Financial Review

Eight Year Anniversary

Sinclair Noe — September 15, 2016

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DOW + 177 =18,212
SPX + 21 = 2147
NAS + 75 = 5349
10 Y + .02 = 1.71%
OIL + .12 = 43.70
GOLD – 8.50 = 1315.10

Wholesale prices were flat in August, mostly because of sharp declines in the cost of food and gasoline; the Producer Price Index was unchanged for the month. In the past 12 months, the producer price index is unchanged. In August, the wholesale cost of food tumbled 1.6%, the biggest drop in almost three-and-a-half years. Gasoline prices slid 2.5%.

If the volatile food, energy and trade margin categories are stripped out, so-called core prices rose a faster 0.3%. Looked at that way, costs have risen 1.2% in the past year, the highest 12-month rate since the end of 2014.

Sales at U.S. retailers fell in August for the first time in five months as traffic dropped off for most stores, a sign that third-quarter growth might not be as strong as previously estimated. Retail sales declined a seasonally adjusted 0.3%. In August, hardly any retail segments did well. Receipts at auto dealers slipped 0.9%. Sales at gas stations fell 0.8% last month, reflecting a decline in prices.

Sales also declined 1.4% at home-improvement centers and 0.6% at department stores. Sales even fell for internet sellers and mail-order companies for the first time since the start of 2015. Only restaurants and apparel stores, helped by back-to-school demand, showed much strength. Restaurant sales increased 0.9% and clothing-store receipts climbed 0.7%.

The U.S. current-account deficit, a measure of the nation’s debt to other countries, sank 9.1% in the second quarter to $119.9 billion. The decline mostly stemmed from an increase in investment in U.S. assets such as stocks and bonds. The current account reveals if a country is a net lender or debtor. The current account deficit was 2.6% of GDP in the second quarter. That’s down from 2.9% in the first quarter and well below a record of 6.3% in 2005.

Industrial production fell 0.4% in August after a revised 0.6% rise in the prior month and a revised 0.5% gain in June. Industrial production fell 1.1% in the 12 months through August. Manufacturing output fell 0.4% over the year, and mining output declined 9.3%. In August, manufacturing, which analysts said accounts for 80% of total industrial output, fell 0.4%.

Reflecting the up and down nature of recent data, the New York Fed and its neighboring Philadelphia Fed reported contrasting conditions in September. The Empire State index, which covers the New York region, showed factory activity contracted in September while the Philadelphia Fed manufacturing index jumped to 12.8 in September from 2 in August, the first back-to-back positive readings in the index in a year.

Rates for home loans jumped. Freddie Mac reports the 30-year fixed-rate mortgage averaged 3.50% in the September 15 week, up from 3.44% in the prior week. The 15-year fixed-rate mortgage averaged 2.77%, up one basis point during the week. Despite the big weekly jumps, rates are much lower than they were a year ago.

The Bank of England opted to hold base interest rates at record lows this morning and to maintain the size of its newly enlarged asset-purchasing program. The bank’s Monetary Policy Committee (MPC) voted unanimously in September to hold the base rate at 0.25 percent, which was cut in August. It also voted unanimously to maintain the size of its corporate bonds purchases at up to £10 billion ($13.2 billion) and government bond purchases at £435 billion.

Switzerland’s central bank has kept its expansive monetary policy intact, holding its deposit rate at -0.75%, stating the Brexit vote has clouded its view of the global economy. “The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing upward pressure on the currency.”

Brazilian prosecutors charged ex-President Lula da Silva with being the “boss” of a vast corruption scheme at state oil company Petrobras, in a major blow to the leftist hero’s hopes of a political comeback. It was the first time that Lula, still Brazil’s most popular politician despite corruption accusations against him and his Workers Party, was charged by federal prosecutors for involvement in the political kickbacks scheme. Lula’s lawyers say the accusations are part of an effort to stop him running in the 2018 election.

On September 15, 2008, eight years ago today, investment banking giant Lehman Brothers filed for Chapter 11 bankruptcy, becoming the largest bankruptcy by asset value. The collapse of Lehman Brothers set off shock waves throughout global markets and economies.

The Dow dropped over 500 points, a 4.4% fall, in one day. The Dow Jones Industrial Average shed 25% over the next 30 days — a quarter of its value in just four weeks. Financial markets froze; not just stock trading, but derivatives tied to every kind of financial transaction from home loans to interest rates on bonds, to foreign currency exchange, to commodities – Lehman was a big player, an out-sized player in derivatives – and everything froze.

Some leading money market funds were unable to maintain their net asset value and began selling for less than $1 per share, a phenomenon known as “breaking the buck.” Liquidity dried up overnight. People were even questioning the future of capitalism.

Three days later, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke went to Congress with the Troubled Asset Relief Program, or TARP, a bailout for the banks. The Fed slashed rates to zero. Within days the contagion had spread around the world with governments having to use taxpayers’ money to bail out over-extended banks.

Despite all the damage, nobody went to jail. The Department of Justice refused to file criminal charges against individuals despite serious indications of violations of federal securities and other laws, uncovered by the Financial Crisis Inquiry Commission (FCIC) probe into the causes of the economic crash. The prosecutors’ cases were laid out for them, yet they refused to prosecute.

The FCIC findings found criminal liability at most of America’s largest banks — Citigroup, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Washington Mutual (now part of JPMorgan) and Merrill Lynch (now part of Bank of America) — along with foreign banking giants UBS, Credit Suisse and Société Generale, auditor PricewaterhouseCoopers, credit rating agency Moody’s, insurance company AIG, and mortgage giants Fannie Mae and Freddie Mac.

The FCIC presented DOJ with evidence that these institutions gave false representations about the loan quality inside mortgage-backed securities; misled credit ratings agencies; overstated assets and earnings in financial disclosures; failed to disclose credit downgrades, subprime exposure and the financial health of their operations to shareholders; and suffered breakdowns in internal company controls. All of these were tied to specific violations of federal law.

And the FCIC named names, specifying nine top-level executives who should be investigated on criminal charges: CEO Daniel Mudd and CFO Stephen Swad of Fannie Mae, CEO Martin Sullivan and CFO Stephen Bensinger of AIG, CEO Stan O’Neal and CFO Jeffrey Edwards of Merrill Lynch and CEO Chuck Prince, CFO Gary Crittenden and Board Chairman Robert Rubin of Citigroup.

And if you think things have changed, just consider the latest scandal: the thousands of Wells Fargo employees who opened millions of fake accounts in the names of real customers, just to meet unrealistic sales goals. It is more evidence that bad incentives are rampant in the financial industry and top executives either look the other way or that they don’t know what’s going on in the companies they run – a sign, if nothing else, that big banks are too big to manage. And that’s just an example from this week.

In the past 8 years we have seen a long, long rap sheet of illegal activity from the banksters; everything from money laundering to market rigging, to tax evasion, to sanctions violations, to robo-signing (that’s the word we invented for blatant, out of control forgery and perjury).

And while it is undoubtedly true that a working financial sector is crucial to the health and growth of an economy, economists increasingly argue that we now have a sector which impairs growth. The Bank of International Settlements published a white paper arguing that periods of rapid growth in finance bring with them slowing growth in productivity in other areas of the economy. In other words, growth is good but uncontrolled growth is a cancer.

The cost of the crisis has been severe. A paper from the Federal Reserve Bank of Dallas estimated that the financial crisis and the recession cost the U.S. economy as much as $14 trillion, or about $120,000 for every household. Since 2008, the global economy has been struggling to recover from the shock. Gross domestic product, or economic growth, is still below the levels seen before the crisis.

While there is growth, it’s been painfully lackluster in recent years. In the US, GDP is forecast to rise 2.4% in 2016, the same as in 2014 and 2015, according to the International Monetary Fund. Unemployment levels have fallen since the crash but there remains a particularly weak area of the labor market: wage growth. Earlier this week we reported that personal incomes picked up last year and millions were lifted out of poverty, but incomes are still at 1998 levels.

Reforms were effectuated, but that doesn’t mean banks are safer. Yes, they have more of a capital cushion but they are bigger and involved in even more risky behavior. In fact, the risks of a big bank failing may actually be greater than they were leading up to the financial crisis. Any attempts at reform were little more than a drop of water in the ocean. Disasters like Lehman Brothers’ collapse can occur at any time, without warning. Those who don’t learn from history are doomed to repeat it.

Financial Review

Justice Deterred

Sinclair Noe — September 10, 2015

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DOW + 76 = 16,330
SPX + 10 = 1952
NAS + 39 = 4796
10 YR YLD + .04 = 2.22%
OIL + 1.51 = 45.66
GOLD + 5.10 = 1111.90
SILV + .10 = 14.81

Wholesale inventories decreased by 0.1% in July, while wholesale sales dropped 0.3%. At July’s sales pace, the inventory-to-sales ratio was unchanged at 1.30 months.

The number of Americans getting laid off from their jobs remains near the lowest level in decades. Initial jobless claims fell by 6,000 to 275,000 in the period running from Aug. 30 to Sep. 5. New claims have been under the key 300,000 level for 27 straight weeks. The last time the pace of layoffs was even lower for such a long stretch was in 1973.

The prices the U.S. paid for imported goods fell by 1.8% in August, marking the biggest decline since the start of the year. Oil prices fell sharply again and strong dollar has also made foreign products cheaper for Americans to buy. Excluding fuel, U.S. import prices declined by a 0.4% last month. Meanwhile, the price of U.S.-made goods exported to other nations dropped 1.4%.

Mortgage rates were little changed ahead of the Federal Reserve’s key rate decision next week. Mortgage buyer Freddie Mac said the 30-year fixed rate mortgage averaged 3.90% in the week ending Sept. 10, up from 3.89%. The 15-year fixed-rate mortgage averaged 3.10%.

Oil prices rallied today.  Energy Information Administration data showed demand for gasoline over the latest four-week period was up almost 4 percent from a year ago, bullish for late-summer consumption of the motor fuel. Gasoline inventories, meanwhile, rose just about half of expected levels last week. Crude oil stockpiles rose nearly 2.6 million barrels last week, more than double expectations. Bottom line, when gas prices are low, we tend to take road trips.

Standard & Poor’s has cut Brazil’s investment-grade credit rating to junk for the first time since 2008, warning that it could lower the grade again in the coming months. The agency pointed to political challenges that are putting a balanced budget at risk as a reason for lowering the rating to BB+. Fitch and Moody’s still have Brazil at investment grade – for now – but if either one follows suit, as the country’s situation rapidly degrades, it would trigger massive cash outflows from pension funds.

The Justice Department is renewing its efforts to charge individuals in corporate investigations. Justice Department officials issued a memo Wednesday to prosecutors outlining best practices and recommending that they only consider a company to have cooperated in an investigation if that company turns over information about the actions of individuals at the firm, “regardless of their position, status or seniority.” And this is not first time the DOJ has tried this scheme. In 2014, then-Attorney General Eric Holder announced that “no company was too big to jail”, and of course since that declaration, no company has been jailed.

The new memo, released by Deputy Attorney General Sally Yates, claims that this new direction “deters future illegal activity, it incentivizes change in future corporate behavior”. This was a point emphasized by Matthew Schwartz, a former prosecutor at the United States attorney’s office in Manhattan who told the New York Times: “The main reason you bring these cases is to send messages to the business community”.

However, they are both wrong; the main reason to seek criminal charges and incarcerate criminals is to punish them, next on the list is deterrence, followed by rehabilitation. That has been the Department of Justice’s longstanding guideline. In fact, in a speech by then-AG Holder in August of 2013, he said “we need to ensure that incarceration is used to punish, deter, and rehabilitate”. It may seem a subtle distinction, but the difference in priorities is huge; especially because it confirms that we have a two-tiered system of justice: one for bankers, and the other for everyone else.

Of course punishment has never been the DOJ’s guideline when dealing with bankers. For many years AG Holder subscribed to the idea of going easy on the banks; it came to be known as the Holder Doctrine, which stems from his now-famous June 1999 memorandum — when he was deputy attorney general — that included the thought that big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern.

The new memo seems to say that the plan is to talk tough in the hope of deterring illegal activity. The memo says “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.” In other words, identify your rogue traders and low-level scapegoats before you try to cut a deal. In fact, the memo goes to great lengths to explain how it is so very, very difficult to bring a case against individuals and especially against executives.

Also, the memo seems to forget the idea from Holder that “no company is too big to jail”. If you want a deterrent effect, how about the idea that a corporate charter can be revoked; imagine if JPMorgan or Goldman Sachs faced the prospect of losing their charter for their crimes; that might prompt directors and officers and shareholders to think twice. Of course that will never happen; the banks really are too big to fail, and nothing has been done in the last 7 years to change that fact.

Since 2009, 49 financial institutions have paid various government entities and private plaintiffs nearly $190 billion in fines and settlements, according to an analysis by the investment bank Keefe, Bruyette & Woods. That may seem like a big number, but the money has come from shareholders, paid out as corporate expenses, and in some cases, tax deductible. For the banks, justice is just a check that somebody else has to write; not much deterrence there.

Wall Street has assumed control over the government, its agencies, and our legal system. The DOJ says it will increase its efforts in deterring Wall Street crime. Forgive me if I seem skeptical.

Meanwhile, New York regulators have sent letters seeking information to big banks that are primary Treasury dealers as part of a probe into the potential manipulation of bond auctions. The banks – including Barclays, Deutsche Bank, Goldman Sachs, Societe Generale, and Credit Suisse – aren’t charged with specific wrongdoing at the moment, as the investigation is still in its early stages. Boston’s public employee pension fund, State-Boston Retirement System, sued 22 primary dealers in July alleging conspiracy to manipulate Treasury auctions.

Companies raised $28 billion of investment-grade bonds in U.S. markets yesterday as the corporate-debt market roared back to life after a three-week hiatus that was partly due to worries about China. Nineteen companies issued debt, including Gilead Sciences with a $10 billion deal, home-improvement retailer Lowe’s and hotelier Marriott International. Overall, firms have sold $1.2 trillion worth of new debt in the U.S. this year, including junk-rated paper, putting the market on course to set a record for a fourth consecutive year.

XPO Logistics has agreed to acquire trucking and logistics company Con-Way for $3 billion including debt. The agreement is the latest in a string of transactions that have helped XPO grow into a major player in the global logistics market: since 2011, the company has completed at least 14 mergers and increased its revenue to a projected $6.7 billion this year from $177 million.

Bombardier surged 24% in Toronto yesterday, the most in a single day since 1988, amid growing optimism over the potential value of the company’s rail unit and the sales prospects for the firm’s CSeries jet. According to earlier reports, Bombardier rejected a bid by Beijing Infrastructure Investment for 60%-100% of Bombardier Transportation that gave the business an enterprise value of as much as $8 billion.

Ikea’s sales climbed 11% to €31.9 billion-euro in the year to August as the world’s largest furniture retailer enjoyed strong growth across different regions. “China remained the fastest-growing Ikea Group market, followed by Russia,” Ikea said. “Germany showed record growth and North America performed well. Also south Europe demonstrated positive progress.” The Swedish retailer aims to earn annual revenue of €50-billion-euro by 2020.

Dell intends to invest $125 billion in China over the next five years as the world’s third-largest computer manufacturer continues its expansion in the country. CEO Michael Dell said, “Dell will embrace the principle of ‘In China, for China’ and closely integrate Dell China strategies with national policies”. The plan includes strengthening the company’s research and development team in the country.

A new visitors’ center and museum opens today at the Flight 93 National Memorial in western Pennsylvania, one day before the anniversary of the Sept. 11 attacks. Fourteen years after the 40 people on board the hijacked United Airlines flight forced the plane into the ground as terrorists aimed it toward Washington, their story is on display for the hundreds of thousands of visitors who come to central Pennsylvania, near a town called Shanksville, each year to visit the Flight 93 National Memorial. Much of the visitors’ center deals with the final 35 minutes of the flight, as passengers fought the hijackers and the crew tried to keep control of the flight. The field has become a full-fledged national monument, financed by a public-private partnership and operated by the National Park Service.

Financial Review

Ongoing Criminal Enterprises

Sinclair Noe — May 20, 2015

 

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DOW – 26 = 18,285
SPX – 1 = 2125
NAS + 1 = 5071
10 YR YLD – .01 = 2.25%
OIL + .77 = 58.76
GOLD + 1.80 = 1210.80
SILV un = 17.18

April 29 and 30 the Federal Reserve’s Federal Open Market Committee met to determine monetary policy; today, they published the minutes of that meeting. There were no surprises. Policymakers have no plans to increase interest rate targets in June. We all knew that. Officials in April “had increased uncertainty regarding the economic outlook,” the minutes showed. They had no good reason to explain why consumer spending was so weak.

“Most” Fed officials think the dramatic slowdown in growth in the first quarter was transitory and that a moderate rebound would resume in the second quarter. Inflation was also expected to move higher.  The international context isn’t helpful to the US economy. Fed officials deem “foreign economic and financial developments” as constituting “potential downside risks,” and they specifically mention Greece and China. Moreover, despite its recent partial retracement, the dollar’s appreciation is “likely to continue to be a factor restraining US net exports and economic growth for a time.”

This suggests that they see a rate hike coming sometime later this year. Only a “few” on the U.S. central bank questioned whether the Fed was providing enough stimulus for the economy at the present time and cautioned against any rate hike in the near future. This is an interesting point because the Fed really hasn’t provided much stimulus for the economy; they have provided stimulus to financial markets but not the broader economy in a direct fashion.

Indirectly, the Fed has provided stimulus to the broader economy through something known as the monetary transmission mechanism, which works largely through housing or other long-lived investments which are sensitive to interest rates. Interest rates don’t have strong impact on short-term investments or short-term capex. A lot of business investment is short-term; a lot of household spending is short-term. So Fed policy, by moving interest rates, normally exerts its effect mainly through housing. And interest rates do move housing. Remember the early 1980s when Paul Volker decided to tighten, interest rates jumped, and housing collapsed. And housing has come back from the lows, but not all the way back. One reason is because people who are most likely to buy houses got slammed in the downturn and couldn’t or wouldn’t jump back into that frying pan.

Today’s economic data backs up the relationship between housing and rates. Mortgage purchase applications fell 4.0 percent in the May 15 week though, year-on-year, applications are still up a very strong 11.0 percent. The ongoing run up in mortgage rates may be easing demand for mortgage applications just at the time that demand for purchase applications had been gaining steam.

And so the Fed is feeling like it has its back to the wall, and the wall is zero interest rates. If there is an economic problem the Fed can’t respond by lowering interest rates, or at least the impact of going into negative territory would be dangerous ground.

There was some debate about how to communicate any move to tighten rates. Some officials think it is important to give a warning to the markets, others worry that telegraphing intentions to hike rates will only result in a rate tantrum. The recent bond-market rout underscores that with bond yields near historical lows, even a moderate rise in yields would chip away the slim interest payments and inflict pain on bondholders. The Fed identifies this as episodes in which there were large monetary disturbances not caused by output fluctuations. Hopefully the Fed remembers the lesson from the Crash of 87; the markets respond violently to surprise rate hikes.

A mixed bag of economic releases this month has bolstered investors’ expectations that the Fed would wait until late this year to act. Fed Chairwoman Janet Yellen will make a speech on Friday that might provide further guidance.

Five global banks have agreed to pay $5.8 billion in combined penalties and will plead guilty to criminal charges related to manipulating foreign currency exchange rates, also known as Forex. Four of the banks, JPMorgan Chase, Barclays, Royal Bank of Scotland, and Citigroup, will plead guilty to conspiring to manipulate the price of US dollars and euros.

Barclays will pay $650 million, Citigroup $925, million J.P. Morgan $550 million and RBS $395 million. Barclays will pay another $1.3 billion to New York State, federal and U.K. regulators.

The fifth bank, UBS, received immunity in the antitrust case because they informed regulators about the Forex rigging as part of an earlier deal related to Libor rigging; UBS had signed a Non-Prosecution Agreement in 2012 on the Libor charges, and their misconduct in the Forex markets violated that earlier agreement even though they self-reported wrongdoing. So, they have immunity on Forex but they had to plead guilty to Libor rigging.  UBS will pay $545 million in fines to the Justice Department and Federal Reserve.

The five banks will pay a further $1.6 billion in fines to the Federal Reserve. Bank of America also faces a $205 million fine by the Fed, but no criminal charges. No bank employees have been criminally charged. The five banks will be under a three-year period of probation.

Between December 2007 and January 2013, euro-dollar traders at Citigroup, JPMorgan, Barclays, RBS and UBS gathered in an exclusive electronic chat room and used coded language to coordinate their moves in the U.S. dollar-euro market. They referred to themselves as the Cartel. By agreeing not to buy or sell at certain times, they protected each other’s trading positions. The big banks were the market makers, setting daily exchange rates, known as the fix. The fix became the price paid for billions of dollars of currency bought or sold on any given day.

And the Cartel managed to skim a little for their efforts. One Barclays trader in the chat room about adding secret mark-ups to the prices wrote: “If you ain’t cheating, you ain’t trying.” Ben Lawsky, New York’s superintendent of Financial Services explained it simply:  “They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients.” Also, a side note, after the big settlement announcement Lawsky announced he will step down next month as New York’s top bank regulator after four years. To his credit, he is not going to work for JPMorgan.

I have not yet seen a figure for how much prosecutors think the Cartel stole, but the Forex market trades close to $5 trillion dollars a day, so today’s fines amount to about one/one-thousandth of daily volume. The rigging took place over more than 5 years. I’m guessing that the money they stole in rigging Forex might amount to more than the fines ordered today. And that raises another interesting question – how did they report that income? Will they now go back and amend their earnings reports?

Didn’t managers and Board of Directors sign off under Sarbanes-Oxley?

And remember that the Forex scandal follows on the heels of the Libor rigging scandal, and the ISDAfix scandal (that involved the $381 trillion market for interest-rate swaps and the $44 trillion market for options on swaps. Banks use it to set coupons paid for bonds tied to commercial real estate. And there is a mountain of evidence, and today Barclays agreed to a $115 million dollar settlement on the ISDAfix investigation. Other banks are also being investigated.)

And before that, the municipal bond rigging scandals, and scandals in commodity markets including precious metals, and tax evasion scandals, and money laundering scandals, and predatory lending scandals, and much, much, much more. Past performance is not a guarantee of future results, but based on past performance you have to figure that the banks have rigged all the financial markets.

FT has a running total of legal fines and settlements paid by banks to US regulators since 2007. According to their calculations, the tote board just touched $155 billion. In case you were wondering, over eight years that works out to $53m per day (including weekends, because client service is a 24 hour kind of business, right.)

The big news in today’s settlement was not the size of the fines, not the scale of the scandal, but that the banks actually admitted criminal guilt. UBS violated its 2012 Non-Prosecution Agreement, and we’re still just looking at a fine for a repeat offender. The banks will get to keep their charters; they can continue to conduct business; three years’ probation. They can still vote, or at least buy elections. The deal does not prevent the Department of Justice from going after individual criminal charges but for now, nobody goes to jail.

HSBC has become one of the biggest global banks to say it will begin charging clients on deposits in a basket of European currencies to prevent its profit margins from being crushed in a record low-interest rate environment. The unusual steps come after the ECB last year became the first big central bank to announce a negative deposit rate, in effect a penalty on banks parking their surplus cash.

The Japanese economy staged a comeback in first quarter, expanding at an annualized 2.4% vs. the previous quarter. Despite the positive figure, economists are still worried about Japanese growth and deflation as most of the expansion was due to a huge build-up of inventories. The Nikkei Stock Index finished the session at a 15-year high.

It is widely recognized that Greece is running out of money. The next questions are when they will run out money and what will happen when they run out of money. Nikos Filis, from the ruling Syriza party, told Greek television Greece will not be able to make a €1.5 billion repayment to the IMF that falls due on June 5 if there is no deal with its international creditors by then.

Financial Review

HSBC – Too Big To Jail

Sinclair Noe — February 9, 2015

 

Podcast: Play in new window | Download (Duration: 13:18 — 6.1MB)

DOW – 95 = 17,729
SPX – 8 = 2046
NAS – 18 = 4726
10 YR YLD + .02 = 1.95%
OIL + .90 = 52.59
GOLD + 5.40 = 1239.70
SILV + .28 = 17.07

Let’s start with oil; OPEC lowered its estimate for non-OPEC supply growth this year by about 400,000 barrels a day, the biggest reduction since the forecast was introduced in August. The US led with a cut of 130,000 barrels a day while estimates for Colombia, Canada and Yemen were also trimmed. The group said it may boost global demand forecasts beyond this month’s slight increase amid rising U.S. gasoline use.

OPEC’s research department said: “The main factors for the lower growth prediction in 2015 are price expectations, a declining number of active rigs in North America, a decrease in drilling permits in the US and a reduction in the 2015 spending plans of international oil companies.”

The United Steelworkers strike continues with walkouts at two of BP’s refineries over the weekend. The strike now encompasses more than 5,000 workers at 11 refineries across the country, which account for about 13% of U.S. fuel-making capacity. Facility owners also hit by the strike include Shell, Tesoro, Marathon Petroleum and LyondellBasell.

Cheap gasoline prices have increased 13 cents in the past two weeks to $2.20 a gallon, nationwide average; but not everybody is buying the idea that oil will keep going up from here. According to US Commodity Futures Trading Commission data cited on Bloomberg. After a two-week rally that pushed oil up 14%, short bets on West Texas Intermediate jumped 1.2% while net-long positions dropped for a third week.

Edward Morse, Citigroup’s global head of commodity research writes that the recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out. A pullback in production isn’t likely until the third quarter. Citi reduced its annual forecast for Brent crude for the second time in 2015. Prices in the $45-$55 range are unsustainable and will trigger “disinvestment from oil” and a fourth-quarter rebound to $75 a barrel. According to the report prices this year will likely average $54 a barrel.

Of course that’s just a guess. I don’t know, you don’t know, and Citigroup doesn’t know, but they print their guesses on glossy paper.

HSBC is a British multi-national bank; it used to be called the Hong Kong and Shanghai Banking Corporation; the UK and Hong Kong are considered home markets, but they also have a subsidiary in Switzerland. And it turns out, they have been misbehaving for quite some time.

At its height, HSBC’s secretive Swiss arm hid a total of $120 billion in assets. These funds were collected from wealthy clients all over the world and have already led to criminal investigations and charges against the bank in France, Belgium, the US and Argentina.

In a report released on Sunday, the International Consortium of Investigative Journalists, an organization based in Washington, along with the newspaper Le Monde in France, The Guardian in Britain, the BBC program “Panorama” and CBS News’s “60 Minutes,” said that secret documents revealed that bank employees had reassured clients that HSBC would not disclose details of their accounts to tax authorities in their home countries and discussed options to avoid paying taxes on those assets.

The documents were stolen from HSBC by a former employee in Switzerland in 2007 and were given to the French authorities, who in 2010 shared them with officials in Britain, Spain and the United States, among other nations. The leaked Swiss HSBC files implicate the bank in apparent misbehavior all over the world; some 30,000 accounts, and about 2,900 clients connected to the US, providing the IRS with a trail of evidence of potential American taxpayers who may have been hiding assets in Geneva. The US Department of Justice and IRS have been investigating HSBC’s Swiss banking operations since the documents were first handed over in 2010 but the scale of those inquiries remain unclear. Tomorrow, Maryann Hunter, who is on the board of governors of the Federal Reserve, and has some responsibility for regulation of foreign banking organizations operating in the US, will give evidence to the Senate banking committee. On Thursday, Geoffrey Graber, a deputy associate attorney general at the DoJ who oversees settlements with Wall Street banks, will appear before a House judiciary subcommittee. Both are expected to be questioned about the leak.

HSBC global and its US bank was forced to pay a $1.9 billion fine two years ago after the DoJ uncovered evidence HSBC subsidiaries had enabled clients to breach US sanctions against Cuba, Sudan and Iran and, due to oversight failures, allowed Mexican drug cartels launder billions of dollars. At the time, the settlement allowed HSBC to escape criminal indictments and keep the banking charter which enables it to operate in the US but the bank had to submit to a 5-year plan to stamp out money-laundering and other illicit practices, and the banks’ compliance would be overseen by an independent, court-appointed monitor.

HSBC is now just over two years into its reform plan, and has been deemed to be complying with the terms of the settlement. However, there are some concerns. In November, the bank reached a settlement with the Securities and Exchange Commission in which HSBC agreed to pay $12.5 million to resolve charges that its Swiss private banking division illegally provided investment and brokerage services to US clients.

So much for the idea that the problems are in the past. The huge amount of leaked info is quite bad for HSBC; it includes stories of coaching clients how to evade taxes; stories of clients being assisted in withdrawing bricks of cash from the Swiss bank. The evidence is quite damning, and yet, still no criminal charges. The Department of Justice will soon face a moment of truth, when they will have to decide whether the phrase “too big to jail” was real or just a crock.

And of course, HSBC is not the only bank that has misbehaved. Financial Times is reporting that the US Department of Justice is investigating whether Barclays and UBS sold structured products without disclosing the profit they were making from currency trades used to generate the products’ returns; essentially skimming profits or perhaps even betting against their own clients. Five major banks, including UBS, were fined $3.4B in November to settle forex allegations, although the DOJ was not one of the agencies involved in the deal. Barclays also did not take part in the earlier settlement.

The S&P 500 rose 3 percent last week, the most in seven weeks, as oil rebounded. The Dow posted its best weekly gain in more than a year. Of the firms that have reported profit so far this season, 78 percent beat analysts’ estimates, while 56 percent topped sales projections. Coca Cola, Time Warner, and MetLife are among 66 S&P 500 companies reporting quarterly results this week.

Comcast and Time Warner Cable’s $45B merger still remains in limbo, with the DOJ and FCC scrutinizing the deal and Tom Wheeler’s new net neutrality proposal. Investors began betting against the combination late last month, with shares of Comcast and Time Warner Cable falling sharply before recovering last week. If regulators allow the deal as is, the merged company would control about 35% of the country’s broadband Internet service coverage and just under 30% of pay television subscribers.

The National Association of Insurance Commissioners, a group representing state regulators, has announced the launch of an investigation into the recent data breach at Anthem. The health insurer revealed last week that hackers had broken into its database containing the personal information of about 80 million customers and employees. Anthem said it welcomes the review and “will cooperate fully.”

If you are one of the 80 million,1 of every 4, Americans who has ever had health insurance with Anthem Blue Cross, Anthem Blue Cross and Blue Shield, Blue Cross and Blue Shield of Georgia, Empire Blue Cross and Blue Shield, Amerigroup, Caremore, Unicare, Healthlink, and DeCare; I am sorry to inform you that your privacy and personal identity has been flushed down the toilet; let the class action lawsuits begin. Not all data breaches are created equal, and the Anthem health insurance hack is about as bad as they get for consumers.

Why? This time the crooks got Social Security numbers. For identity thieves, the Social Security number is the key that unlocks the vault, and they now have millions of them, plus they stole all sorts of other info, so they don’t have to guess when it comes to matching the Social Security data to you and everything you’ve ever worked for. If you have managed to save a nest egg for retirement, you will need to defend it, forever. How could this happen? Because Anthem didn’t encrypt our data, and there is no law that says they must.

Harris Poll has released a survey of America’s most- and least-loved corporations. Wegmans, a Rochester, New York grocer, claimed first place, followed by Amazon, Samsung, Costco, and Johnson & Johnson. Halliburton, Monsanto, Dish Network, and AIG were near the bottom of the list. The most hated company: Goldman Sachs.

Samsung’s TVs are listening to your every word. The company disclosed that its smart TVs will automatically capture all nearby conversations as part of its voice recognition features, and potentially transmit sensitive data to a third-party service. George Orwell saw it coming years ago.

A South Korean vacuum robot tried to devour its owner…Firefighters were called after it consumed some of her hair and refused to let go. …Yet Japan is still launching a robot hotel. A 72-room getaway will open this summer, staffed by 10 multilingual humanoids. What could go wrong?

Wednesday, August 20, 2014 - Sunlight is the Best of Disinfectants

Financial Review with Sinclair Noe

DOW + 59 = 16979
SPX + 4 = 1986
NAS – 1 = 4526
10 YR YLD + .02 = 2.42%
OIL + .63 = 93.49
GOLD – 3.80 = 1292.40
SILV + .04 = 19.55

No economic reports today, but the Federal Reserve released the minutes of the July 29-30 FOMC meeting. You will recall that the Fed left interest rates unchanged and continued the taper by reducing large scale asset purchases by $10 billion a month, with the plan to end purchases by October. The Fed had said in its policy statement following the July meeting that there was "significant" labor market slack, but the minutes showed many members of its policy-setting panel thought this characterization "might have to change before long."

Most Fed officials wanted further evidence the labor market and the economy were showing significant improvement before changing their view on raising rates, but they said, "Labor market conditions had moved noticeably closer to those viewed as normal in the longer run," and policymakers "generally agreed" the job market was healing faster than they had expected.

Most Fed policymakers felt any change in their view on when to start raising rates "would depend on further information on the trajectories of economic activity, the labor market and inflation." Well, we got more data yesterday showing that inflation is not a problem yet; so that leaves economic activity and the labor market. The economic trajectory has remained sluggish since the beginning of the recovery; GDP turned negative in the first quarter of this year and then showed a very strong bounce in the second quarter. Is the second quarter bounce sustainable? It seems most Fed officials think it could be. And the Fed minutes almost seem to gloss over this long-term sluggishness, or what the Center for Economic Policy Research callssecular stagnation. What is secular stagnation?

A persistent gap between actual and potential output. Because of an imbalance between saving and investment, the nominal interest rate required to maintain full employment falls to less than zero -- not just briefly, but persistently. Since the rate can't be cut to less than zero, monetary policy (as currently conceived) can't keep the economy running at full potential.

A slowdown in growth of potential output. This may happen because of demographic changes, or because innovation isn't what it used to be, or for other reasons.

An irreversible drop in the level of potential output. Even if the full-employment rate of interest is still positive and the growth in potential output hasn't slowed, the recession may have permanently cut its level -- for instance, by causing workers to leave the labor force and not come back. Even if the economy now grows as fast as it did before, it's on a lower track and won't ever converge with the path it was on pre-crash.

This all means that the Fed’s long awaited economic liftoff might not happen, at least for another 20 years or so. But the Fed doesn’t seem to be concerned with this problem, which means that if the US economy experiences secular stagnation, the condition will be self-inflicted.

That leaves the Fed with the question of the recovery in the labor market. So, it really boils down to jobs. More jobs, and specifically, the quality of the jobs. So far, the average wage is stuck at $24.25 an hour; too many jobs are part-time or temporary. If we start to see some movement on wages, and more full-time positions, that might be a sign for rate increases. One area of remaining slack is the low participation rate, the percentage of working age population that is still in the labor pool; many people got out of the pool. Last month the economy added 209,000 net new jobs. The unemployment rate moved up to 6.2% from 6.1%. The jobless rate can rise for both good reasons (more people looking for work) and bad reasons (fewer people having a job).  Even though the economy added jobs, more people joined the labor force, and that is why the unemployment rate moved higher.

There are many things that could derail the recovery in the labor market, but for now the Fed thinks things are on track, and that means a probable rate increase in the first half of 2015. Any rate increase is likely to be incremental. Right now the fed funds target rate is between zero and 0.25%. It would likely be increased by 25 basis points, with the lower range representing the rate on overnight reverse repurchase operations. In reverse repos, the Fed borrows funds overnight from banks to mop up excess cash in the financial system.

Market reaction to a slightly more hawkish Fed stance: well, the dollar index continued higher, Treasuries dropped but then settled down, precious metals were a little lower, oil was higher, stocks initially threw a little tantrum and then recovered. After all, there were no real surprises.

Elsewhere, we’ve been waiting for the Department of Justice announcement on a settlement with Bank of America. Bank of America has reportedly reached a record $17 billion settlement to resolve an investigation into its role in the sale of mortgage-backed securities before the 2008 financial crisis. The official announcement will come tomorrow. The deal works out to $10 billion in cash, and $7 billion in soft dollar consumer relief - which is really a gift to the bank involving credits for various forms of consumer aid that the bank would or should be doing anyway. So, if you have a BofA mortgage and you’ve been having trouble with a loan mod or a refinance – try again. And by the way, the bank will make money on consumer aid.

The deal requires Bank of America to acknowledge making serious misrepresentations about the quality of its residential mortgage-backed securities issued by itself and by Countrywide Financial and Merrill Lynch. In exchange, BofA will probably not have to actually admit wrongdoing, and they get a free “get out of jail” card.  

Usually these settlements include a statement of facts which is most notable for its absence of facts and details. That silence means the Department of Justice is essentially protecting the banks from private lawsuits by deliberately withholding evidence which could result in even further disclosure of really bad behavior and even bigger damages and other unexpected outcomes. The biggest unexpected outcome would be that the public finally says to hell with the bankster criminals and we all see through the flimsy apologists in the media and the cronies in politics.

Most people know the banksters got away with murder; and I use the word literally, not figuratively. Most people want to see bankster executives prosecuted. Most people understand that the fines in these settlements are just a slap on the wrist, cost of business paid by shareholders, and taxpayers. Yep, the fines are typically considered tax deductible.

Tomorrow, the DOJ will announce the biggest settlement ever against a bank: $17 billion. But we know, it’s really a little under $10 billion in cash, with all kinds of little gifts to the banksters to soften the blow. And we know this will do nothing to deter future wrongdoing. You can place a huge derivative bet that they’re still committing those same crimes and new ones (such as subprime auto), so the prosecution clock resets daily.

And the crazy part is that the Department of Justice and BofA think we’re all too stupid to understand the cronyism. They will portray the settlement as a get tough stance on the bankers. Hogwash, I know it, you know it.

About 100 years ago, Supreme Court Justice Louis Brandeis wrote his famous statement that "sunlight is said to be the best of disinfectants" in a 1913 Harper's Weekly article. He went on to say that transparency is “justly commended as a remedy for social and industrial diseases.” Brandeis actually wrote privately about the idea of transparency 20 years earlier, writing, “about the wickedness of people shielding wrongdoers and passing them off (or at least allowing them to pass themselves off) as honest men."

About 100 years ago, the country was struggling with what was known as the Money Trust, the rough equivalent of today’s systemically important financial institutions, or too big to fail banks. Brandeis asked how the great wealth of his day had been accumulated, and he concluded: “power breeds wealth as wealth breeds power. But a main cause of these large fortunes is the huge tolls taken by those who control the avenues to capital and to investors. There has been exacted as toll literally ‘all that the traffic will bear.’”

Just a reminder, some of the mortgage problems of Bank of America date back to their acquisition of Countrywide; BofA had their own illegal mortgage problems. The guy who started Countrywide and nearly ran it into the ground is Angelo Mozillo. Until now, the harshest penalty imposed on Mozilo has been a $67 million settlement with the SEC from 2010 to resolve allegations that he misled Countrywide investors. Actually, Mozilo was forced to disgorge about $45 million from the sale of stocks, some of which may have been based on insider information; and then Bank of America paid for most of the other penalties; which is to say shareholders and consumers paid for Mozilo’s penalties.

The US attorney’s office in Los Angeles is now preparing a civil lawsuit against Mozilo and as many as 10 other former Countrywide employees. Government attorneys plan to sue Mozilo, Countrywide’s former chairman and chief executive officer, and other individuals using the Financial Institutions Reform, Recovery and Enforcement Act. The law, approved by Congress in 1989 in response to savings-and-loan scandals, gives prosecutors 10 years to bring cases and has less stringent liability requirements than criminal charges.

Prosecutors dropped a criminal probe of Mozilo in early 2011. The Citizens for Responsibility and Ethics in Washington, a watchdog group, sued the Justice Department in June to try to obtain its records detailing investigations of Mozilo and Countrywide. The group faulted the government for failing to prosecute either Mozilo or the company “despite substantial evidence of wrongdoing.”

Monday, August 11, 2014 - Dog Days

Financial Review with Sinclair Noe

DOW + 16 = 16,569
SPX + 5 = 1936
NAS + 30 = 4401
10 YR YLD + .01 = 2.42%
OIL + .20 = 97.85
GOLD – 1.20 = 1308.90
SILV + .10 = 20.11

It was actually a quiet day on Wall Street; not much economic data today; we’re winding down earnings reporting season. It is a Monday, so there was some M&A action, but for the most part a slow day; we used to call them the dog days of summer. On a day like this, you can claim whatever you want for whatever market movement there is.

NATO sees a "high probability" of a Russian invasion of eastern Ukraine as some 20,000 Russian troops massed on the nearby border. Kiev had the number at 45,000 Russian troops. The Kremlin announced it had sent a convoy of humanitarian aid to Ukraine under the auspices of the International Red Cross. Western governments are generally opposing, in advance, any Russian aid missions, which they fear could serve as a pretext for a military incursion to support pro-Russian separatists fighting the Ukrainian Army in the country’s southeast. The European Commission issued a statement warning “against any unilateral military actions in Ukraine, under any pretext, including humanitarian.”

Ukraine, the United States and European nations have repeatedly warned Russia against mounting a stealth invasion under the disguise of humanitarian aid, and have looked on with growing alarm as Russian officials have spoken in ever-stronger terms about the humanitarian plight of eastern Ukrainians.

Meanwhile, the US continues its bombing-slash-humanitarian mission in Iraq. The United States launched a fourth round of airstrikes Sunday against militant vehicles and mortars firing on Irbil as part of efforts to blunt the militants' advance and protect American personnel near the Kurdish capital. Reinvigorated by American airstrikes, Kurdish forces retook two towns from Sunni militants. U.S. warplanes and drones have also attacked militants firing on minority Yazidis around Sinjar, which is in the far west of the country near the Syrian border. The US has begun providing weapons to Kurdish forces; the move to directly aid the Kurds underscores the level of  concern about the ISIS militants' gains in the north.

Iraq's president named a new prime minister to end Nuri al-Maliki's eight year rule, but Maliki refused to go after deploying militias and special forces on the streets of Baghdad. But Maliki's Dawa Party declared his replacement illegal, and Maliki's son-in-law said he would overturn it in court. Washington delivered a stern warning to Maliki not to "stir the waters" by using force to cling to power. Maliki himself said nothing about the decision to replace him.

Maliki's opponents accuse him of  keeping key security posts in his own hands instead of sharing them with other groups, alienating Sunnis in particular by ordering the arrest of their political leaders. Islamic State fighters were able to exploit that resentment to win support from other Sunni armed groups. Maliki's Shi'ite State of Law bloc emerged as the biggest group in parliament in the April election, but does not have enough seats to rule without support from Sunnis, Kurds and other Shi'ite blocs, nearly all of which demand he go. Maliki also appears to have alienated his supporters in Iran. Obama says a more inclusive government in Baghdad is a pre-condition for more aggressive US military support against ISIS.

Israeli and Palestinian negotiators resumed indirect talks mediated by Egypt today, as a 72 hour ceasefire appears to be holding, at least for the first few hours.

So, we still have geopolitical hotspots, but for today, they are smoldering rather than exploding; although that could change in a heartbeat.

Stanley Fischer, who took over as vice chairman of the Fed in June, deliver a speech in Stockholm today.  Fisher says economists and policy makers had been repeatedly disappointed as the expected level of growth failed to materialize: “Year after year, we have had to explain from midyear on why the global growth rate has been lower than predicted as little as two quarters back.”

Fischer said it was difficult to determine how much of the slackness was because of cyclical factors and how much represented a more fundamental, structural change in advanced economies. He warned of 3 headwinds to growth: a weak housing market, cuts in federal government spending and weaker global growth that reduced demand for American exports. Fischer also questioned whether the recent weak growth is a temporary problem or a more long-term structural problem. 

A new report from the US Conference of Mayors looks at the weakness of earnings in the recovery. Jobs growth in the US since the 2008 recession has been undermined by lower wages, with workers earning an average 23% less than earnings from jobs which were lost. The average annual salary in sectors where jobs were lost - particularly manufacturing and construction - during the 2008-9 financial crisis was $61,637; Job gains through the second quarter of 2014 in comparative sectors showed average wages of $47,171, implying $93 billion in lower wage income. The report also showed that 73% of metro areas had households earning average salaries of less than $35,000 a year. American workers, on average, earned $24.45 an hour in July, up only a penny from June. Over the last year, wages have grown just 2%, in keeping with where they have been stuck since late 2009. The study also found a continuing accumulation of wealth among the top 20% of the nation's earners. From 2005 to 2012, the highest income bracket was responsible more than 60% of all income gains in the country.

The pipeline group Kinder Morgan, the biggest of the master limited partnerships, announced yesterday that it would acquire its three associated companies and reorganize as one corporation based in Houston. The new Kinder Morgan will have an estimated enterprise value of about $140 billion, $100 billion of market value and $40 billion of debt, making it the third-biggest energy company in the United States, after Exxon Mobil and Chevron. Kinder Morgan, which encompasses a huge network of oil and gas pipelines across North America, will acquire its two related M.L.P.s ‒ Kinder Morgan Energy Partners and El Paso Pipeline Partners ‒ and a third related company, Kinder Morgan Management, for $71 billion. Kinder Morgan will pay a premium for each company and use mostly stock to finance the purchases, allowing shareholders of the three targets to essentially continue their ownership.

Under the existing structure, Kinder Morgan’s related companies were obliged to pay out a majority of their profits to investors, including significant payments to Kinder Morgan itself. The distributions had grown so large in recent years that Kinder Morgan was lending money back to the related companies so they could fund growth. It was a profitable arrangement, but became overly complex and ultimately constricted the combined companies’ growth. The move is expected to free up cash for the company to invest in new capital expenditures needed to accommodate new reserves of natural gas being tapped across North America. It’s also expected the move will allow Kinder Morgan to become more acquisitive.

Last week, Bank of America reportedly agreed to a settlement deal with the Department of Justice for $16 billion, with $9 billion in cash fines, and $7 billion in soft dollar relief to borrowers. We still haven’t heard confirmation; but that would break the record for the largest bank settlement in history, set less than a year ago by a $13 billion agreement between Justice and JPMorgan Chase.

The numbers that accompany these deal announcements always seem impressive. But how large are they, really? That depends on your point of view. Bankers fraudulently inflated a housing bubble. They became extremely wealthy as a result, but the housing market lost $6.3 trillion in value when the bubble burst. It had only recovered 44% of that lost value by of the end of 2013. That's more than $3 trillion still missing from American households. As of the first quarter of this year,  9.1 million residences - 17% of mortgaged homes - were still "seriously underwater," which means that homeowners owed at least 25% more on the home than it was worth.

And homeowners weren't the only ones hurt by banker misdeeds. When the bubble burst, it took the economy with it. Unemployment and underemployment remain at record levels, even as the stock market surges and corporations enjoy record profits. Payments on those 9.1 million underwater mortgages are a form of wealth transfer from Main Street to Wall Street, as homeowners continue to overpay the bankers who inflated those mortgages in the first place - or risk losing their homes to them. If this added burden harms their credit score, they'll pay banks more for other forms of borrowing as well.

And yet, these settlements do not require banks to provide principal relief for these underwater homeowners. They don't ask banks to return homes that they wrongfully took from their owners. They don't ask banks to forfeit every penny of earnings received through forgery or perjury. They don't even ask them to restore the credit ratings of defrauded customers. What's more, there's very little reason to believe that these large sums will be paid in full. Much of the "consumer relief" in past deals has turned out to be nothing more than gamesmanship with numbers. Banks modify loans in ways that are advantageous to them, offer deals they almost certainly would've offered anyway, and then count them against their "settlement" obligations. What's more, it hasn't been announced whether this deal will be tax-deductible. If so, Americans will get shortchanged at the federal level, too.

Bank of America is a repeat offender with six violations since November 2011, but there have been no criminal prosecutions of big-bank executives, an omission that Federal Judge Jed S. Rakoff lamented in a recent speech. Rakoff called the lack of prosecutions from the Justice Department and the Securities and Exchange Commission "technically and morally suspect" and characterized the excuses they've given for failing to prosecute as "hollow" and "lame."