FINANCIAL REVIEW

Skim Just a Little

Sinclair Noe — November 20, 2014

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 33 = 17,719
SPX + 4 = 2052
NAS + 26 = 4701
10 YR YLD – .02 = 2.33%
OIL + 1.50 = 76.00
GOLD + 11.40 = 1195.50
SILV+ .12 = 16.35

Record high close for the Dow Industrials and the S&P 500 index.

The Consumer Price Index, or CPI, measures inflation at the retail level; prices that you and I pay for stuff. Prices were unchanged in October at an annualized rate of 1.7%. Lower gasoline prices offset increases in housing (up 0.3%), medical care (up 0.2%) and airline fares (which increased 2.4% despite lower fuel costs). The price of gasoline fell 3% last month. The cost of food edged up 0.1% in October, but that was the smallest gain in four months. Fruits, vegetables, dairy and beef increased in cost, but pork, chicken, fish and eggs all declined. Food prices are up 3.1% from a year earlier.

Excluding the up-and-down food and energy categories, core consumer prices rose 0.2%. Over the past 12 months the core rate of inflation has risen an unadjusted 1.8%.

Initial jobless claims fell by 2,000 to a seasonally adjusted 291,000 in the week ended Nov. 15. The number of people who applied for new unemployment benefits totaled fewer than 300,000 for the 10th straight week.

The National Association of Realtors reports sales of existing homes rose 1.5% in October to a seasonally adjusted annual rate of 5.26 million, the highest level since September 2013. October’s pace of sales was up 2.5% from a year earlier. The median sales price of existing homes hit $208,300 in October, up 5.5% from the year-earlier period. October’s inventory was 2.22 million existing homes for sale, a 5.1-month supply at the current sales pace.

The Conference Board’s index of leading economic indicators rose 0.9% in October. The leading economic index is a weighted reading of 10 different indicators.

The Philadelphia Fed reported its manufacturing index rose to a much-stronger-than-expected reading of 40.8 from 20.7 in October, marking the best level since 1993. Separately, the Markit Flash Manufacturing Purchase Managers Index fell to 54.7 in November from October’s final reading of 55.9. A reading above 50 signals expansion in economic activity. The index was at its lowest level since January.

A new Markit survey of the Eurozone shows output is still increasing very slightly, with weakness in the manufacturing and services sector. Perhaps most worryingly, a separate Markit survey focused on German factories suggested that Germany, Europe’s largest economy, has gone flat.

Construction on the $50 billion Nicaraguan Interoceanic Grand Canal is expected to begin December 22. The 172 mile canal would connect Atlantic and Pacific, in much the same way as the Panama Canal, but the Nicaraguan Canal would be longer, deeper and wider. Feasibility studies have been approved, even though the canal would pass through Lake Nicaragua, Central America’s largest lake, and a major source of freshwater. The construction is expected to last for 5 years and the canal would be operational in 2020.

The state of Arizona is suing General Motors, accusing the company of putting the public at risk by concealing safety issues related to defective ignition switches and delaying recalls. The suit seeks civil penalties of up to $10,000 per violation and affects hundreds of thousands of vehicles, suggesting a total potential penalty against GM of billions of dollars if courts rule in the state’s favor. Documents produced to Congress and federal safety regulators suggest GM may have been aware of issues with the switch for at least a decade before ordering recalls. The recalls have expanded to encompass 60 serious defects affecting 27 million vehicles. The company has set up a compensation program for victims of the faulty ignition switch. Arizona argued that consumers lost money because GM vehicles fell in value.

A Senate Committee also held a hearing on the safety of airbags made by Takata, and why more cars have not been recalled. The National Highway Traffic Safety Administration called on automakers to expand the recall nationwide; Takata has resisted expanding the recall. One senator said that cars with Takata airbags were simply too dangerous to be driven until replacement parts could be produced. And really, it just is a matter of money. Car companies and airbag manufacturers are betting that people dying will be cheaper than the price of a recall.

It’s time for today’s edition of “Banks Behaving Badly”.

The first story comes from the New York Times but it was easy to miss because the Times wrote about it in confusing ways; here’s the crux. This guy worked as a regulator for the New York Federal Reserve Bank for 7 years, and then he got a job working for Goldman Sachs, a bank he had supposedly been regulating. And then the guy got confidential information on another bank, one of Goldman’s clients from a buddy who was still working for the New York Fed. This has so many conflicts of interest that it is hard to count, and the leaking of confidential information is criminal, and is now under investigation by several regulatory bodies. What really makes the story galling is that Goldman executives knew this was going on, and did not take action until September 26th, the day ProPublica released tapes of a former regulator for the NY Fed talking about how Goldman prevented regulators from regulating. In other words, they only took action when they had been exposed.

Next, the Senate is holding two days of hearings into the practice of Wall Street banks holding physical commodities and engaging in related businesses such as power plants and warehouses. The Senate Committee also issued a report which says that banks such as Goldman Sachs, Morgan Stanley and JPMorgan Chase bought up large stockpiles of aluminum and copper and were able to influence prices by manipulating their holdings. According to the report, Goldman Sachs engaged in an elaborate scheme to delay aluminum shipments and jack up the price of aluminum.

Sen. Carl Levin, who heads the Senate’s Permanent Subcommittee on Investigations, said Goldman Sachs engaged in a “merry-go-round” of aluminum movement between its warehouses with no purpose other than to drive the price of the commodity higher; essentially they moved aluminum from one warehouse in the Detroit area to another warehouse, simply to avoid making physical delivery of aluminum, creating an artificial physical shortage. Goldman has denied any wrongdoing.

The report also alleges that banks exceeded US limits on the amount of commodities they were allowed to hold in order to manipulate prices. The banks involved had invested in oil, coal and power plants, as well as copper and other commodities. The scale of those investments put the bank’s financial health in jeopardy if they had been exposed to an environmental catastrophe such as the Gulf oil spill or a mine explosion. The Senate’s report made public a never-before-seen 2012 Federal Reserve report showing Goldman’s commodity operations had an extreme loss scenario that could exceed the bank’s reserves by $1 to $15 billion.

The Senate investigation found that JPMorgan amassed physical commodity holdings equal to 12% of its Tier 1 capital yet told regulators that it held far less. Morgan Stanley, meanwhile, was found to have controlled 55 million barrels of oil storage capacity, 100 oil tankers, and 6,000 miles of pipeline. All 3 banks have been divesting their physical commodity operations. Banks entered the commodities markets to provide hedges for providers, traders and other market participants. They ended up with huge stakes and, according to the committee, were able to corner at least parts of the market.

Now, if you are wondering why this is important, other than the point that it is risky for the banks and could result in a catastrophic financial failure, consider the direct impact on you and the economy. Goldman’s manipulations of the aluminum market may seem like a small scale event; the aluminum market is not a big market, and aluminum is a fairly cheap commodity, but hundreds of millions of times a day in America we reach for an aluminum can, 90 billion times a year, and just a small increase off a tenth of a cent per can adds up; and add the tons of aluminum used in things like cars, electronics and house siding, and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years. Now we could accomplish better things with $5 billion than moving aluminum from one warehouse to the next. And remember, copper is a bigger market, and oil and electricity are even bigger markets, and foreign exchange markets are huge, and interest rate markets are huge; and all along the way, the banks have been skimming off, just a little here and a little there, while adding nothing of value in return.