gains. On the other hand, August is the 43rd consecutive month of unemployment above 8%. We're not seeing the massive declines of 4 years ago, but we're not seeing enough growth to lift us out of the weakness. In the 27 months since the start of the current employment recovery, the private sector has added 4.3 million jobs. Once one takes account of population growth there has been essentially no progress in repairing the labor market after the recent downturn. We are better off than we were when jobs bottomed out in 2009 but we're not as well off as we need to be.

Why the slow recovery? In the past, local government employment has been almost recession-proof. This time it’s not. Going back as long as the data have been collected (1955), with the one exception of the 1981 recession, local government employment continued to grow almost every month regardless of what the economy threw at it. But since the latest recession began, local government employment has fallen by 3 percent, and is still falling. In the equivalent period following the 1990 and 2001 recessions, local government employment grew 7.7 and 5.2 percent. Even following the 1981 recession, by this stage local government employment was up by 1.4 percent. Without this austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent.

We've talked about the failure of the austerity programs in Europe. There is no meaningful federal government for the Euro-zone to provide either stimulus or austerity. And while we have seen stimulus programs on the federal level in the US, we have had unprecedented austerity at the level of state and local government. Going on a diet may help you get healthier, but the quickest way to lose 40 pounds is to cut off your leg, which would not make you healthier. Sadly, austerity will never balance a budget; actually it will increase deficits.

Let's break down the report. Average hourly wages dipped a penny to $23.52 and are only slightly ahead of inflation in the past year. The average work week was unchanged in August after being revised downward in July to 34.4 hours. And the number of temporary jobs fell for the first time in five months. Both figures suggest that companies are seeing less demand for their services and need fewer workers. Many of the jobs were in lower-paying industries such as retail, which added 6,100 jobs, and hotels, restaurants and other leisure industries, which gained 34,000. Higher-paying manufacturing jobs fell by 15,000, the most in two years.

That may seem incongruous with some of the retail sales reports lately; in July and August, auto sales and overall sales were moving higher. Generally, when people are out of work or especially when they give up looking for work, they start pinching pennies; we have seen that, at least not yet. Another possible explanation is that we are starting to slide into the subterranean economy much like we've seen in Europe. Still, we have a consumer driven economy, and if people tighten up, the GDP will slip down.

And that may seem incongruous with with the multi-year highs we've seen on Wall Street. At some point, consumers squeezing dollars hurts corporate earnings, and even though sales are decent they don't seem sustainable. Where are we finding ongoing demand? No demand means revenue dries up, unemployment moves up. Meanwhile, the Dow, the S&P 500 and the Nasdaq Composite are all more than 100% higher than the March 2009 lows. Remember the Pop Quiz? What does Wall Street love? Answer: Free money.

The Federal Reserve is now ready for another round of Quantitative Easing. In the minutes from the most recent FOMC meeting the Fed indicated they will dish up more free money. At the speech last week in Jackson hole, Fed Chairman Bernanke told investors and economists that he believes QE still has more to give, essentially priming markets for QE3, suggesting it’s now just a matter of time; he said the first two rounds of QE pushed GDP up by 3% and added more than 2 million jobs.

Yesterday, European Central bank president Mario Draghi announced a major, open-ended, bond buying program designed to push down the borrowing costs of the peripheral countries, specifically Spain and Italy, and if Portugal and Greece ever get back in the bond market, it would theoretically aid them. Draghi's plan doesn't solve the problems of the Euro-zone but it should prevent those problems from immediate implosion. It makes sense for Bernanke to get some extra bang for the buck by piggybacking on the ECB bond buying scheme. Because the reality is that the central banks are globalized.

Next week, the FOMC meets again. It is almost dead certain they will announce a large easing policy. This is what Bernanke does; this is what Bernanke has telegraphed he will do. Nothing in today's jobs report changed that inevitability. What is not certain are the results of QE3; it would take monetary policy into uncharted territory, and there is not much to support Bernanke's enthusiasm for QE as a job generator. Fiscal policy does have the power to put people to work but Congress is a mess. Earlier this summer, the bank of International Settlements wrote in its annual report that central banks had basically reached the end of their ropes, and that from there on out, it was all up to fiscal authorities. Bernanke's Jackson hole speech didn't offer any new ideas, just an endorsement for more QE. And since the economy hasn't improved enough, Bernanke is promising to do more of what hasn't been working.

So, we have central banks kicking the can again, and political parties partying and maybe you're wondering what the banksters are up to. Same old, same old.

IKB Deutsche Industriebank is suing, or at least it seems that way: the German lender is suing Citigroup and Goldman Sachs over losses of $137.4 million and $73.2 million, respectively, on mortgage-backed securities. In May, IKB sued Bank of America over losses of more than $200 million on mortgage bonds.  

Meanwhile, a federal appeals court has revived a lawsuit accusing Goldman Sachs Group Inc. of misleading investors about the risks associated with mortgage securities offerings. Thursday's decision by the Second U.S. Circuit Court of Appeals in New York could subject banks to a wider array of claims by mortgage securities investors, by letting them sue over securities in which they did not specifically invest themselves. The decision allows lead plaintiff NECA-IBEW Health & Welfare Fund, an electrical workers' pension fund that owned some mortgage-backed certificates underwritten by Goldman, to pursue a class-action case on behalf of investors in other certificates backed by mortgages from the same lenders.

A regulator has sued UBS, accusing the Swiss bank of violating federal and state laws through misrepresentations in the sale of mortgage-backed securities to two credit unions that later failed, according to a court filing. The two unions, U.S. Central Federal Credit Union and Western Corporate Federal Credit Union (WesCorp), paid more than $1.1 billion for the securities in 2006 and 2007, according to a complaint filed by the regulator, National Credit Union Administration (NCUA).

In the lawsuit filed in a Kansas court, NCUA said that at the time of purchase, U.S. Central and WesCorp "were not aware of the untrue statements or omissions of material facts" in the offering documents of the residential mortgage-backed securities (RMBS). The misrepresentations in the offering documents had caused US Central and WesCorp to believe the risk of loss was minimal, when in fact the risk was substantial. NCUA has previously filed similar lawsuits against JP Morgan Chase, Royal Bank of Scotland Group, Goldman Sachs, and Wachovia, now a unit of Wells Fargo .

NCUA has settled claims worth more than $170 million with Citigroup, Deutsche Bank, and HSBC.

Thursday, September 6, 2012 - Free Money With Strings Attached

Free Money With Strings Attached

-by Sinclair Noe

DOW + 244 = 13,292
SPX + 28 = 1432
NAS + 66 = 3135
10 YR YLD +.08 = 1.67%
OIL - .67 = 95.82
GOLD + 7.90 = 1702.30
SILV +.44 = 32.81
PLAT + 10.00 = 1589.00

Pop Quiz.

Q: What does Wall Street love?

A: Free money.

The Standard & Poor’s 500-stock index jumped 2 percent by the close to its highest level since January 2008. The Dow Jones industrial average added about 244 points, or 1.9 percent. And the Nasdaq composite index gained 2.2 percent for its highest close since 2000. In Europe, stock market indexes closed with gains of more than 2 percent, with Spanish and Italian stocks up more than 4 percent. The DAX in Frankfurt added 2.9 percent. The FTSE 100 in London gained 2.1 percent.

Today, the European Central Bank announced they will launch a new and potentially unlimited bond buying program to lower borrowing costs for countries struggling with debt. The idea is to buy bonds with maturity of three years or less. ECB President Mario Draghi claims this is within the mandate of the ECB. Germany's Bundesbank reiterated its opposition to the plan. Draghi said the ECB would only help countries that signed up to and implemented strict policy conditions, with the euro zone's rescue fund also buying their bonds, and preferably with the IMF involved in designing and monitoring the conditions.

At a news conference, Draghi said: "Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios," and he indicated there are no limits on the size of the transactions. The bond buying program would not target specific bond yields. Spanish and Italian government bond yields have fallen significantly since Draghi said on August 2 that the ECB would buy bonds issued by Madrid and Rome. Again today, yields fell further after he announced the bond buying program.

Draghi also said the ECB was prepared to waive its senior creditor status on bonds it purchased - meaning it would be treated equally with private creditors in case of default. This was a little trick of the ECB during the Greek meltdown, where they basically jumped to the front of the line when it came time for payment. The central bank hopes that by removing private investors' concern about being paid back last in the event of a sovereign default, they will not be frightened by ECB intervention.

Draghi said all bond purchases would be "sterilized" by taking in an equivalent amount in deposits from banks to avoid any risk of inflation; think trash for bonds. The bond purchases have not started yet, and they might never get off the ground. Germany's constitutional court is scheduled to rule on the Euro Stabilization Mechanism rescue fund next week. Support for Mr. Draghi includes the German chancellor, Angela Merkel.

The German economy has already been dragged down by the downturn of the other euro-union countries. As much as Germans may complain about the less competitive indebted countries of the south, the costs to Germany of a euro collapse would be enormous. If Spain and Italy are shut out of the debt markets, the bailout funds are too small to bail them out. The cost of a bond buying program may be uncomfortable but the cost of a full fledged crisis and possible collapse of the euro-union is prohibitive.

Although the bond-buying program announced Thursday should reduce the pressure on Spain and Italy, if those countries choose to seek its protection, it will not solve the deep structural problems of the euro. The thinking is that it could buy time for the political leaders of the 17-nation euro zone to follow through on their past promises to back the currency with a more tightly integrated fiscal union and more disciplined oversight of national budgets.

And the bond buying plan is not guaranteed to succeed. The ECB deal is based on conditionality. Greece is the implied fate of anybody who dares to flout the rules. Greece hangs on the edge of being tossed from the euro-union while the country is increasingly being placed in an untenable position, which will almost certainly set it up for future failure. Part of the problem is whether Greece can be allowed to fail without destroying the union.

Marshall Auerback reports:

The eurozone creditors are now saying the Greek government must tighten the universal neoliberal screws even further by imposing a six day work week and perhaps reducing wages as well, as a condition for the Greeks getting another “bailout.” Of course, unemployment and underemployment in Greece are rising rapidly, so it is hard to see how extending the work week for the already employed can be the kind of “tough love” that will create an increase in the total number of jobs or improve the economy. In the creditor’s eyes, however, that is unimportant; the real problem is Greece’s dysfunctional culture of work and profligacy.

So the neoliberal policy solution for turning around the Greek economy is to improve the culture of work is to introduce a kind of debt peonage by taking the Greeks back to the 19th Century. And what happens when the six-day work week and wage reductions do not work, as they inevitably won’t? What comes next? Charles Dickens knew the answer — improve the culture of work by relaxing child labor laws to reduce wages further and/or privatize the Aegean islands, Delphi, and the Acropolis. No problem.

Greece, to be sure, has its share of self-inflicted economic problems, but austerity economics is pushing Greece into a death spiral. Europe is cutting its nose to spite its face as it converts one Eurozone economy after another into a barter state. The problem is that the renewed bond buying will be tied to the conditionality of yet more fiscal austerity, and Greece is being held up as the poster boy of what happens when you don’t comply with the conditions laid out by the ECB, or the Troika. In addressing the solvency issue, the ECB’s conditionality ironically will make the very “problem” of fiscal profligacy and higher government deficits much worse, as demand gets crushed by yet more austerity.

In other economic news, the Institute for Supply Management said its services index jumped to 53.7 last month from 52.6 in July. That beat economists' forecasts for a 52.5 reading. A reading above 50 indicates expansion in the sector. This follows a less than robust ISM manufacturing report on Tuesday.

Also today, we had a possible preview of tomorrow's jobs report. Initial claims for unemployment dropped by 12,000 last week to 365,000. ADP, the payroll processing company estimates nonfarm private businesses added 201,000 new jobs from July to August. The forecast for tomorrow's official jobs report is calling for an increase of about 150,000 jobs. The ADP report is not very good at actually predicting the official BLS report, but it suggests the number might be a little better than current guesses.

The data will also set the tone for monetary policy, ahead of the September 12-13 meeting of the Federal Reserve's policy board, the Federal Open Market Committee. Last week Fed chief Ben Bernanke laid out his case for the FOMC to take more action to boost the economy, citing the lack of progress this year on jobs and the rise in long-term joblessness.

Today the markets jumped higher on the prospect of the ECB passing out free money and the hope the Federal Reserve will pass out even more free money next week. Of course the buzz on the street from the central bank handouts is kind of like the buzz a little kid gets from eating too much sugar; it is fun for the moment but it wears off quickly. With respect to equity market levels, it doesn’t matter anymore. This isn’t the market we learned about in the past or what is described in the texts. Earnings don’t matter anymore, except for random stock picking, and then probably not very much after a few days or weeks of reduced stock prices. Structurally, the market only responds to liquidity and algo enthusiasm. What will sustain the markets moving forward? What will sustain the economy moving forward. Central bankers may be good at averting crashes; they may even be good at creating crashes, but what can they do to build sustainable economic growth? 

Wednesday, September 5, 2012 - Just Waiting and Being Productive

Just Waiting and Being Productive

-by Sinclair Noe

DOW + 11 = 13,047
SPX – 1 = 1403
NAS – 5 = 3069
10 YR YLD +.01 = 1.59%
OIL +.44 = 97.72
GOLD – 2.80 = 1694.40
SILV - .09 = 32.37
PLAT + 2.00 = 1577.00

We wait for the ECB and as we wait we try to remain productive.  Three months ago, George Soros said the powers that be in the euro-zone, which is another way of saying Germany, could still correct their mistakes and reverse the trend and make things right, and they had a three month window to get their act together. Soros delivered the speech on June 2^nd.

The European Central Bank meets tomorrow and there is a rumor floating around that that ECB President Mario Draghi is ready to announce a plan to buy unlimited sovereign debt of countries that formally request assistance and agree to be bound to fiscal compliance.  So far, it is just a rumor but we have seen Italian and Spanish bond yields have dropped sharply. The German Constitutional Court is ruling on whether the ESM is constitutional, and German manufacturing is contracting; so the timing presents some challenges. The German Finance Minister today said people should lower their expectations. I don’t know what that means. Maybe Draghi has managed to cobble a deal to allow unlimited bond purchases; we won’t know until Thursday night, Friday morning; if a deal is in place it is a big deal. If a deal is not announced, it won’t be a case of  diminished expectations, it will be nasty.

The Euro-crisis has seen the private sector losing big and making big transfers of capitals to try to protect what they have left; money is bleeding out of the periphery countries and that results in a loss of demand, and business slows and that destroys the ability to support new borrowing.  The government then goes into deficit to offset the decline in private credit creation and the downturn in business activity.  As GDP declines, the fiscal response has been to shrink the economy which just makes debt servicing more and more impossible, absent massive write-downs or massive expansion of the ECB’s balance sheet.

Here’s an example; it will require some imagination on a sultry summer day, but imagine it is the dead of winter and you are in a cabin on a snowy mountainside. You have no heat but you have a fireplace  and some matches but you have no firewood; so you burn the chair; then you burn the table; then another table; then the cabinets. And finally, you are in an empty shell of a building and the only thing left to burn is the door. If the fire goes out, you will freeze. If you burn the door, there will be no protection from the cold and you will freeze.

This is the problem with the European periphery countries. As austerity has been imposed, the economies have destabilized, and have only served to dry up demand and slow business and drive capital out of the periphery countries, and the result has been a downward spiral.

Basic choices about the structure of the currency union have yet to be made, as advocates for centralized control over bank regulation and government tax and spending policies clash with skeptics who fear the loss of sovereignty in the euro zone’s 17 member nations. Major resources, including those of the European Central Bank, remain at least partially sidelined as officials continue to debate the guidelines for using that money to help rescue flagging governments.

 There may be no good solution. But Draghi has promised to do whatever is needed, which sounds a bit more ominous than promising. Still, we should expect something out of the ECB meetings.

After all, it’s been three months.

If the ECB disappoints, then the Federal Reserve is standing by, and judging from the most recent minutes of the last FOMC meeting and the speech from Fed head Bernanke at Jackson Hole last Friday, it seems the Fed is ready to provide an accommodative monetary policy.  Here’s the part of Bernanke’s speech that got everybody convinced the Fed is going to take action:

“As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

The Fed doesn’t use language like “grave concern” without being ready to address the grave concern; still, it’s not a done deal till the fat lady sings.

The biggest political news this week will be Friday’s jobs report.  If the economy added a whole bunch of jobs and the unemployment rate drops, the Fed might postpone quantitative easing and that would disappoint the traders. It’s a strange world full of pretzel logic.

VP nominee Paul Ryan is saying that Obama's record is like Jimmy Carter's record. When it comes to employment we should hope so. During Carter's four years in office payroll employment expanded some 10 million, or 12.5%.  or at an average annual rate of 3.1%   This is the second best employment record of any post WW II Presidential administration.  It is almost a full percentage point stronger than Reagan's average gain of 2.2%.

I would think the better comparison would be against Bush where over eight years payroll employment only expanded some 308,000.  Interestingly, in three and a half years under Obama payroll employment has expanded more than it did over eight years under Bush.  In modern times every Democratic presidential administration left office with a lower unemployment rate than when they took office.  But only one Republican Administration has managed this accomplishment.

The Treasury Department has a Bureau of Public Debt; these are the folks that watch as the government debt topped $16 trillion over the past few days. The Bureau of Public Debt would like for you to suggest ways to reduce the debt. You can email your suggestions to debt.management@treasury.gov. 

Over the years, they’ve received a lot of ideas; some people even send money; last year they  took in more than $7 million in gifts to help pay down the debt. Last summer a sheet metal worker donated some money with this note saying: “We just got a contract raise, which doesn’t make any sense with the current state of the economy.  I can’t speak for anyone else, but I would’ve been willing to have part of that money directed to keep the country from going under.”

Someone else offered this email suggestion: “In one action, we could bring some equality to our social system and at the same time wipe out our national debt. How to do this? Just simple, confiscate the wealth of the top one percent of the wealthiest people in the country.”  A retired military officer recommended a “comprehensive communications strategy” to educate citizens on “U.S. Treasury bills, notes and especially bonds.” Perhaps the most drastic suggestion was that the government should only pass laws that are fully paid for. 

The Labor Department reported this morning that the productivity of US workers rebounded more than initially estimated in the second quarter as employers tried to protect profits. The measure of employee output per hour climbed at a 2.2 percent annual rate, after a 0.5 percent drop in the prior three months. Companies did a good job on productivity during the crisis, and they will continue to try to increase productivity to boost profits, but it’s not so easy to do that from here. The biggest gains in productivity during the current expansion have probably already occurred as companies find they need to boost staff to further increase output and as investment in new equipment cools. At the same time, a weakening global economy is already hurting earnings, indicating businesses will continue to look for ways to operate more efficiently. The potential for increasing profits by cutting costs has come down quite a bit.

Tuesday, September 4, 2012 - Review of the Economic News

Review of the Economic News

DOW – 54 = 13,035
SPX – 1 = 1404
NAS + 8 = 3075
10 YR YLD +.02 = 1.58%
OIL +.26 = 95.56
GOLD + 3.60 = 1697.20
SILV + .26 = 32.46
PLAT  + 21.00 = 1576.00

The Institute for Supply Management manufacturing index fell to 49.6% in August, lower than the 49.8% in July and the worst reading since July 2009. Readings below 50% indicate contraction in manufacturing companies surveyed. It appears to be part of a global trend; there has been a slowdown in manufacturing activity in Asia and Europe. Only eight of 18 industries as tracked by ISM were growing in August, led by printing, primary metals and food. August’s new-orders index fell to 47.1% from 48.0% in July; this points to manufacturers ratcheting down production activity, and that might also lead to a slowdown in hiring. The employment index fell to 51.6% from 52%; still positive but heading in the wrong direction.

Another ISM survey of the services sector — things like banking, health care and entertainment — is also expected to show an economy plodding ahead. The services index is forecast to edge down to 52.5 from 52.6.

The monthly jobs report is always an important chunk of economic data, and this Friday's report takes on a little added significance because the Federal Reserve FOMC will be meeting next week to determine policy, and most likely announce something like QE3. It's expected the economy added about 120,000 new jobs in August. While that’s enough to keep pace with the natural expansion of the labor force, it’s far too weak to reduce the 8.3% unemployment rate. And the chances that hiring will accelerate in the final months of the year appear to be fading. There doesn't appear to be any great catalyst to ignite job growth – with the exception of possible action from the Fed; so in a twisted way, a bad jobs report on Friday could serve as justification for Federal Reserve action to spark the economy.

Moody's Investors Service has changed its outlook on the Aaa rating of the European Union to “negative,” warning it might downgrade the bloc if it decides to cut the ratings on the EU's four biggest budget backers: Germany, France, the UK, and the Netherlands.  So, Mario Draghi, the president of the European Central Bank, has been claiming he will do whatever it takes, and this Thursday the ECB Governing Council will be meeting and they are widely expected to provide details of a new debt-buying plan, something that might put a cap on sovereign bond yields.

And then Germany will be determining whether they are constitutionally willing to go along with any deal, and today Moody's simplified the case. Still a new survey shows only a quarter of Germans think Greece should stay in the euro zone or get more help from other countries.  Of course, there is a strong chance the ECB will announce a rate cut and hold back on announcing a bond buying program. Both the ECB meeting and the Federal Reserve meeting hold great potential for major disappointment.

Moody's is only getting around to an obvious situation. The Euro-economies are crumbling. Spain is starting to go the way of Greece. There is a run on the Spanish banks. In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks, an amount equal to 7 percent of the country’s overall economic output; doubts grew about the durability of Spain’s financial system. 

The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight. More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent. According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted.

Apple became the world’s most valuable-ever company two weeks ago. It is worth $624 billion, more than all the listed companies in Portugal, Ireland, Greece and Spain together.

General Motors reported auto sales rose 10% in August as all four major brands posted growth, led by Buick. Chrysler reported its US auto sales were up 14% as the company reported broad growth across its brands. Meanwhile, Ford's US new-vehicle sales improved 13% from a year ago on strong growth in utility-vehicle sales.

CoreLogic reports home prices nationwide, including distressed sales, increased on a year-over-year basis by 3.8 percent in July 2012 compared to July 2011. This was the biggest year-over-year increase since August 2006. On a month-over-month basis, including distressed sales, home prices increased by 1.3 percent in July 2012 compared to June 2012. The July 2012 figures mark the fifth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis. Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 4.3 percent in July 2012 compared to July 2011.

Construction spending fell in July from June by the largest amount in a year, weighed down by a big drop in home improvement projects. There are two ways to read this; one – we have run out of money for the improvements, two – we have done everything on the honey-do list. I'm going with the second reason, based upon personal experience.

The Commerce Department said  overall construction spending declined 0.9 percent in July, but spending on construction of single-family homes and apartments increased again, a hopeful sign for the modest housing recovery. It followed three months of gains, which were driven by increases in home and apartment construction.  The June decline left spending at a seasonally adjusted annual rate of $834.4 billion. That's nearly 12 percent above a 12-year low hit in February 2011. Construction activity is roughly half of what might be considered to be healthy.

There is more fallout from the Libor rate-rigging scandal. Reuters reports Barclays has notified FINRA that a top executive and trader have been fired for their roles in the scandal. The regulatory filings disclosing the reasons for the two departures are not normally made public and Barclays did not specifically comment on the terminations, but they issued a statement that said:  "the firm undertook a thorough and robust internal disciplinary process promptly following the regulatory review which was completed in late July."

The dismissals reveal that even after settling with authorities, the full extent of Barclays' role in the rate-rigging scheme is still playing out. Lawyers familiar with the investigation say federal prosecutors continue to reach out to individuals to gauge interest in cooperating or taking pleas. They said US prosecutors are expected to begin making decisions in early September about whether to charge individual traders.

Also, at least a dozen US private equity firms have been subpoenaed by the New York state attorney general as part of a probe into whether a widely used tax strategy that saved these firms hundreds of millions of dollars is proper.  Among the firms that were subpoenaed are Bain Capital, KKR & Co, TPG Capital, Apollo Global Management, and Silver Lake Partners. Bain was once headed by Mitt Romney.  The subpoenas, which were sent out in July, seek documents related to the conversion of fees these private equity firms charge for managing investors' assets into fund investments. This means the investigation predates the release last month of confidential Bain fund documents by Gawker that revealed such a practice.

The practice is known as a "management fee waiver." As fund investments, the income would be taxed as capital gains, which attract rates around 15 percent. Without the conversion, the fees would be ordinary income, taxed at rates around 35 percent. The tax probe is being conducted out of the New York Attorney General's Taxpayer Protection Bureau, which was set up in early 2011. According to the AG's website, the agency was established "to root out fraud and return money illegally stolen from New York taxpayers at no additional cost to the state".