FINANCIAL REVIEW

Thanks Hank

Sinclair Noe — October 7, 2014

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Financial Review

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

DOW – 272 = 16,719
SPX – 29 = 1935
NAS – 69 = 4385
10 YR YLD – .07 = 2.35%
OIL – 1.91 = 88.43
GOLD + 1.50 = 1209.30
SILV – .16 = 17.29

The S&P 500 dropped below its 50-day moving average last week and has yet to move back above that level. Coincidentally, the S&P 500 has been sliding for a few weeks, going back to September 19, which was the day of the Alibaba IPO, just coincidentally. The Dow is also trading below its 50 day moving average. Welcome to the start of earnings season.

In the past 3 months the US dollar has jumped by 8% against the euro. That makes American goods more expensive relative to European goods. And it wasn’t just the dollar against the Euro, but against a basket of foreign currencies. It is estimated that a 5% rise in the dollar versus the euro results in a drop of about $1 for full-year Standard & Poor’s 500 Index per-share earnings; current estimates for the S&P are running around $118. Partly because of the dollar and the related decline in oil prices, earnings estimates have seen one of the largest downward revisions over the last few years aside from the weather-beaten first quarter of this year.

Earnings-per-share are projected to have grown 4.9% in the third quarter, that’s down from 7.8% earnings growth 3 months ago. At the end of March, third quarter earnings were forecast to grow 9%. The strong dollar may have an even greater impact on guidance for the fourth quarter. Alcoa marks the unofficial start of the earnings season with their report after markets close tomorrow.

US job openings hit a 13-year high in August. According to a report published by the US Labor Department, there were 4.84 million open jobs to fill in the US in August, up from 4.61 million the previous month. The good news is economists were only expecting 4.7 million job openings. The bad news: Hiring in August dropped to 4.6 million from 4.9 million in July.

Americans boosted their use of credit in August by the slowest rate in nine months. Consumers increased borrowing by a seasonally adjusted $13.5 billion in August, or by a 5% annual rate. The gain was the smallest since last November and marks a big deceleration from the 8.1% increase in July. Consumers took out more loans to buy cars or pay for college, with non-revolving credit rising by 7%. Yet Americans actually cut credit-card use a touch, as revolving credit dropped 0.2%. Consumer credit increased by an annual pace of 6.2% in 2012 and 6% in 2013 and it’s on track to grow even faster in 2014 despite the slowdown in August.

A gauge that tracks delinquencies in eight major types of closed-end loans, such as credit to buy cars or pay for property improvements, dropped in the second quarter to 1.57%, the lowest rate in the data’s four-decade history; the data does not include home purchase mortgages.

The International Monetary Fund trimmed its forecast for global economic growth to 3.3%, down from the earlier forecast of 3.4%, forecast in July. The IMF predicts the US economy will grow at a 2.2% pace, which is up from the July forecast. The 17-nation euro zone is expected to expand by just 0.8% this year. If you are thinking you’ve heard this story before, and I’m just repeating myself, well, not exactly; the IMF has developed a nasty habit of missing economic forecasts, and when the misses are exposed, they are forced to revise.

Three scientists win a Nobel for making the world a little brighter. Isamu Akasaki, Hiroshi Amano, and Shuji Nakamura won the Nobel Prize for physics for their discovery of how to produce blue light from semi-conductors, which allowed for the creation of white-light LEDs. So, the Nobel goes to the inventors of a new light bulb, but that is a major deal.

Nearly a fourth of global electricity consumption is used to brighten dark spaces. Traditional incandescent and fluorescent lights are notoriously inefficient with much of the energy used to produce light lost in the form of heat. Meanwhile, LED lamps last longer and use a fraction of the energy to produce the same, if not more, light. That has huge consequences for the developed world, and cities, offices, and homes are already swapping out old bulbs for the brighter, more efficient LEDs. But the technology has perhaps even greater significance for the more than 1.5 billion who lack access to electricity grid. In Sub-Saharan Africa, that’s two out of three people. By requiring less power, LEDs perform better than traditional lights on portable, scale solar energy, which makes spreading electricity to rural, off-grid regions much easier.

Federal officials asked a group of large banks and other financial institutions last month to check if they had seen indicators associated with the cyberattack that resulted in the theft of account information for millions of JPMorgan customers this summer. A number of financial institutions responded that they had seen traffic from the suspect computer addresses linked to the hackers, but that they didn’t believe they had been breached. Rather, the hackers, whose identity remains unknown, appeared to be “probing,” or searching for weaknesses on the firms’ digital perimeters. So, who has the weakest cyber security? Either the other financial institutions have been hacked and they just don’t realize it yet, or JPMorgan was a pathetically weak link.

The New York Times reports that the Department of Justice is preparing to charge several of the world’s biggest banks with colluding to alter the price of foreign currencies; essentially rigging the Forex market. Deutsche Bank, Citigroup, JPMorgan Chase, Barclays and UBS are among the dozen or so banks under investigation. Prosecutors are reportedly planning to indict individual bank employees for currency manipulation. They will not be going after the bank executives, but rather the traders. That is a familiar story. Everyone knows that the CEOs of big banks know absolutely nothing about what’s actually going on in their banks. The execs offer up a sacrificial lamb and go on with their unsavory practices, but this time might be different.

The idea is that prosecutors would use the currency rigging to reopen earlier settlements in the Libor interest rate rigging cases. Those rate rigging cases have already led to settlements with 5 banks, and part of the deal there was not to do bad things like rig markets. Meanwhile, some banks also remain under investigation. In the last major rate-rigging case against a bank, prosecutors are discussing the possibility of forcing Deutsche Bank or one of its subsidiaries to plead guilty to manipulating Libor. And the Libor case could quite easily result in criminal charges, if the DOJ has the spine for it. That remains to be seen. So far the Department of Justice has been afraid of the impact of a wounded bank on the world economy, and so they have done little more than levy “slap-on-the-wrist” fines, essentially taking a cut of the ill-gotten gains; like allowing a Cocaine Cartel to pay its criminal fines in crack.

The AIG bailout trial started last week. The trial is largely the result of former AIG CEO Maurice “Hank” Greenberg arguing that AIG wasn’t treated as well as the banksters when it came time to pass out taxpayer bailouts. The banksters got sweetheart deals, and for AIG, the government demanded 80% of the company stock, and used it as collateral against the loan, and charged 12% on the loan, and later, started sweeping all the dividends. Greenberg and his companies, notably Starr International, were the biggest AIG investors at the time, and the government’s bailout effectively crushed their shares.

Of course, AIG had been playing fast and loose with derivatives of subprime mortgages, and they had been forced to restate earnings, and their entire operation was a big, greedy hot mess that likely would have collapsed without a taxpayer bailout. AIG had become the industry leader in credit default swaps, essentially insuring the big banksters on large swaths of toxic mortgage deals. If AIG did not unravel all that credit default insurance, the entire banking structure likely would have collapsed.

Yesterday, former Treasury Secretary Hank Paulson admitted that certain firms were treated differently than others; AIG was treated tougher than Citigroup; Paulson said that circumstances warranted it because those banks were more essential to keeping the financial system afloat. He said that the government had to treat AIG harshly to win political support. Of course, the government didn’t treat AIG that harshly, gifting them a carryover tax benefit worth $35 billion and letting their executives take bonuses in 2009. Hank Greenberg argues that AIG could have survived; that other potential suitors were ready to step in with offers, but the government made them an offer they couldn’t refuse, and then the government changed the terms of the offer. There has been no testimony that a gun was held to anyone’s head. AIG took the deal at the time.

Today, Tim Geithner took the stand; Geithner was the president of the New York Fed in 2008, before he succeeded Paulson as Treasury Secretary. Geithner admitted that he had described an AIG bankruptcy as an unacceptable option and that the company represented a “systemic risk” in September 2008 that required government intervention. And that seems to be Greenberg’s argument; that the bailout of AIG was punitive and confiscatory. And it looks like it probably was. That’s what it should have been. AIG was forced to pay the credit default swap insurance, the banks survived; the taxpayers were paid back for their bailout of AIG, and now Hank Greenberg and Starr International want an extra $40 billion.

Of course, AIG might have gone completely bust, they could have dragged down the banksters with them, and the entire financial system could have melted down, and Hank Greenberg could be scrounging for a meal in the dumpster. Instead, he was left with a few billion, just enough to hire some high priced lawyers to spit in the face of taxpayers who saved his bacon. Thanks Hank.

http://dealbook.nytimes.com/2014/10/06/big-banks-face-another-round-of-u-s-charges/

FINANCIAL REVIEW

Paulson, Bernanke, and Geithner Walk Into a Courtroom

Sinclair Noe — October 6, 2014

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Financial Review

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

DOW – 17 = 16991
SPX – 3 = 1964
NAS – 20 = 4454
10 YR YLD – .02 = 2.42%
OIL + .05 = 90.39
GOLD + 16.10 = 1207.80
SILV + .49 = 17.45

Stocks erased early gains. The Russell 2000 Index of small cap stocks took a hit of nearly 1%. Earnings season is right around the corner. Alcoa kicks off the unofficial start of earning season on Wednesday, and we’ll get 8 companies from the S&P500 reporting this week. The average estimate for the S&P500 calls for right at 5% earnings growth; however there are concerns about the impact of a strong dollar on overseas revenue.

Not much in the way of economic data today. The economy added at least 200,000 new jobs in seven of the past eight months and all signs point to similarly strong hiring through the end of the year. The latest evidence? A ninth straight increase in the employment trends index produced by the Conference Board, a nonprofit economic-research firm. The index is now 6.1% higher than a year ago.

Slightly less optimistic is the new, broader, all-purpose employment index from the Federal Reserve, it’s called labor market conditions index; it was up 2.5 points last month after an increase of 2.0 in August. This is a new index the Fed has built that draws on 19 separate jobs-related measures to give a broad sense of the labor market; it includes data on labor force participation, average weekly hours and hourly earnings, and hiring and quit rates. As we have seen in many of the monthly jobs reports, the unemployment rate is more of a headline number that doesn’t always tell us if the labor market is tight or slack. This new index is designed to be more comprehensive. That’s about all I can tell you for now.

The Federal Open Market Committee releases minutes from its Sept. 16-17 meeting on Oct. 8.

The protests in Hong Kong have faded away. Protestors briefly blocked entrances to two government buildings, but faced with the prospect of government violence, combined with an agreement between government and protestors to hold formal talks in the future, the mass crowds have largely gone home. Tens of thousands of protestors are now just a few hundred stragglers. It’s difficult to keep up a mass protest for more than about one week.

World Bank experts say China’s economic growth is likely to slow slightly to 7.4% this year, and to lag even a bit more next year. A separate World Bank report says growth will accelerate in India, expanding at a 6 percent rate next year, and a bit faster in 2016.

Yesterday was election day in Brazil, at least the first round. Incumbent Dilma Rousseff and pro-business rival Aecio Neves, will face off in an Oct. 26 runoff to decide what has been Brazil’s most unpredictable election in decades. The incumbent of the Workers’ Party, or PT, had 42 percent of the votes yesterday, followed by Neves of the Brazilian Social Democracy Party, known as PSDB, with 34 percent. While Brazil’s inflation hovers around the 6.5 percent upper limit of the target range and the economy slid into recession in the second quarter, unemployment at 5 percent remains near record lows.

Last week, JPMorgan Chase disclosed that hackers had broken into their computer systems in a massive security breach affecting 76 million households. That’s a huge number, just shy of two-thirds of American households, making the breach the largest cyber-attack against a bank in history.

Yet the company has not disclosed a separate, presumably even larger figure: the number of individual customers whose personal information was compromised. JPMorgan has said that no account information was stolen by the hackers, but that they were able to access contact details like names, phone numbers and email and home addresses. Internal bank information, such as what types of accounts individuals held, was also stolen. The bank has argued that because contact information was stolen, as opposed to account details, the best way to measure the size of the hack is by households, not individuals.

Hank Paulson, Ben Bernanke, and Tim Geithner walk into a courtroom; it sounds like the making of a joke, but it is serious business about why some firms were bailed out and others were hung out to dry. Specifically, it is part of a lawsuit alleging the 2008 federal rescue of American International Group cheated shareholders of $40 billion. Former Treasury Secretary Hank Paulson testified for 2 hours today. Paulson said he valued stability above all else in regulating markets, followed by the need for market participants to be responsible for the consequences of their actions.

“It was important that terms be harsh because I take moral hazard seriously,” Paulson said, referring to the economic term for consequence-free risks. Paulson drew a distinction between AIG’s treatment and that of Citigroup, which he acknowledged received better terms than the insurer. Paulson said AIG had to be rescued because if it failed “the country faced a real disaster.” The government avoided punitive terms for Citigroup because it feared doing so would encourage shortsellers to attack other banks, further destabilizing the economy. There was no similar risk of a domino effect in the insurance market.

In a bit of a bombshell, Paulson said he talked with the Chinese government about investing in US firms as part of the rescue scheme; in AIG’s case, Paulson said he didn’t think the Chinese would be interested in a deal without a government guarantee. “The government couldn’t provide that assurance,” Paulson said. “The Chinese were very, very nervous” about investing in U.S. firms at the time.

Geithner is scheduled to testify tomorrow. Bernanke is scheduled to take the stand on Wednesday.

The FCC has extended its public comment timeframe for the proposed Comcast Time Warner Cable mega-merger. The $45 billion marriage was meant to be open for public comment and debate until Oct. 8, but that portion of the review has now been pushed back to Oct. 29; the agency expects its review of the deal to be done by Jan. 2016.

Hewlett-Packard said today that it plans to split into two separate companies, a personal-computer and printer business, and corporate hardware and services operations. Meg Whitman will lead Hewlett-Packard Enterprise, a business focused on corporate hardware and services, while Dion Weisler, the vice president in charge of Hewlett-Packard’s personal-computer and printer operations, will become CEO of that business. The HP split comes a week after eBay announced it would spin off PayPal to shareholders. This looks like another example of financial engineering. If HP hasn’t been able to right the ship after dozens of industry-spanning acquisitions and an inconclusive multiyear restructuring, the next logical step is to bust it up and hope the pieces are worth more than the whole.

Glencore Plc is laying the groundwork for a potential merger with Rio Tinto Group in the next year that would create the world’s largest mining company, worth about $160 billion. As a preliminary step, Glencore has reached out to Aluminum Corp. of China, the Chinese state-backed company that is Rio’s largest shareholder, to gauge its interest in a potential deal. A merger would catapult the combined company past BHP Billiton to become the largest mining group, combining Glencore’s commodity-trading operations with Rio’s portfolio of iron-ore projects.

The Spanish health minister reports a Spanish nurse who treated a missionary for Ebola at a hospital in Madrid, has tested positive for the disease. The female nurse was part of the medical team that treated a 69-year-old Spanish priest who died in a hospital last month after being flown back from Sierra Leone, where he was posted. The nurse is believed to have contracted the virus from that priest. The World Health Organization confirmed there has not been a previous transmission outside West Africa in the current outbreak. Spanish authorities said they were investigating how the nurse became infected at a hospital with modern health care facilities and special equipment for handling cases of deadly viruses.

Today, the White House announced the government would develop expanded screening of airline passengers for Ebola, both in the West African countries hit by the disease and the United States.

The 2014 Nobel Prize in Physiology or Medicine was awarded on Monday to American-British neuroscientist John O’Keefe, and Norwegian scientists May-Britt Moser and Edvard Moser. The Mosers are the fifth married couple to be awarded a Nobel Prize. The trio received the award for their discoveries of cells that constitute a positioning system in the brain, which was described as an “inner GPS.” In 2005, they discovered a type of nerve cell that generates a coordinate system and allows for precise positioning. Together, these discoveries explain how the brain creates a map of space and how we navigate our way through a complex environment. Now, here’s where it gets interesting; Alzheimer and dementia patients often have a hard time with location – they tend to get lost easily. Since these spatial cells are among the first to be hit in Alzheimer’s and other forms of dementia, understanding how they are degraded should shed important light on the disease process.

The Supreme Court today said it would not hear appeals from five states whose same-sex marriage bans had been invalidated by lower federal courts. The decision, issued without explanation, will lead to recognition of gay marriages in 11 more states. It also allows an avalanche of legal challenges to the remaining bans to keep going forward in state and federal courts, where gay and lesbian couples have overwhelmingly prevailed.

The court’s decision leaves unchanged 20 state laws blocking same-sex unions. Each is already under legal attack, facing challenges in state or federal court, and sometimes both. Challenges to marriage bans already have reached a handful of state appeals courts and in the federal Fifth, Sixth, Ninth and Eleventh circuit appeals courts. By letting gay and lesbian marriages go forward in 11 other states, the justices almost certainly made it harder to reverse course in the future. If they do, the court would have to do more than simply prohibit some couples from marrying; it would have to invalidate marriages that have already taken place. It will become very hard for the Supreme Court to take that back.