Financial Review

Like It Never Happened

Sinclair Noe — June 29, 2016

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DOW + 284 = 17,694
SPX + 34 = 2070
NAS + 87 = 4779
10 Y + .04 = 1.51%
OIL – .30 = 49.58
GOLD + 6.80 = 1319.30

Stocks rallied for a second day, and it was a global rally. The dollar weakened. The yield on 10-year Treasuries rose four basis points to 1.51 percent after falling Monday to the lowest in almost four years. The MSCI All-Country World Index had its biggest two-day gain since August. The S&P 500 moved from negative year to date to slightly positive. The Dow Jones Industrial Average stretched its rebound to 553 points since Monday’s close.

Britain’s FTSE 100 Index erased its post-Brexit losses with a 6.3 percent surge over two days. The Stoxx Europe 600 Index climbed 3.1 percent. The gauge has recovered 4.7 percent after tumbling 11 percent over two days. It is still heading for a second consecutive quarterly decline. Emerging-market shares climbed. Maybe cooler heads prevailed; maybe it is a short squeeze. Goldman’s basket of the most shorted shares in the Russell 3000 Index rose the most since 2009. Doesn’t matter. Prices moved higher.

And so this raises the question of whether all the fear over Brexit was justified, or if this is just the calm before the storm. The fall in the pound sterling is a blessing for the British economy, and a headache for the Eurozone. The exchange rate is acting as a shock-absorber. The FTSE 100 index of equities in London is back to where it was on the eve of the vote, compared to falls of roughly 6% in Germany and France, 10% in Spain, 11% in Italy, 13% in Ireland, and 14% in Greece.

The UK was stripped of its AAA credit rating but there has been no sign of systemic meltdown. Britain’s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error.

US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or “start ginning up scatter-brained or revengeful premises.” Nobody seemed to heed his words at the EU’s summit in Brussels, but the situation still carries the potential for significant economic damage, even if it plays out in slower motion.

European Union leaders wrapped up a two-day conference in Brussels and called for an orderly British withdrawal from the bloc to minimize instability. They also spelled out conditions for a new relationship with a departing Britain, warning that if British business wants to continue to enjoy the seamless single market after its departure, it would also have to accept that EU citizens can continue to enter Britain.

Francois Hollande, the French President, has warned London that it will no longer be the center of euro-denominated clearing following the Brexit vote, dealing a blow to one of the City’s biggest markets and casting further doubt on the London Stock Exchange’s merger plans. Mr. Hollande, speaking after a tense meeting of European Union leaders last night, said: “The UK has said it doesn’t want any more freedom of movement. Now it won’t have access to the single market anymore.”

Scottish minister Nicola Sturgeon, spoke before the European Commission in Brussels, trying to make the case for Scotland to stay in the EU. In last week’s referendum, Scottish voters backed staying in the EU by a nearly 2-1 majority. Mrs. Sturgeon argued that Scotland must not be dragged out of the EU against its will. She wants to negotiate directly with Brussels to protect membership rights of Scots and is open to a new independence referendum, splitting from the UK, if that is the only way to keep Scotland in the bloc. Sturgeon drew a mixed response from EU leaders. Spanish Prime Minister Rajoy said flatly, “If the United Kingdom leaves, Scotland leaves.”

Moody’s has cut its outlook on the British banking system from stable to negative following last week’s referendum, saying: “We expect lower economic growth and heightened uncertainty over the U.K.’s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions.”

The Federal Reserve delivered a report card on the largest banks in their annual stress tests. US units of Deutsche Bank and Banco Santander were the only firms to fail the tests in 2015, and they failed the tests again this year. The Fed gave Morgan Stanley only a conditional pass, saying that the bank also had to resolve weaknesses in its processes. Morgan Stanley has until Dec. 29 to resubmit its capital plan for approval. The stress test results, known as CCAR (or Comprehensive Capital Analysis and Review), are particularly important because they determine how much capital big U.S. banks can put toward dividends, stock buybacks, acquisitions or investments.

General Electric has won approval to drop its designation as a too-big-to-fail financial institution, capping a transformation that has included the sale of almost all of its lending business. The Financial Stability Oversight Council determined that GE no longer poses a threat to U.S. financial stability. The decision marks the first time a company has been granted formal release by the council.

The Commerce Department reports consumer spending increased 0.4 percent last month, on increased demand for automobiles and other goods. Consumer spending in April was revised up to show it advancing 1.1 percent instead of the previously reported 1.0 percent jump. Consumer spending rose at a 1.5 percent annual rate in the first quarter, holding down gross domestic product growth to a 1.1 percent pace. Personal income rose 0.2 percent after advancing 0.5 percent in April. Wages and salaries gained 0.2 percent. Savings slipped to $730.6 billion last month from $753.7 billion in April.

A gauge of pending home sales slid 3.7% in May, a step back following several months of strong sales. The National Association of Realtors’ index fell to 110.8 in May from a downwardly-revised 115.0 in April. Even with that revision, April figures were the highest since February 2006 – but May marked the first year-over-year decline since August 2014.

The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Last week the NAR reported sales of previously-owned homes rose to the highest level in more than nine years in May. So, it appears demand is still strong but there is a shortage of inventory.

Congress has been thinking about doing something about the debt problem in Puerto Rico. Of course, Congress hasn’t actually done anything yet. They did table further debate on a bill, which means a vote could come later this evening or tomorrow on a measure to allow Puerto Rico to restructure its total debt and establish an oversight board to impose big cuts in spending. And it probably doesn’t matter.

Puerto Rico will default on more than $1 billion in general obligation bonds on Friday. The default will mark the first time the U.S. territory has failed to pay what it owes on general-obligation debt, a $13 billion swath that its constitution says has the top claim to the government’s funds. Puerto Rico had already defaulted on debt issued by three agencies, but creditors were left with little recourse because the securities were backed by weaker legal safeguards.

Governor Garcia Padilla previously said the commonwealth couldn’t raise enough to cover what’s owed to bondholders even if he shut down the government. The island has about $2 billion in principal and interest payments due Friday, and total debt of around $70 billion. Without the ability to file for bankruptcy protection as cities including Detroit have done, Puerto Rico pushed Congress to give it legal tools to force creditors to the bargaining table and prevent an onslaught of lawsuits. Instead, it looks like they will be headed to court.

Energy Transfer Equity has terminated its merger agreement with Williams Cos. after a court ruled that it can walk away from the deal since it was unable to deliver a required tax opinion by June 28. Williams published a statement saying it is committed to completing the merger and will “enforce its rights” under the terms of its agreement. The deal had been valued at nearly $33 billion when it was signed last year.

Toyota announced another massive recall. The Japanese carmaker said it needed to recall 2.8 million cars over a possible fault in emissions control units, after it announced on Tuesday that 1.4 million Prius and Lexus models had to be brought in to have their air bag inflators fixed.

Coca-Cola expects to pull some of its beverages from Vermont stores this week as the state imposes a new law requiring all products made with genetically modified organisms to include warning labels. Although its top beverages will stay on shelves, including Coca-Cola, Diet Coke and Coke Zero, some smaller brands or configurations may temporarily disappear. Kellogg, Campbell Soup and Mars previously announced they would comply with the Vermont law and begin labeling their products for GMOs.

Nike’s futures sales disappointed. Nike reported adjusted earnings per share of $0.49, beating the consensus by a penny. Revenue rose 6% to $8.2 billion but was a bit shy of estimates. The closely followed worldwide futures orders jumped 11%, missing the 13% increase that analysts were anticipating.

Financial Review

The Foreseeable Future

Sinclair Noe — November 9, 2015

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

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DOW – 179 = 17,730
SPX – 20 = 2078
NAS – 51 = 5095
10 YR YLD + .01 = 2.34%
OIL – .18 = 44.11
GOLD + 2.50 = 1092.90
SILV – .16 = 14.68

The jobs report on Friday showed a rise of 271,000 new jobs last month and the unemployment rate dropping to 5%. In a speech in Tempe on Saturday, San Francisco Fed President John Williams said: “My forecast is that we’ll reach our maximum employment mandate in the near future and I’m increasingly confident that inflation will gradually move back to our 2% goal.”

Williams said: “I view the next appropriate step as the start of a process of gradually raising interest rates,” and the data will determine when it comes to lifting rates. Williams offered an upbeat outlook on the economy, and he said that it is OK that the pace of job creation has slowed relative to recent history, because continuing on that pace could cause problems. (For whom?)

We all knew about the jobs report on Friday, so why the delayed reaction in the markets today to news from Friday? Well, that would be assuming that the markets went down today because everybody figured out that the Fed is definitely going “live” with a planned rate hike in December. I don’t know why the markets went down today. On any given day, markets go up or down. Buying is stronger than selling or vice versa.

Wipe out the statistical noise in the past 3 months of jobs reports and the labor market looks like it has for a long time, sluggish growth. Wipe out the statistical noise of today’s trading and the market is still in an uptrend, with strong seasonal probabilities to boot. And a trend in place is more likely to continue than it is to reverse…, until it reverses.

In its semiannual economic forecasts, the Organization for Economic Cooperation and Development said that growth in the U.S. would continue to be among the most robust in the group of nations, hitting 2.4% in 2017. It predicted the 19-nation Eurozone would continue to lag behind the U.S., with growth at 1.5% this year, and 1.9% in 2017. Growth throughout the OECD is forecast to hit 2% this year.

Global financial regulators published new rules that aim to stop banks from becoming “too big to fail,” to prevent a repeat of the 2008 financial crisis. The plan, drawn up by the Financial Stability Board in Switzerland, aims to ensure that the world’s biggest lenders maintain sizable financial cushions that can absorb losses as a bank is failing, without threatening a crisis in the broader banking system. The new standards aim to make banks change the way they fund themselves to better weather a crisis, a requirement that could force firms to raise more than $1.2 trillion in new securities.

Under the rule for total loss-absorbing capacity, or TLAC, by January 2019 large lenders will have to hold a financial cushion of at least 16% of their risk-weighted assets in equity and debt that can be written off. That requirement will gradually increase, reaching 18% of assets weighted by risk by January 2022. A leverage ratio requirement will also be imposed, rising from 6 percent initially to 6.75 percent. The rules would apply to the world’s top 30 banks.

The push to make sure banks are no longer too big to fail is also advancing on a second front, as Wall Street expands a revision of financial contracts worth trillions of dollars. The changes are expected to allow certain securities and funding contracts to remain intact for as long as 48 hours after a bank fails; theoretically, that would be enough time for governments to step in and set up a healthy version of the doomed institution.

We have reported the story of Turing Pharmaceutical, the company run by a thirty-something former hedge fund manager who bought a shell company and then bought rights to a drug, daraprim, that had been around for more than 60 years; he promptly jacked the price up from $13.50 a pill to $750. At first it seemed like an outlier.

Then we heard from Citron Research, a short-sale researcher, saying that Valeant Pharmaceutical had been cooking the books, setting up bogus specialty pharmaceutical suppliers to show sales that didn’t really exist. Valeant shares were clobbered, losing two-thirds of value from recent highs. Today, Citron came out with another report on another company. In a tweet, Citron says Mallinckrodt’s stock has significantly more downside than Valeant, and is a far worse offender of the reimbursement system – more to follow.

We don’t know what will follow but it has become clear that pharmaceutical companies are gaming the reimbursement system and are actively involved in price gouging – not all of them but enough to sour the entire pharmaceutical industry.

Saudi Arabia is determined to stick to its policy of pumping enough oil to protect its global market share, indicating that the country is in no mood to change tack ahead of OPEC’s Dec. 4 meeting in Vienna. The chairman of Saudi Aramco said, “There have been no conversations here that say we should cut production now that we’ve seen the pain.”

Weyerhaeuser has agreed to buy Plum Creek Timber in a deal that combines the two largest owners of timberland in the U.S. The all-stock transaction will result in a $23 billion timber REIT carrying more than 13 million acres of land.

Anbang Insurance Group said it would acquire U.S. annuities and life insurer Fidelity & Guaranty Life in a deal valued at about $1.57 billion as Chinese insurers seek to expand into the United States. Chinese insurers including Fosun International Ltd and Anbang Insurance have launched some $6.1 billion worth of overseas deals this year as they seek to diversify their holdings by purchasing interests in real estate, insurance and other sectors.

Goldman Sachs is closing its money-losing BRIC fund; BRIC stands for Brazil, Russia, India, and China. The bank said in an SEC filing that it doesn’t expect “significant asset growth in the foreseeable future.” The fund had lost 88 percent of its assets since its 2010 peak.

Google is making its internal AI development software available for free, hoping to influence how people design, test, and run artificial-intelligence systems.  Google is releasing a program called TensorFlow as freely available open-source software. It’s based on the same internal system Google has spent several years developing to support its AI software and other mathematically complex programs.

Dubbing it the “Networks of the Future,” Ericsson and Cisco have agreed to create a broad technology and commercial partnership that stops short of a full-blown merger but aims at an unusual level of cooperation in everything from research and development to customer service. The alliance will help add $1 billion or more in annual sales for each company by 2018. The companies say the partnership will offer customers the best of both companies: routing, data center, networking, cloud, mobility, management and control, and global services capabilities.

Sierra Leone was declared Ebola-free by the World Health Organization on Saturday, making it the second West African nation – besides Liberia – to eradicate the disease. Although the Ebola-free stamp means that Sierra Leone has gone 42 days, or two incubation cycles of the virus, without an infection, the country still faces significant hardships ahead. According to the IMF, Sierra Leone is on track to suffer Africa’s worst recession this year: a ruthless 21.5% contraction.

Greenhouse gas levels in the atmosphere reached a record high in 2014. According to the World Meteorological Organization levels of carbon dioxide, the main greenhouse gas, climbing steadily towards the 400-parts-per-million (ppm) level, having hit a new record every year since reliable records began in 1984. Carbon dioxide levels averaged 397.7 ppm in 2014 but briefly breached the 400-ppm threshold in the northern hemisphere in early 2014, and again globally in early 2015.

Levels of the other two major man-made greenhouse gases, methane and nitrous oxide, also continued a unrelenting annual rise in 2014, reaching 1,833 parts per billion (ppb) and 327.1 ppb, respectively. Both rose at the fastest rate for a decade. Next month 150 countries will be meeting in Paris for a major conference on global warming; so far none of the proposals submitted for consideration at the conference would curb emissions enough to meet a target agreed in 2010 to limit global warming to within 2 degrees Celsius (3.6 Fahrenheit) of pre-industrial levels.

The Center for Public Integrity, a Washington based nonprofit has issued its 2015 State Integrity Investigation, ranking each state for transparency and accountability and conflicts of interest and corruption. The good news for Arizona is we ranked 22^nd; in the bottom half but not the worst. The bad news is Arizona only graded out with a “D”. The most corrupt state was Michigan; the least corrupt, Alaska, Connecticut, and California. I do not make this up.

FINANCIAL REVIEW

Something is Rotten

Sinclair Noe — December 12, 2014

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

DOW – 315 = 17,280
SPX – 33 = 2002
NAS – 54 = 4653
10 YR YLD – .08 = 2.10%
OIL – 2.52 = 57.43
GOLD – 5.60 = 1222.80
SILV – .06 = 17.14

The fall in oil prices has been dramatic, now down almost 47% since June. Nobody was expecting it would fall that far that fast. Goldman was forecasting $85 oil for 2015 as recently as October 29. Crude-oil futures fell to their lowest since May 2009 on Friday, briefly dropping below $57 a barrel, after the International Energy Agency delivered the latest reduction in forecasts for global oil demand. On the week, oil futures have lost slightly more than 12%. So, oil is a bit oversold right here but it is never a good idea to try to catch a falling knife.

And the whole drop just tells us that something is rotten in the markets. The fundamentals of oil have not changed in concert with the price. We don’t have double the oil we had in June. So why is the price cut in half? I know that’s overly simplistic, but either the market is too negative on energy, or it is not diligent enough in thinking about broader implications. Low prices lead to oil being left in the ground. Low oil prices lead to debt defaults. Low oil prices can lead to collapses of exporters. Benefits to consumers likely smaller than expected. Hoped for renewables lose luster with low oil prices. The sharp decline in the price of oil has disoriented markets and changed the perception of the creditworthiness of companies and countries. And don’t forget, deflationary pressures, which is great when you go to the gas station to fill up but not so great in a number of other ways.

Bill Gross, who used to run the world’s largest bond fund before joining Janus Capital in September, said the Federal Reserve may become more “dovish” after oil prices plunged in recent weeks. Gross says the Federal Reserve would have to take lower oil prices “into consideration.” Why would they start to eliminate language that talked about an extensive period of time when the US itself is, not deflating but disinflating, and certainly not moving in the direction of its 2 percent inflation target?

The drop in oil prices likely reflective of world reaching debt expansion limit. The worry, as always, has nothing to do with the central banks’ concern for you, your job, your children, wealth equality, or the future, and everything to do with the simple fact that the stability of the banking system absolutely depends on a steady stream of new loans being created. The core of the problem is that we have a monetary system that is either expanding or collapsing. It has no steady state. Oil has been an engine of growth, resulting in global spending of nearly $3 trillion over the past decade, and that means a bunch of financing. We have never spent more money developing new oil supplies than we did last year, nearly $700 billion; and for all that spending, we did not double the current production. Something is very wrong with that equation, and that means something has to give. New oil drill programs are being scrapped left and right. New drill permits in the U.S. shale plays were down 40% in November compared to October and for good reason: most of the plays are uneconomical at current prices.

The shale miracle could easily turn into the shale collapse. This calls into question the sky-high valuations we currently see for stocks and bonds. Central banks have tried to prop up financial assets and financial markets, and one way was to finance the energy sector; after all, they already blew up the housing market. A decline in oil prices is not only due to supply issues but demand issues.

So, right now, the market players are having a hard time figuring out what all this means, and when they are clueless, they sell. The S&P 500 ended the week with the biggest loss in two-and-a-half years, while the Dow Jones Industrial Average recorded its biggest weekly decline since Sep 2011. The S&P 500 lost 3.5% for the week. Maybe it is just that we were due for a down week. The Dow was down 3.8% for the week, and the Nasdaq Comp lost 2.9% for the week.

A couple of economic reports today. Producer prices, or prices at the wholesale level, fell a seasonally adjusted 0.2% in November, the second decline in the last three months. The rate of wholesale inflation over the year fell to a nine-month low of 1.4%. The Federal Reserve policy committee will meet next week and this is another bit of data showing inflation should not be a concern.

The University of Michigan and Thomson Reuters consumer sentiment gauge rose to a preliminary reading of 93.8 from 88.8 in November; it’s the highest reading since January 2007. The global economy may be going to hell in a hand basket but if we can fill up the SUV and still have money to go to a movie, life is pretty sweet.

Sometime tonight or maybe Monday, the Senate will vote on whether to fund the government. Late last night, the House passed a spending bill and a two day extension to give the Senate time to vote. The idea of funding the government isn’t really controversial. We all know that the government will be funded, but the politicians use it as leverage to tack on poison pills, or provisions that probably would not pass on their own merit but they are accepted to avoid a shutdown. Perhaps the most controversial of these add-ons is a Wall Street-friendly provision which made its way into the bill at the last minute, the weakening of the so-called “swaps push-out rule” from the 2010 Dodd Frank financial reform law.

The push-out rule bans big banks from using taxpayer-insured depositor funds to back certain risky derivatives trading. It also requires financial institutions to move parts of their business involved in those trades to separate groups or affiliates, without FDIC insurance. The new provision would allow banks to gamble in the derivatives markets with FDIC insured depositor money. If their bets turn out to be losers, the taxpayers would bail them out, again. Imagine going to Las Vegas and gambling; if you win you get to keep all the money but if you lose the taxpayer has to pay for your losses.

If this sounds like a sweetheart deal for the big banks, well it is. The language in the bill appeared to come directly from the pens of lobbyists at Citigroup. Yes, this is the same Citigroup that was bailed out in 2008 because they were ready to implode under the weight of bad bets in derivatives. The Citi-drafted legislation will benefit five of the largest banks in the country: Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America, and Wells Fargo. These financial institutions control more than 90 percent of the $700 trillion derivatives market.

The Washington Post is reporting that the provision was so important to the profits at the big banks that JPMorgan’s chief executive Jamie Dimon himself telephoned individual lawmakers to urge them to vote for it. You should try that, call your Senator; you’ll either get a recorded message or an aide who will write down your message and then throw it in the wastebasket. Jamie Dimon has a direct line. Why? Because money is more important than a vote.

Yes, this is the same JPMorgan that is the subject of an open criminal investigation by the Department of Justice for manipulating foreign exchange rates. Yes, this is the same JPMorgan that has paid billions of dollars in fines for a variety of transgressions and signed deferred prosecution agreements that if they ever broke the law again they would be criminally liable. Yes this is the same JPMorgan that gambled in the derivatives markets in the London Whale deal, and then lied about it.

And what they are likely to win is the repeal of the Dodd-Frank Act provision that requires them to separate their gambling from their banking; they fought against inclusion in the Act in 2010, and they’ve been fighting it ever since. So JPMorgan and Citigroup wrote new legislation and there is a good chance it will pass, without debate or amendment because they slapped it on the spending bill. But in finally getting what they wanted, big banks also thrust themselves back into the limelight in the worst possible way, simultaneously reminding the public of their role in causing the financial crisis and in their continuing influence over the various levers of the government. In one fell swoop, they undid whatever recovery to their battered reputation they’d made in the past four years and once again cast themselves as the sleazy casino gamblers and the bribers of politicians who offer a one-finger salute to taxpayers who bailed them out.

Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation said in an interview yesterday that the bankers are trying to blackmail us by making sure government is not funded unless they get their way. Now consider that repealing the swaps provision, which was Section 716 of Dodd-Frank, is likely to only help banks on the margins, since they are allowed to continue engaging in the activity through affiliates. So, why are they fighting so hard to repeal it? Wall Street’s business model depends on the ability of large financial conglomerates to keep exploiting the cheap funding provided by their “too big to fail” subsidies.

Last year Bloomberg calculated that the top 10 US banks received a taxpayer subsidy worth $83 billion because the largest banks can borrow money at a lower rate because creditors assume the government, on behalf of taxpayers, will rescue them in an emergency. And so if this banker written legislation passes, we the taxpayers will be on the hook for the next bailout of the banksters, because the bankers’ money is more important than anything. And it will only be a matter of time.

FINANCIAL REVIEW

Net Neutrality

Sinclair Noe — November 10, 2014

 

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

Financial Review

DOW + 39 = 17,613
SPX + 6 = 2038
NAS + 19 = 4651
10 YR YLD + .05 = 2.36%
OIL – 1.43 = 77.22
GOLD – 26.90 = 1152.60
SILV – .22 = 15.71

Record highs for the Dow Industrial Average and the S&P 500 index, plus new records for the Dow Transportation Average. We enjoy milk and cookies. The S&P 500 has rebounded 9.4 percent from a six-month low on Oct. 15.

We’re still a couple of weeks away from Thanksgiving but third quarter earnings season is wrapping up, and analysts are already looking to next year, anticipating earnings will rise another 7% or so to around $126. And while stock prices have been hitting highs, volatility has dropped; the VIX is back down to 12 or so, indicating a fair amount of complacency, even as stocks hit highs. Commodity prices have been scraping the bottom of the barrel, with oil and gold near multi-year lows; one exception is cattle prices. Live-cattle futures last week hit an all-time high on CME, and prices are unlikely to come down anytime soon. In addition to increasing demand for beef, the recent drought in Texas and Oklahoma dented cattle herds, which has forced farmer to undergo a lengthy cattle replacement process.

Stock market analysts aren’t the only ones looking to next year. The World Economic Forum is out with its new Outlook on the Global Agenda 2015. Deepening income inequality tops the list of economic trends to watch. The US tops the list of most unequal of the world’s rich nations, and has surged ahead of the rest mostly in the last 30 years. What should be done about inequality? The report doesn’t get into specifics, but it does say this: “We know what we need: inclusive economies in which men and women have access to decent employment, legal identification, financial services, infrastructure and social protection, as well as societies where all people can contribute and participate in global, national and local governance.”

After the financial crisis in 2007-2009, governments had to spend billions of dollars of taxpayer money to rescue banks that ran into trouble and could have threatened the global financial system if allowed to go under. Since then, regulators from the Group of 20 economies have been trying to find ways to prevent this happening again. The G-20 is meeting in Australia this week, and Mark Carney, the Bank of England governor and chairman of the Financial Stability Board has released a proposal to put an end to taxpayer bailouts of the “too big to fail” banks.

The proposal calls for the big global banks to have a buffer of bonds or equity equal to 16% to 20% of their risk weighted assets. The bonds could be converted to equity to help shore up a bank if it should falter (at least that’s the theory). The new buffer, formally known as total loss absorbing capacity or TLAC, must be at least twice a bank’s leverage ratio, a separate measure of capital to total assets regardless of the level of risk. Globally, the leverage ratio has been set provisionally at 3 percent but Fitch ratings agency said banks might end up with a buffer equivalent to as much as a quarter of their risk-weighted assets once other capital requirements were included. Analysts have estimated this could run to billions of dollars.

The new rule will apply to 30 banks the regulators have deemed to be globally “systemically important”.

The Financial Times reports Swiss bank UBS is close to a settlement to resolve allegations of improprieties in its precious metals trading business; this might also signal a settlement regarding to rigging forex markets. UBS had closely integrated its forex and metals trading.

US public pension funds performed worse in the third quarter than all other institutional investment plans. Public pensions lost a median 1% in the third quarter, compared with a median drop of 0.84% for all plans over the same period. Small public pensions with less than $1 billion of assets were down 1.07%. Larger corporate funds with more than $1 billion of assets had the best showing for the second quarter in a row, losing just 0.54 percent this past quarter.

President Obama today came out in favor of net neutrality, endorsing a proposal to empower the Federal Communications Commission to require internet service providers to treat all web traffic equally and not charge content providers for better access. Obama’s statement said: “We cannot allow Internet service providers to restrict the best access or to pick winners and losers in the online marketplace for services and ideas.”

The FCC is currently weighing whether ISPs, such as Verizon and Comcast, can choose to block or prioritize delivering traffic to certain websites; creating slow lanes of information delivery for much of the web, and high-speed lanes for a toll. Net neutrality is about what kind of traffic lanes we should have on the Internet. Supporters of net neutrality think all online information should be treated equally; everybody gets to travel at the same speed. Opponents argue that fast lanes and priority access would actually make the Internet better.

Imagine a world where big companies like Netflix and Google pay extra money to give their users faster service. How could a plucky upstart search engine or the next video streaming service hope to compete? To provide the same speed, they’d have to pay too. But being young and small they might not have the resources. Net neutrality puts all Internet companies on the same footing, and in that way it helps support innovation and promote entrepreneurship.

Public policy groups want tough regulations that guarantee all websites are treated equally and can be accessed by people increasingly reliant on the Internet. Companies led by Comcast, Verizon, and AT&T argue that only light regulation is needed to ensure providers don’t block or slow Web traffic, and they say strict rules would squelch investment. What really terrifies the telecoms is that they’ll have to justify the rates you pay under the new rules; if not now, then eventually.

Obama’s plan would reclassify ISPs as common carriers under Title II of the Telecommunications Act, treating the service as a public utility. Under that section, it’s illegal “to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services.” And just like access to telephones or access to electricity, everybody would have equal access. For instance, the FCC doesn’t allow phone companies to charge more than $6.50 for a single line, so that all Americans can afford access. Similar pricing rules are in place at electricity plants. If the internet is regulated under Title II, the government could come up with a similar cap on how much companies can charge for internet access.

Obama’s proposal asks for no blocking of websites, no slowing of Internet content, and no deals that let companies pay for faster delivery of their content. He said the FCC should use utility-style rules that give the agency powers that extend to rate regulation, and forebear from setting prices. FCC Chairman Tom Wheeler has been considering a plan that mixes the utility-style regulation Obama advocates with weaker regulatory powers, which may allow for companies to pay more for quicker content delivery or fast lanes.

And while the telecom companies oppose net neutrality, it has wide support from the public, which submitted to the FCC almost 4 million comments overwhelmingly in favor of net neutrality this summer. Whether FCC Chairman Tom Wheeler will adopt Obama’s plan remains in question.

Nearly two months before notifying federal regulators and the public that it was recalling cars with a dangerously defective ignition switch, General Motors placed an urgent order for 500,000 replacement switches with its supplier, Delphi Automotive. GM sent emails to Delphi on Dec. 18, 2013, a day after a committee met to discuss the switch issue but declined to order a recall. Despite the official inaction, a GM employee sent an email to Delphi the next day requesting the half-million replacement parts for “an urgent field action for our customers.”

The emails were turned over by Delphi during discovery in class-action litigation against the automaker. The defective switch can, if jostled or bumped, shift to off or “accessory” mode without warning, causing a moving car to stall in traffic. The loss of power can deactivate the airbag system and impede power steering and brakes. GM has repeatedly said that the cars are safe to drive if nothing but the car key is on the ring, but in not making the problem public when it ordered the replacement parts, GM did not disseminate that information. The defect led to the recall of 2.6 million vehicles earlier this year. So far, 61 claims have been deemed eligible for compensation, including 30 deaths and 31 injuries.

FINANCIAL REVIEW

Milk and Cookies in the Land of No Satisfaction

Sinclair Noe — November 5, 2014

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

Financial Review
DOW + 100 = 17,484
SPX + 11 = 2023
NAS – 2 = 4620
10 YR YLD un = 2.35%
OIL + 1.69 = 78.88
GOLD – 28.20 = 1141.00
SILV – .72 = 15.42

Record highs for the Dow Industrials and the S&P 500.

The midterm election is history, and it was a big night for the GOP. Republicans will have at least 52 Senate seats, a gain of 7. In the House, the GOP will now have at least 243 seats, a gain of 14. The GOP also gained 2 net governorships. So it was a big night. However, Obama was not on the ballot, even though some of the campaign ads made it sound that way; he’s got 2 more years and he still has veto power. It takes a two-thirds majority in both the House and Senate to override a veto. Republicans have nowhere near two-thirds of either chamber. So, get ready for 2 more years of gridlock.

One takeaway is that people are not satisfied with the economic progress of the past few years. While Wall Street is at record highs and the unemployment rate has dropped, that just isn’t enough. Fewer people participated in stock market gains and even though more people have jobs, the jobs aren’t paying what they used to. It doesn’t mean the numbers are wrong; the Dow closed at 17,484 and that is a real number, but the stocks in the Dow have used financial engineering to achieve price gains. The unemployment rate is 5.9%, not 32% (according to a survey released last week by Ipsos Mori, the average American guessed that the unemployment rate is 32%), but people have seen wages decline, they have seen their careers replaced by jobs. The top concerns of voters going into the midterms were economic growth and job creation.

According to national exit poll data, roughly half of the people interviewed as they left the polls said they expected life for the next generation of Americans to be “worse than life today.” Roughly four out of every five America voters were either “very worried” or “somewhat worried” about the direction of the economy in the next year, and just 22% said they were “not at all worried” or “not too worried”. Just 1% of voters felt the economy was “excellent.” Roughly 70% said the economy was “not so good” or “poor.” When asked whether the economy was getting better, getting worse, or roughly the same, voters were split evenly between the three choices. And when asked if a voter’s family financial situation had improved in the past two years, just 29% of respondents said it had. More than 60% of voters polled said they felt the US economic system “favors the wealthy.” On a side note, the new Credit Suisse 2014 Global Wealth Databook reports that each year since the recession, America’s richest 1% have made more than the cost of all US Social programs.

Since 1926, the S&P 500 has gained nearly 17% on average in Year 3 of presidential terms. The next-best years for stocks are presidential election years, when equities have gained 9.8% on average. The Stock Trader’s Almanac tells us that the Dow Jones industrial average has not suffered a third-year loss since 1939. Part of it has to do with the fact that the third year of an administration also tends to see the best growth in gross domestic product. Market strategists surmise that the party in power in the White House has a vested interest in stimulating the economy, and the markets as much as it can in the year before it faces re-election.

Researchers at Leuthold discovered that stocks have risen at an annualized rate of nearly 25% (including dividends) in the period that runs from the midterm elections in November to April of the following year. We are also moving into what is known as the best 6 months in the market; that November through April time is typically better than May through October. And then there is a tendency for an end of year, or Santa Claus rally. According to the Stock Traders’ Almanac, fourth quarters during years when midterm elections are held have produced an average gain of 8% over the past 65 years. They’ve been followed by rallies of almost that much in the next three months, making the average 16% two-quarter rally the best combination of the election cycles.

The S&P 500 has risen an average 15.1% in calendar years when a Democratic president has been opposed by a Republican-controlled Congress since 1945. These are tendencies and probabilities, not guarantees.

Let’s check the economic news. The Institute for Supply Management’s nonmanufacturing index dropped to 57.1% from 58.6% in September. New orders fell 1.9 points to 59.1% and production slipped 2.9 points to 60%. Yet the employment gauge, a sign of hiring intentions, rose 1.1 points to 59.6%, the highest level recorded since 2005.

ADP reports private employers added 230,000 jobs in October, the most since June. The monthly government jobs report is Friday, with most estimates around 225,000 net new jobs.

Productivity rose 1.5% in the third quarter, down from 2.3% in the spring. When workers and companies produce more and more goods and services with the same amount of labor and materials, firms make bigger profits and they can offer larger pay raises. The flip side of low productivity is that it’s often the result of companies that have too few workers to meet growing demand. So it’s usually a sign to hire more workers and rely less on overtime.

Bloomberg reports that of the S&P 500 members that have reported their latest quarterly results, 82% topped profit projections, while 61% exceeded sales estimates; that’s the fastest pace of earnings beats in 4 years.

Qualcomm reported a fiscal fourth-quarter profit of $1.89 billion, or $1.11 a share, on revenue of $6.69 billion. Both revenue and earnings missed estimates.

Chrysler reported a 32% increase in net income on stronger sales of SUV’s and pickup trucks.

Tesla reported third-quarter results that topped expectations after the close, but the electric car maker lowered its delivery forecast for 2014 to 33,000 cars (it had expected to deliver 35,000 cars).

SolarCity reported a 20% rise in quarterly revenue as it added more customers. SolarCity also reported a net loss of $70 million, wider than the $37 million loss it reported a year ago.

When Alibaba Group delivered its first quarterly report as a public company, they showed earnings of $1.1 billion, or 45 cents a share, up 15% from a year earlier; those numbers excluded some $490 million in expenses from Alibaba stock given to employees as part of their compensation. This stock-based compensation expense made up the vast bulk of items excluded from Alibaba’s preferred “adjusted” profit measure.
West Texas Intermediate crude rebounded from a three-year low, climbing to $78.88 a barrel after a government report showed that US oil supplies increased less than analysts expected last week, while refineries increased operating rates.

The recent plunge in oil (today’s move excluded) is propelling shares of airlines and truckers, and that has in turn pushed the transportation index to new highs. Dow theorists will tell you that the performance of the transports often indicates the market’s next move, as they are economically sensitive stocks. With the index at a record, though, some investors are asking a simple question: Is rally in the transports simply all about oil, or are they signaling a stronger economy ahead?

The Federal Reserve unveiled a final rule today designed to prevent large financial firms from becoming so big that their failure could shake the core of the financial markets. The final rule, required by the 2010 Dodd-Frank Wall Street reform law, prohibits banks and certain large financial firms from acquiring another company if that merger would cause their liabilities to exceed 10% of the total consolidated liabilities for all financial firms. The “too big to fail” rule applies to banks and to large financial firms who are designated as “systemic” by the Financial Stability Oversight Council. Richmond President Jeffrey Lacker delivered a speech today, saying that the Bankruptcy Code must be a viable option for large complex financial institutions to end the perception that some firms are too big to fail.

FINANCIAL REVIEW

The Failure of the Holder Doctrine

Sinclair Noe — September 25, 2014

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Financial Review

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

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, March 25, 2014 - Want to Buy a Cookie?

by Sinclair Noe

Financial Review

DOW + 91 = 16,367
SPX + 8 = 1865
NAS + 7 = 4234
10 YR YLD un 2.73%
OIL - .39 = 99.21
GOLD + 2.10 = 1312.70
SILV + .07 = 20.10

According to the S&P/Case-Shiller home price report, the home price index covering 10 major US cities increased 13.5% in the year ended in January. The 20-city price index advanced 13.2% for the year. Month to month, the 20-city index dropped 0.1%; the drop is not just weather related; from December to January, prices fell in 12 of the 20 cities Case-Shiller tracks.

Taking a look at a few cities: LA was down 0.3% for the month but up 18.9% for the past year, San Diego was up 0.6% for the month and 19.4% for the year, Phoenix was down 0.3% for the month but up 13.8% for the year, San Francisco was up 0.5% for January and 23.1% for the year, the hot spot was Las Vegas up 1.1% for the month and 24.9% for the year, to lead the nation.

The Commerce Department reports new home sales dropped 3.3% from January to February to a seasonally adjusted rate of 440,000. Sales fell in all regions except the Midwest, where they jumped 36.7%. Sales dropped 15.9% month to month in the West. The national median price for a new home was $261,800 last month, up from $260,800 in January. Compared with February 2013, the median price fell 1.2%. At the current sales pace there is a 5.2 month inventory.

A recent Trulia report gauges whether home prices are over or undervalued, and where. Nationally, home prices are still undervalued by about 5%. When home prices hit their bottom at the end of 2011, national home prices were about 15% undervalued. That’s no longer the case, and in some select markets rising prices are coming unchained from their long-term fundamentals. Six of the nation’s ten most overvalued cities were in California. Trulia figures the Orange County metro area is about 16% overvalued, and Los Angeles is 13% overvalued.

The Commerce Department also reported today that nationwide personal income growth slowed to 2.6% last year from 4.3% in 2012. Personal income rose 0.3% in January from a month earlier. Residents in every state saw weaker income growth from a year earlier. The personal income report measures everything Americans receive from all sources, including wages, salaries and property income. Several factors contributed to the slower overall income growth, including the expiration of a 2% payroll tax “holiday” last year. As a result, many people received salary bonuses and personal dividends in 2012, which boosted that year’s incomes. Earnings grew in 2013 in every industry except civilians who work for the federal government. Inflation pressures remained weak over the year, with the price index for personal consumption expenditures rising only 1.1% in 2013 from 1.8% in 2012.

The Conference Board Consumer Confidence Index rose to 82.3, up from 78.3 in February. Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead, but they are feeling less optimistic about their current economic circumstances. Hope springs eternal.

Each year about this time, the Girl Scouts send forth minions to sell cookies for 7 weeks. Katie Francis, a sixth grader from Oklahoma City, set a new sales record of 18,107 boxes, topping the old record of 18,000; that works out to about 370 boxes sold per day; figure 12 hours a day, that works out to a sale every 2 minutes. Her secret to success: time, energy, and asking absolutely everyone she comes in contact with to buy cookies.

The Federal Reserve today published 11 research papers which tend to confirm information we have relayed in the past; big banks get a hidden subsidy in the form an implied bailout, or the idea they are too big to fail. The new research focuses on the primary bond market where banks sell their new debt to investors, instead of measuring the taxpayer subsidy through bank bond “spreads” in the secondary market. And the new research only covers up to 2009, so things may have changed a bit, but the biggest US banks enjoyed an extra $60 million to $80 million of cost savings per average new bond sale over their smaller competitors.

Fed staff wrote in one paper that a greater likelihood of government support leads to more risk-taking at big banks, including impaired lending and net charge-offs. Regulators have shied away from suggestions that they should break up banks, pointing instead to the new rules that require banks to reduce leverage, maintain a supply of assets they could sell quickly, and stop making risky trades with their own money. Officials say they also have made strides to ensure regulators are equipped to resolve big banks in a crisis rather than bail them out.

The Murdoch Street Journal is reporting the SEC is investigating whether a boom in complex new bond deals is being used to hide certain illegal risks. A number of likely cases are in the pipeline. Separately, the government has expanded an inquiry into how Wall Street banks may have been cheating their clients by mispricing certain bond deals.

If you are still trying to figure out what Bitcoin is, you are not alone, but the IRS thinks they have figured it out; it is not legal tender in any jurisdiction; it is property and should be taxed as such. That means that employers who choose to pay wages in Bitcoins will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes. And the same goes for profits on the sale of Bitcoins, at least the Bitcoins that aren’t lost in the digital wallets of Mt. Gox.

Another study says that you should pay closer attention to annual shareholder meetings, and maybe the most important thing to watch is where the meeting is held. Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter; the more surprising the location, the worse the news, and the harder the company's stock price falls. It’s not a hard and fast rule, just a general indicator.

Global markets have been increasingly concerned about the impact of slowing economic growth on Chinese financial institutions. Apparently the locals are also nervous. Hundreds of Chinese citizens had an old fashion run on the banks, trying to withdraw cash from branches of 2 small Chinese banks in the Jiangsu province after rumors spread about the solvency of one of them.

The Houston Shipping Channel remains closed today because of a weekend oil spill. The closure from this weekend has delayed shipments of crude and refined products in and out of the channel. Roughly 11% of the US refining capacity is transported through the channel. The incident was coincidentally timed around the 25th anniversary of the Exxon Valdez disaster. If the closure lasts much longer, refiners will begin to miss scheduled deliveries and companies expected to have product to load and offload may have to declare force majeure. You know what happens to oil and gas prices if that occurs and continues.

The White House and the House Intelligence Committee have leaked separate proposals that are supposedly aimed at ending the mass collection of Americans’ phone records. The full draft of the House bill is not yet available but it is tentatively named the “End Bulk Collection Act. The plan would have telephone companies hold on to phone data and the government could search data from those companies based on "reasonable articulable suspicion" that someone is an agent of a foreign power, associated with an agent of a foreign power, or "in contact with, or known to, a suspected agent of a foreign power". The NSA’s current phone records program is restricted to a reasonable articulable suspicion of terrorism.

A judge would reportedly not have to approve the collection beforehand, and the language suggests the government could obtain the phone records on citizens at least two “hops” away from the suspect, meaning if you talked to someone who talked to a suspect, your records could be searched by the NSA. A report in The Guardian says that coupled with the expanded “foreign power” language, this kind of law coming out of Congress could, arguably, allow the NSA to analyze more data of innocent Americans than it could before.

The New York Times reports the White House proposal would supposedly end the collection of phone records by the NSA, without requiring a new data retention mandate for the phone companies, while restricting analysis to the current rules around terrorism and, importantly, still requiring a judge to sign off on each phone-record search made to the phone companies.

We still don’t know what would happen to other types of bulk data collection, such as internet and financial records. Also, the NSA has been collecting phone data on people up to three hops away from a suspect so long as it had “reasonable articulable suspicion” that the suspect was involved in terrorism; then they hold that bulk data, dumping it into something they call a “corporate store” where they feel free to conduct further analysis even if they don’t have “reasonable articulable suspicion”.

The existence of the NSA program was disclosed and then declassified last year following leaks by Edward Snowden, the former NSA contractor. The current court order authorizing the collection of data is set to expire on Friday. The FISA court is expected to renew authorization for at least 90 days while changes are considered. The government has been unable to point to any thwarted terrorist attacks that would have been carried out if the program had not existed, but has argued that it is a useful tool.