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

Chips and Salsa Like 1999

Sinclair Noe — April 24, 2015

 

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DOW + 21 = 18,080
SPX + 4 = 2117
NAS + 36 = 5092
10 YR YLD – .03 = 1.92%
OIL – .58 = 57.16
GOLD – 14.40 = 1179.90
SILV – .11 = 15.77
 
Yesterday, the Nasdaq closed at 5,056, finally surpassing its tech-boom peak of 5,048 set in March 2000. It only took a little over 15 years to get back to those levels. Today the party continued. The S&P 500 hit a new record high close, but just barely; topping the March 2 record by a fraction. For the week, the Nasdaq surged 3.2% and the S&P 500 jumped 1.8%. The Dow added 1.4%.

WTI crude oil closed down 58 cents at $57.16 a barrel, retreating from Thursday’s 2015 high of $58.41. It rose for a sixth straight week, its longest such stretch since the first quarter of 2014. This week’s gain was 2.5 percent. After a sell-off between June and January driven by oversupply, oil prices seem to have found their footing in the last three months, gaining about 33 percent from a low in March.

In the past year, there’s been an inverse relationship between the price of crude oil and the relative performance of retail stocks. Also, most retailers aren’t hurt by a stronger dollar; rather, it helps because items imported to the US are cheaper. An almost 60 percent decline in oil between June 2014 and mid-March contributed partly to the rally in retailers’ shares as investors anticipated a boost to consumption that would benefit retailers’ profitability. We haven’t seen a big boost; consumers have tended to hold onto a dollar rather than buy baubles. Americans saved 5.8 percent of their disposable personal income in February, the highest since December 2012.

Businesses aren’t spending either. Orders for durable goods rose a seasonally adjusted 4% in March, but the increase was driven almost entirely by higher demand for autos, commercial jets and military hardware. However, a key measure of business investment fell for the seventh straight month to underscore a slowdown in how much companies are spending. So-called core orders excluding aircraft and military goods fell 0.5%. Shipments of core capital goods, a category used to help determine quarterly economic growth, dropped 0.4% in March. Business just aren’t spending much on equipment.

A new Bank of America Merrill Lynch survey finds that U.S. investors pulled $79 billion out of equities YTD – including net outflows in 9 of the past 10 weeks – despite stock prices continuing to break new record highs. The survey says: “Correction risks will grow in the absence of fresh inflows in coming weeks.”

Just a day after clearing a Senate committee, the new Trade Promotion Authority bill has been approved by the House Ways and Means Committee, giving Congress the ability to vote yes or no on trade agreements, but without the ability to make amendments over the next five years. The bill would ease passage of the Trans-Pacific Partnership, which the Obama administration is currently negotiating with Japan and 10 other nations.

After a lengthy delay, Loretta Lynch was confirmed as the new Attorney General. Eric Holder made a farewell address to staff today; as Holder leaves, he takes with him the Holder Doctrine, maybe. The Holder Doctrine is the idea that the Department of Justice and other regulators would not seek criminal prosecution against the big banks because of the potential collateral damage to the economy; it came to be known as “Too Big to Jail.” Lynch is widely believed to possess a better grasp of financial markets and their inner workings than her predecessor, Eric Holder, which some think could make her an even greater threat to big banks. Don’t expect big changes for several reasons; Lynch will only be in office for a maximum of about 18 months, and in that short time she will have plenty of issues on her plate, including: privacy laws and the seizure of phone records by the NSA, criminal  justice reform and sentencing standards for nonviolent drug offenders, changing marijuana laws across the nation, revisions to the Patriot Act, civil rights voting rules, and the use of excessive force by police – just to name a few. The Holder Doctrine is gone but don’t expect anything to change.

Deutsche Bank’s supervisory board gathered today to review a sweeping restructuring plan to cut back investment banking operations. Another proposal calls for Deutsche to exit retail banking entirely, to become a pure investment and commercial bank. A few weeks ago, Deutsche was saying they wanted to be a mega-bank like JPMorgan, now they want to scale back and be more like Goldman Sachs. This follows yesterday’s $2.5 billion fine for the bank’s role in rigging Libor benchmark interest rates. The bank also agreed to accept a criminal guilty plea for the British subsidiary at the center of the case, which is a way of insulating a guilty plea away from the parent company. While the deals require Deutsche Bank to dismiss certain employees, no one at the bank has been criminally charged. The deals will not end the bank’s legal problems. It is also ensnared in the foreign exchange investigation. And it is suspected of violating United States sanctions against countries like Iran.

Greece appeared to offer concessions on some key reforms on Friday, ahead of the Eurogroup meeting in Riga today, but it wasn’t enough to appease the Eurozone finance ministers, who are now demanding a list of reforms before they will consider releasing further funds on behalf of Greece. The government in Athens has come up with several reform pledges but it is not enough for the finance ministers, and the mood at the meetings turned ugly today; Greek Finance Minister Yanis Varoufakis described the meeting as “intense.” Mario Drgahi, president of the European Central Bank, said “Time is running out.” Maybe, but the cost of no solution would be enormous, not just for Greece but the entire Eurozone. And that has been the Greek government’s threat; the only problem is that the Eurozone economies have been recovering, all except Greece.
 
Comcast has dropped its planned acquisition of Time Warner Cable. The news comes after FCC staff recommended a hearing on the deal and a week after another report claimed DOJ antitrust lawyers are leaning against it. Regulators applauded the deal’s demise. Attorney General Eric Holder said the decision was “the best outcome for American consumers,” and Federal Communications Commission Chairman Tom Wheeler called it “in the best interests of consumers.”

Already, Charter Communications has reached out to Time Warner about a possible merger. I don’t see how that would be much better. The FCC appears to be taking their public interest role a bit more seriously of late, and if they had problems with the consequences for consumers of a Comcast-Time Warner merger, a Charter-Time Warner merger could yield the same issues.

Samsung ramped up Galaxy S6 production. Higher-than-expected demand for the company’s new curved-screen S6 Edge prompted it to open a third screen factory sooner than planned, boosting production to 5 million per month from 2 million previously. Meanwhile, Samsung is hinting at a new design for its smartwatch, the same day the Apple Watch becomes available.

The Apple Watch hit the market with a low-key launch. A few high-end fashion boutiques around the world are stocking the watch, though supply is severely limited. But Apple’s own retail stores aren’t yet selling the smartwatch, and most online pre-orders have not yet arrived.

American Airlines posted a record profit in the first quarter of $932 million or $1.30 per share. Passenger revenue per available seat mile is expected to decline 4% to 6% in the second quarter when compared to that period in 2014 due to a variety of factors, including increased competition, and the impact of a strong dollar versus weaker foreign currencies. American Airlines will put off delivery of five Boeing 787 Dreamliners that had been due to arrive next year, a step to curb growth in its long-haul fleet and maintain pricing power.

Biogen reported profits were up 71% for the quarter, but they missed analysts’ estimates.

Yesterday, Amazon, Microsoft, Starbucks, and Google reported earnings and today…
Amazon shares jumped nearly 15% Friday, hitting $445.36 by mid afternoon. That gain made CEO Jeff Bezos just over $4.8 billion, moving him to ninth place on Forbes’ realtime list of the world’s billionaires. He was #15 at the beginning of the year. Just a reminder that Amazon reported a loss yesterday.

Microsoft was up 10.4% at 47.87. It turns out that Amazon and Microsoft are neck and neck in revenue from the cloud. Google climbed almost 18% today. Investors have been looking for Google, Microsoft and Amazon to show promise outside their bread-and-butter businesses. Microsoft cannot solely rely on PC sales to drive its profits, Amazon has very low profit margins on the products it sells and Google is heavily exposed to desktop computer advertising while the world is shifting to mobile. Yesterday’s reports gave us some evidence that these tech companies’ strategies might be working.

The first couple of weeks of earnings brought reports from the banks and the tech companies; we knew those would likely be the strongest sectors and they were. The energy stocks will likely be bad and those reports will come next week.

We’re only about halfway through earnings reporting season. So far, 135 companies in the Standard and Poor’s 500 have reported their earnings, and of those, 100 have beat analysts’ expectations. And while companies have exceeded expectations on profit, only 41% have beat on revenue.

First up next week: Apple, the largest stock in the land, reports after the market closes Monday. Analysts expect $2.14 per share in first-quarter earnings. Tuesday, Twitter will check in, and will use more than 140 characters to do so. Wednesday, MasterCard will show what’s in its wallet.  Thursday, ExxonMobil reports, followed by Chevron on Friday; and that is when things will get scary; we know the oil companies faced big challenges in the quarter, we just don’t know how ugly it might be.

FINANCIAL REVIEW

The Failure of the Holder Doctrine

Sinclair Noe — September 25, 2014

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Financial Review

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DOW – 264 = 16,945
SPX – 32 = 1965
NAS – 88 = 4466
10 YR YLD – .06 = 2.51%
OIL – .32 = 91.21
GOLD + 5.30 = 1222.90
SILV – .18 = 17.60

In economic news:
For the week ending Sept. 20, seasonally adjusted initial claims for unemployment compensation were 293,000, up 12,000 from the previous week’s revised level of 281,000. For the comparable week of 2013, the figure was 316,000.

Orders for durable goods dropped 18.2% in August; which sounds absolutely horrible until you put in in perspective; durable goods orders were up 22.5% in July. It sounds like the economists behind this report need to step away from the crack pipe, but the real reason for the volatility is airplane orders, which are for big expensive durable goods, and usually in big, expensive contracts. For example, Boeing took orders for 107 new planes in August, but that’s down from 324 orders in July. Stripping out the transportation sector, order rose 0.7%. Orders for core capital goods – a broader measure of business investment – climbed by 0.6% in August.

Tomorrow the government will reveal the third of three regular estimates of growth in the period of April to June. The gain in GDP is likely to be raised to 4.7% from a prior estimate of 4.2%, mainly because fresh data show that consumers spent much more on health care than initially estimated. If so, that would mark the fastest spurt of growth since the recession ended in mid-2009. The third quarter ends in just a few days, and it is estimated that 3Q GDP expanded at about a 3.2% pace.

The war continues. French fighter jets struck ISIS targets in Iraq and US fighter jets struck ISIS targets in Syria. A third night of air raids by the United States and Arab allies targeted ISIS controlled oil refineries in eastern Syria that have been a major source of revenue for the terrorist group. Britain announced today that it too would join air strikes against ISIS in Iraq, after weeks of weighing its options. Prime Minister David Cameron recalled parliament, which is expected to give its approval tomorrow.

Iraq’s Prime Minister Haidar al-Abadi, in New York to attend a UN meeting, said he had credible intelligence that ISIS networks in Iraq were plotting to attack US subways and French metro trains. US intelligence officials say they have no evidence of specific threats.

The Russian parliament is considering a proposal that would allow the Kremlin to seize foreign assets on Russian soil, and there are a lot of foreign assets in Russia, many of them oil related.

Attorney General Eric Holder is resigning. He will step down when a successor is confirmed for the post. Holder has been Attorney General for nearly six years, making him one of the longest serving AGs in our history. He was also the first African American AG. White House officials are already pushing out narratives about Holder’s “historic legacy of civil rights enforcement and restoring fairness to the criminal justice system,” but there is one area where Holder was an absolute failure: going after the banksters on Wall Street.

As of today, there has been no significant surge in criminal cases stemming from the financial crisis, to the profound annoyance everyone who sees aggressive prosecution as the only deterrent for future fraud. Instead, Holder has preferred blockbuster civil settlements, including a recent $13 billion deal with JPMorgan Chase CEO Jamie Dimon and an impending agreement with Bank of America that could top $12 billion. That sounds like a lot of money, but the actual amounts are…, well nobody really knows what the actual amounts are; we do know that it is significantly less than the headline numbers after factoring in tax accounting and credits for actions already being undertaken by the banks; what has come to be known as “soft” consumer relief; things like banks getting credited for the amount of a short sale that was going to happen anyway. And there has been lack of transparency around how these penalties are being paid to aggrieved consumers. One federal judge, rejected a settlement with Citibank in 2011, called the fine “pocket change”. Holder’s Justice Department appealed; making certain the fine was not too harsh for the banking giant.

Under Holder, the Justice Department greatly expanded the use of deferred prosecution agreements with large corporations, from financial firms to agricultural giants. These are arrangements that take the place of criminal prosecutions; instead, the offending corporation supposedly admits wrongdoing, pays a fine, which is typically a small fraction of yearly profits, and agrees to remedy internal problems that lead to the crime. In return, the government agrees not to prosecute.

There are a couple of problems with the deferred prosecution agreements, or DPAs. First the banksters never really got around to admitting wrongdoing. The admissions of wrongdoing have been incredibly vague, at best. In at least one case, involving Libor rate rigging, the CEO of Barclays gave a written admission as part of the DPA, and then went out and made public claims that he had done nothing wrong. Another problem with DPAs is that they do not act as a deterrent. The idea is supposed to be something similar to a probationary period for the bank; stay out of trouble and the prosecutors will not go after harsher punishment. The reality is that DPAs are repeatedly violated without consequence.

Perhaps the most egregious example came when Justice allowed HSBC to enter deferred prosecution for wide-ranging multibillion-dollar money laundering at the bank on behalf of large illegal drug operations and also terrorist groups. There was ample evidence that HSBC had set up separate teller windows at its Mexican bank branches to accept the large trays of cash coming from the Mexican drug cartels. And there was solid evidence that HSBC had conducted business with Iran, and Cuba and other entities on a sanctions blacklist. The punishment amounted to about 2 months’ profits. If you’re going to put people in jail for having a joint in their pocket or for slinging dime bags on the corner in a city street, you cannot let people who laundered $850 million for the worst drug offenders in the world walk. But that’s exactly what Holder did, time after time after time.

In March, the Justice Department’s own inspector general released a report that found that the criminal division’s efforts to hold Wall Street executive accountable were a low priority, and in some cases the lowest possible priority, despite Holder’s claims that it was at the top of his to-do list.

Holder has tried to explain his lack of prosecutions relating to the 2008 collapse by claiming the cases were too hard to prove, but that is a weak argument. The Sarbanes Oxley Act, for example, would provide a straightforward template: it makes it a crime for executives to sign inaccurate financial statements, and there is ample evidence that Wall Street CEOs were aware of the toxicity of the sub-prime mortgages sold by their firms.

Late last year, Judge Jed Rakoff of the Federal District Court of Manhattan published an essay titled, “The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?” Rakoff cited the Financial Crisis Inquiry Commission report that found multiple examples of fraud. He suggested a doctrine of “willful blindness” at Holder’s Justice Department and said “the department’s claim that proving intent in the financial crisis is particularly difficult may strike some as doubtful.” Needless to say, it is rare that a sitting judge publicly calls out the nation’s top cop for what amounts to cowardice. Advocates for financial accountability often point to the Savings and Loan crisis as a counter-example of Holder’s failure to prosecute: despite much smaller-scale fraud, 1,000 bankers were convicted in federal prosecutions and many went to prison.

Holder’s failure to prosecute had a name: the Holder Doctrine; and its origins go back to the days of Enron and the prosecution and conviction of Arthur Andersen, the former “Big Five” accounting firm convicted of obstruction of justice for destroying documents relating to the Enron scandal. The prosecution and collapse of Arthur Andersen cost many otherwise decent accountants their livelihood. Holder admitted as much in Senate testimony last year. He said:
“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy,”… “I think that is a function of the fact that some of these institutions have become too large.”

Holder continued, acknowledging that the size of banks “has an inhibiting influence.” He said that it affects “our ability to bring resolutions that I think would be more appropriate.”

According to the Holder Doctrine and Justice Department guidelines, before bringing a criminal case, prosecutors must consider “the nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime.” The conventional wisdom is that simply charging a company with a crime raises the possibility of putting the firm out of business because customers, suppliers, counterparties and others will stop doing business with it. In other words, the banksters were just too big to jail.

The Holder Doctrine raises all sorts of interesting questions. Should we prosecute corporations ever? Or should we only prosecute small businesses? Should the size of an institution or its systemic importance influence the decisions of prosecutors? Wasn’t Dodd-Frank legislation supposed to fix the too big to fail problem. If the banks are still too big to jail does it also mean they are still too big to fail? If shutting down a huge bank would impose too many costs on society, then why don’t prosecutors insist that the banks be split up as a condition of not dropping the entire C-suite into the deepest hole in the gray bar hotel?

We don’t yet know Holder’s successor at Justice, but there should be a litmus test for the new AG. Keep it simple. Just ask if they believe in justice for all?

Tuesday, August 19, 2014 - It’s Just a Matter of Time

Financial Review with Sinclair Noe

DOW + 80 = 16,919
SPX + 9 = 1981
NAS + 19 = 4527
10 YR YLD+ .02 = 2.40%
OIL (sept) = 94.48
GOLD – 2.00 = 1296.20
SILV - .18 = 19.50

The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.4%, but energy costs declined 0.3%; the first drop in energy prices since March. Consumer prices have risen an unadjusted 2% over the past 12 months, down slightly from June. Prices surged in the early spring but have since tapered off. Excluding volatile food and energy prices, the core rate has risen 1.9% in the same span, unchanged from the prior month. Almost all of the increase in consumer prices can be traced back to housing costs, or shelter prices; over the past year, shelter prices are up 2.9%.

Hourly wages have risen about 10% overall since June 2009, to $24.45 an hour. But over the same span they’ve slipped 0.3% in “real” or inflation-adjusted terms. Since the Great Recession ended five years ago, the amount of money Americans earn each hour after adjusting for  inflation has actually fallen. And that largely explains why the economy is growing so slowly.

The Federal Reserve should be in no hurry to raise interest rates because there is no serious threat from inflation, at least not now.

According to the US Travel Association and GfK, a market research firm, you might not take a vacation this year. About 40% don't plan on using all of our paid time off. The share of American workers taking vacation is at historic lows. In the 1970s, about 80 percent of workers took a weeklong vacation every year. Now, that share has dropped to a little bit more than half. The declining popularity of vacation has wide-ranging effects not just on workers, but also on their employers and indeed the overall economy. Studies have found that taking fewer vacations is correlated with increased risk of heart disease; other research has shown that workers who take vacations, or even a small break during the workday, are more productive when they return. This vacation aversion is a North American phenomenon; the US is the only “advanced” economy that doesn’t require companies to give paid vacation days.

Housing starts rose to an eight-month high in July. Groundbreaking for new housing jumped 15.7% last month to a seasonally adjusted 1.09-million unit annual pace; this follows 2 straight months of declines. Groundbreaking for single-family homes, the largest part of the market, increased 8.3% in July to a seven-month high. Starts for the multi-family homes segment, such as apartments, jumped 33%.

Home Depot reported quarterly profit today. Profit rose 14% to $2.05 billion. Sales rose 5.7% to $23.8 billion. The number of transactions rose 4.2%. Home Depot said it expects same store sales to grow faster in the second half of the year, as more people take on remodeling projects. However, Home Depot maintained its full-year sales growth forecast of about 4.8%. Lowe's, the world's second-largest home improvement company, is scheduled to report results tomorrow.

Back in 2006 bust, when the housing market went bust, Phoenix was one of the first cities to get hammered with lower prices; in 2011, Phoenix was one of the first cities to snap back; prices, off by nearly 60% from peak, then rebounded sharply; home prices are up nearly 46% from the 2011 low. The number of homes in some stage of foreclosure has fallen to about 4,300 homes today from more than 50,000 four years ago.

Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. Investors accounted for nearly 15% of homes bought in June, down from about one-quarter last year and one-third of sales in June 2012. The market is moving away from from bargain-hunting investors, who typically pay cash for distressed properties, to traditional buyers with mortgages. The Phoenix market is slowly moving back to normal, but there is still a long way to go.

Employment in Phoenix, after expanding at an average annual pace of 2.6% and 2.8% in each of the last two years, is up just 1.5% so far this year. When people don’t have a job or are not secure in their jobs, they don’t buy houses. The sluggish local economy is compounded by consumers still too battered from the bust to think about getting a loan. Some don't have sufficient equity to turn a house sale into an adequate down payment on their next purchase. Others suffered credit blemishes or income hits that make banks reluctant to lend.

Reuters reports Phoenix based PetSmart is exploring a potential sale of the company. Jana Partners, which has reported a 9.8% stake in PetSmart, has been calling on the company to pursue a sale after what it calls years of financial underperformance. There is no guarantee the review will lead to a deal and PetSmart could still determine that it would be better off on its own.

Today marks the ten year anniversary of Google. The company went public August 19, 2004 at a price of $85 a share; and it’s gone up 1,304% since then. A few stocks have done better over that time, but only a few, and of those, only Apple was in the S&P 500 10 years ago when Google went public. Today, Google’s revenue tops $65 billion, more than all but 40 US companies. Net profit margins exceed 20%, higher than all but three. Ten years ago, Google had a forward PE of 52; today, the forward PE is 20. So as share prices have constantly moved higher, valuation has constantly moved lower; which is a neat trick.

Over the past 10 years, or you could say over the past 25 years, a great deal of wealth has flowed to the tech giants of Silicon Valley; which means that the wealth has flowed away from Wall Street. And the techies have finally figured out they don’t need Wall Street bankers to make a deal. According to data from Dealogic, approximately 70% of the tech deals completed in early August have been sealed without a Wall Street bank consultant helping the buyer identify the transaction. And over the past two years, the trend has been growing, with more than half the tech deals in 2012 occurring without a banker working on behalf of the buyer. This M&A consulting shift highlights a subtle but growing divide between fee-eager bankers and the tech giants of today.

Maybe the problem is that the banks just have a hard time remembering who their clients are. Case in point: you may remember the story of Standard Chartered, the British bank, which back in 2012 paid about $667 million to settle charges that it had engaged in money laundering by making transfers for clients in Iran and other countries that were covered by American sanctions. They had to add compliance monitors. A few months later the bank’s chairman denied any wrongdoing, which was a direct violation of the settlement; and he was forced to quickly recant. Today, it seems that all of those new legal staffers and crime-fighting committees also didn’t get the memo about what they are meant to be doing. New York’s financial regulator slapped another $300 million fine on Standard Chartered for “failures to remediate anti-money laundering compliance problems as required” in its previous settlement.

Part of the bank’s 2012 agreement included hosting an independent monitor permanently installed by regulators on-site to vet anti-money laundering procedures. This monitor was back-testing the bank’s processes and found them lacking, particularly when it came to flagging suspicious dollar transfers from its Hong Kong and United Arab Emirates affiliates.

In a statement, Standard Chartered said that it “has already begun extensive remediation efforts and is committed to completing these with utmost urgency.” And this time they really, really mean it; not like last time. So, this raises the question of how many times a bank can break the law, and get away with a slap on the wrist. What does a bank have to do before they forfeit their charter?

The New York State regulator, Benjamin Lawsky, said: “If a bank fails to live up to its commitments, there should be consequences. That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”

So, the penalty is nearly $1 billion in fines over the past couple of years, but actually works out to about 12% of bank profits over the same time.

You might also remember last month when Attorney General Eric Holder announced the $7 billion settlement with Citigroup for its role in packaging troubled mortgages into securities and selling them as investments in the years before the crisis, even though a bunch of Citigroup bankers knew better and did it anyway. And last November, there was a settlement with JPMorgan. And there is a chance that later this week we will see a settlement announced with Bank of America.

It all falls in line with the “too big to fail” idea known as the Holder Doctrine, which stems from a 1999 memo, when then Deputy AG Holder 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. Holder was thinking of the collapse of Arthur Anderson after the collapse of Enron. So, now Holder holds to the idea of settlement over prosecutions.  Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong.

The problem is, of course, that these settlements allow for the Wall Street bankers to get away with their bad behavior without being held the slightest bit accountable. And with no real deterrent, as Standard Chartered has just confirmed, it’s just a matter of time until they do it all over again.