Financial Review

An Imperfect Circle

Sinclair Noe — March 14, 2016

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DOW + 15 = 17,229
SPX – 2 = 2019
NAS + 1 = 4750
10 Y – .02 = 1.96%
OIL – 1.15 = 37.35
GOLD – 15.10 = 1236.00

No economic reports scheduled for this morning but the remainder of the week will be busy. The Fed FOMC will release their economic forecast along with their policy statement on Wednesday. One area of near-unanimous agreement is that the Fed will not raise rates this week. Instead, we will look at the FOMC’s economic forecast and the language they use in their statement. Also on the calendar: February retail sales, Housing Starts, Industrial Production, Job Openings, Philly Fed, Consumer Sentiment Index, and the Commerce Department’s current account for the fourth quarter. The reports could shed more light on the health of the U.S. economy and the future path of monetary policy.

Morgan Stanley strategists are growing increasingly concerned about the risk of a global recession, slashing forecasts for all major equity markets and advising investors to sell stocks that have recently rallied. They also cut bond yield forecasts for 2016, saying the U.S. central bank will wait until December before raising interest rates. According to the company report, Treasury 10-year yields might fall to 1.45% by the end of September, analysts wrote, approaching the record low of 1.38% set in 2012. They also warned that a slowing global economy and high production would prevent any sharp rises in oil prices. For 2016, Morgan Stanley now sees the US economy growing by 1.7%, down from a previous forecast of 1.9%. The Eurozone is expected to grow by 1.5%, down from 1.8%, while the outlook for emerging-market economies was cut to 4% from 4.4%.

If you don’t like that analysis, Goldman Sachs issued a report saying they think the Fed will hike rates in June, and an April rate increase is still on the table, even if it rattles financial markets. Goldman analysts say it is more important for policymakers to assure a smooth landing for the economy rather than a steady stock market.

The Bank of Japan’s policy board is set to discuss this week whether to exempt $90 billion in short-term funds from its newly imposed negative interest rate, after the securities industry warned that investment money would be driven into bank deposits. China’s central bank won’t resort to excessive stimulus to bolster growth but will keep a flexible stance in the event of an economic shock – domestic or global. The PBOC cut interest rates six times since November 2014 and reduced the amount of cash that commercial lenders must hold as reserves. Both the Swiss National Bank and Bank of England opine on Thursday

Next weekend’s oil talks may be in jeopardy after Iran’s Oil Minister said his country won’t join a group production freeze until it doubles its post-sanctions output. Iran said they would only join the output freeze group once they reached production of 4 million barrels a day. In a sign that investors are growing more skeptical about a rebound in oil prices, ICE data showed on Monday that speculators had cut net long positions in Brent crude by 9,500 contracts in the week to March 8.

For now, share buybacks continue to prop up the stock market. Mutual fund and exchange traded fund investors have been selling – pulling out $40 billion since January and on pace for $60 billion, one of the biggest quarterly withdrawals ever. On the flip side, S&P 500 Index companies are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. Of course, buybacks can get dangerous, especially when companies take on debt to buy their shares. And you have to wonder how far this extreme can go.

More than three million people marched through cities across Brazil on Sunday to protest political corruption, a weak economy, and to call for the impeachment of President Dilma Rousseff, in a showing that could accelerate efforts to remove her from office. The demonstration in Sao Paulo was the largest ever recorded by polling firm Datafolha. Brazilians demonstrated peacefully for Rousseff’s ouster, expressing their support for the anti-corruption blitz that has put several high-profile executives and politicians behind bars.

In late 2010, in the waning months of the Financial Crisis Inquiry Commission, the panel responsible for determining who and what caused the financial meltdown that lead to the worst recession in decades voted to refer Robert Rubin to the Department of Justice for investigation. The panel stated it believed Rubin, a former U.S. Treasury Secretary who has held top roles at Goldman Sachs and later Citigroup, “may have violated the laws of the United States in relation to the financial crisis.” Rubin, the commission alleged, along with some other members of Citi’s top management, may have been “culpable” for misleading Citi’s investors and the market by hiding the extent of the bank’s subprime exposure, stating at one point that it was 76% lower than what it actually was.

No government action was ever brought against Rubin. And there is no evidence that Department of Justice acted on the crisis commission’s recommendations. A source close to Rubin says the former Wall Street executive was never contacted by the Justice Department in relation to the commission’s allegations. And it wasn’t just Rubin and a few executives at Citi, the FCIC referred several cases to the Department of Justice and, as we all know, nothing happened. The bankers were never jailed, never indicted. A few fines were paid, but that mainly came from shareholders. No major Wall Street figure was ever prosecuted for crimes related to the financial crisis.

On Friday, the National Archives released the previously unreleased documents from the Financial Crisis Inquiry Commission, including minutes of meetings and transcripts of interviews. The FCIC investigations included some pretty clear evidence for fraud and other criminal acts; the cases were referred to the Department of Justice; nothing was done. Why didn’t the DOJ act? They won’t say. None of this is surprising but it is a well-documented and devastating indictment of how the banksters have corrupted the justice system. And sadly, that is the only kind of indictment we will ever see.

Plaintiffs suing General Motors over a faulty ignition switch will get two chances in a Manhattan court this week to argue that the U.S. automaker should be held accountable for injuries, deaths and lost vehicle value. Jury selection begins later today in the second trial involving a car accident allegedly caused by GM’s defective device (a first trial ended in January following claims of misleading testimony). In the same courthouse tomorrow, plaintiffs suing over lost vehicle value and accidents that occurred before GM’s 2009 bankruptcy will seek to reverse last year’s court decisions that freed “New GM” from several liabilities.

Starwood Hotels & Resorts Worldwide received a buyout offer from a consortium led by China’s Anbang Insurance Group, possibly derailing the company’s planned takeover by rival Marriott International. The offer of $76 per share in cash values Starwood at $12.8 billion. Marriott said it remained committed to its offer for Starwood, which would create the world’s largest hotel chain with top brands including Sheraton, Ritz Carlton and the Autograph Collection. Marriott’s offer of $72.08 per share in stock and cash valued Starwood at $12.18 billion on Nov. 16. That offer is now worth about $11 billion as Marriott shares have dropped 6.5 percent since.

Private equity firm Apollo Global Management is nearing a deal to acquire The Fresh Market, Inc. for $28.50 per share in cash, or more than $1.3 billion, in a move that could derail bids from Kroger, KKR, and TPG Capital. An agreement could be announced as early as today, but a deal has not yet been finalized and was still possible to be amended or fall apart at the last minute.

AlphaGo, Google’s Go-playing computer, took a 3-0 lead on Saturday against one of the world’s top players, clinching the five game series. “I am very sorry for the powerless display,” Lee Sedol told reporters in Seoul. “I have never felt before such severe pressure as I do now, and I suppose my abilities were a bit lacking to overcome that.” Lee struck back to win game four against AlphaGo on Sunday. The fifth match will take place tomorrow.

The annual Game Developers Conference kicks off today in San Francisco, where more than 26K people from around the globe will congregate for a five-day gathering focused on augmented- and virtual-reality. According to Digi-Capital, investors in 2016 have already have pumped $1.1 billion into the technologies, more than the total for any prior year. Researchers at Gartner estimate nearly 40 million headsets will be sold world-wide by 2020.

Just in case you’re thinking that digital games are nothing more than games, Microsoft announced today that computer scientists and amateurs will be able to evaluate and develop artificial intelligence, or AI, software using its Minecraft virtual landscapes. Improving AI software by getting it to play video games has been done before. But Microsoft suggests the open-ended nature of Minecraft makes it particularly useful because of the huge variety of situations it can simulate from first-person perspectives.

Today is Pi Day, March 14, or 3-14, the first three digits in Pi; which refers to the ratio of a circle’s circumference to its diameter, and not a delicious desert. The diameter of a circle is the distance from edge to edge, measuring straight through the center. The circumference of a circle is the distance around. And the ratio works on any circle, big or small, which means Pi is a constant number. As an irrational and transcendental number, it will continue infinitely without repetition or pattern, except of course, that it embodies the order inherent in a perfect circle. The first 6 digits in Pi are 3.14159, and if you round that number up, you get 3.1416, which would match March 14, 2016.

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

Lather, Rinse, Repeat

Sinclair Noe — November 4, 2014

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

Financial Review

DOW + 17 = 17,383
SPX – 5 = 2012
NAS – 15 = 4623
10 YR YLD – .01 = 2.34%
OIL – 1.31 = 77.47
GOLD + 2.90 = 1169.20
SILV – .11 = 16.13

Election Day 2014! We should all be very, very happy. Forget about red and blue, we can all count our blessings because the campaign ads on radio and TV are going away. There is one redeeming thing about this whole election. It will be over in a few hours. Say hallelujah!

Or you could say that it’s amazing that anyone bothers to vote given that our choices are between tweedle dumb and tweedle dumber. Still, I went to the polls today, early, and I cast my ballot. I was the only voter voting. In a few hours we’ll get the results. And the most likely result is that not much will change, despite the drama and despite hundreds of millions to persuade you. It takes a fortune for a politician to get beat these days, but most of the money isn’t real, it’s magic money that doesn’t belong to anybody, or at least nobody is willing to admit they spend money on politics. We’ve got the best politicians money can buy.

The present split Congress is the least-productive in US history. Regardless of the election’s outcome, the 114th Congress is unlikely to be any more productive than the 113th. Maybe that’s good news; when they do something is when they become dangerous. There are plenty of issues worthy of intelligent discussion and debate, however that never seemed important in this midterm election. That we have been burden with such an abundance of bull and still survived just shows we are a super nation.

Lather, rinse, repeat.

Let’s look at the economic news.

Home prices were down slightly in September, according to Corelogic prices were down 0.1% for the month and that resulted in year to year growth of 5.6%, the slowest pace in 2 years. So, the rate of growth in home prices has clearly slowed. For Arizona, home prices are still down 30% from the peak.

New orders for US factory goods fell for the second straight month, down 0.6% in September. August’s orders were slightly revised to show a 10.0 percent fall instead of the previously reported 10.1 percent decline. The decline in orders was led by aircraft, machinery, capital goods and computers and electronic products.

Yesterday we reported that auto sales were up in the third quarter, but the car companies are calling them back faster than they can sell them. Toyota is recalling 5,850 vehicles because of a possible loss of steering control. Ford is looking at 5 recalls totaling 202,000 vehicles for a variety of issues, including an incorrect repair of a steering problem in a previous recall.

Oil futures dipped under $76 a barrel for a while today. If there was any doubt on which country Saudi Arabia was targeting with their price shattering oil production, there is not any doubt now. While Russia, Iran and Venezuela might turn out to be collateral damage in the Saudi oil production surge, the message that Saudi Arabia is trying to send is directed to the US shale producers. The Kingdom made no secret of their displeasure yesterday when they cut oil prices to US buyers while raising them for everyone else in the world. Saudi Aramco next month will sell its Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, the November discount was $1.05 yet it lowered prices for all grades to the US.

The plan is to maintain market share in the US and bury the US energy producers. The Saudis fear predictions that US oil imports could fall to zero by 2037 as a reason they need to nip US oil producers in the bud. They are threatened by US oil production and they are acting to try to break the US producers back. That is one of the reasons todays balance of trade numbers weren’t much higher, even in the face of a strong dollar. The US not only has reduced oil imports but has become a major exporter of oil products.

The nation’s trade deficit increased 7.6% in September to the highest level since the late spring as exports to Europe, China and Japan all fell. In turn, this will likely lead to a lower revision of third quarter GDP; probably a drop from the 3.5% initial estimate, down to about 3%. In September, the trade gap climbed to a seasonally adjusted $43 billion from a slightly revised $40 billion in August. Yet if petroleum is excluded, the nation’s trade gap climbed to $47.2 billion in September to mark the highest level in seven years. Here’s the downside of a strong dollar: US exports of goods fell 3.2% with China, 6.5% with the European Union and 14.7% with Japan.

It’s not just a strong dollar but a combination of weak global economies. Today the European Commission said the Eurozone will need another year to reach even a modest level of economic growth. The new forecast calls for 0.8% growth across the Eurozone economy this year, and just 1.1% growth next year.

The Independent Evaluation Office of the International Monetary Fund issued a report that basically says the IMF did a poor job responding to the financial crisis; the IMF ignored its own research and pushed too early for richer countries to trim budgets. They admit the IMF was overly concerned about high debt levels and large fiscal deficits, and urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis.

The European Central Bank meets Thursday to try and figure out their next course of action.

Lather, rinse, repeat.

While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks.

Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth, as in the case of Britain from 2010 to 2012, Japan this year and the United States after the 2013 “sequester” and fiscal cliff deal. In more extreme cases, such as Italy and Spain, fiscal tightening has plunged them back into deep recession and aggravated financial crises. Meanwhile countries that ignored their deficit problems, as in the United States for most of the post-crisis period, or where governments decided to downplay their fiscal tightening plans, as in Britain this year or Japan in 2013, have generally done better, both in terms of economics and finance.

When faced with private sector deleveraging, there are limits to the persuasive powers of low interest rates to revive private economic activity; low rates may help in an inflationary environment, but in a deflationary environment, spending is needed to stimulate demand. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening. As a result, any reduction in budget deficits becomes more and more deflationary. The flip side is that fiscal expansion could truly provide economic stimulus without the worry of interest rate increases. That doesn’t mean that we will see fiscal expansion to correct the problem, just because there is indisputable mathematics to support it.

Lather, rinse, repeat.

JPMorgan Chase has added $2.4 billion to its estimate of the amount of legal costs it may face. That figure was disclosed yesterday in a securities filing in which the bank also formally acknowledged that it was facing a criminal investigation by the Justice Department into the behavior of traders in the foreign exchange market. In the past few days, Citigroup, Royal Bank of Scotland, HSBC, and Barclays all announced new reserves totaling more than $2.3 billion to deal with investigations into foreign exchange rate manipulation. Deutsche Bank added more than $1 billion to legal reserves for the expected cost of settlements. The cases involve collusion in the $5.3 trillion daily foreign exchange market to affect rates.

If it sounds familiar, well that is because we have seen settlements like this before. In 2012 Barclays and UBS entered deals to pay fines totaling almost $2 billion; a UBS subsidiary pleaded guilty to rigging Libor. The prosecutors and regulators probably thought the agreements would deter further bad behavior. The deals involved non-prosecution or deferred prosecution agreements. The agreements allow the Justice Department to reinstate charges if there is any future violation of the law. Most important, admissions by the bank as part of the settlement can be used against it as evidence later, essentially stripping the bank of any possible defenses if the case were to proceed further. There is little chance, then, that a bank could fight the charges, so it would have to agree to a new settlement with more onerous terms and a new penalty.

But it turns out that simply slapping the banks with more and bigger fines, does not deter future bad behavior. The government is not required to minimize the collateral consequences of a conviction, and individuals are usually required to fend for themselves if they are convicted of a crime. But the foreign exchange inquiry involves a number of leading global banks, each with thousands of employees worldwide. So federal prosecutors go for punishment that does not threaten the continued existence of one of the banks. In other words, punishment that doesn’t actually punish.

The government has imposed billions of dollars in fines over the past few years for corporate violations, part of an effort to show that no company is “too big to jail”, while steadfastly refusing to actually jail a bank or major bank executives for criminal violations.

Lather, rinse, repeat.

Monday, May 19, 2014 - Still Too Big to Jail

Financial Review with Sinclair Noe

DOW + 20 = 16511
SPX + 7 = 1885
NAS + 35 = 4125
10 YR YLD + .02 = 2.54%
OIL + .58 = 102.16
GOLD - .10 = 1293.60
SILV - .01 = 19.44

Merger Mania Monday. Late yesterday, AT&T announced an offer to buy DirecTV for $48 billion, or $95 per share. The combined AT&T-DirecTV would serve 26 million customers; that would make it the second-largest pay TV operator behind a combined Comcast-Time Warner Cable, which would serve 30 million under a $45 billion merger proposed in February. The Comcast deal still faces regulatory hurdles.

AT&T and DirecTV promised consumer benefits like more economical bundles that tie mobile phone, pay TV and Internet service together on a single bill. The deal could face regulatory scrutiny from the Federal Communications Commission and Department of Justice. Unlike the cable company tie-up, the AT&T-DirecTV merger would effectively cut the number of video providers from four to three for about 25% of US households. That's a situation that could result in higher prices for consumers and usually gives regulators cause for concern.

The value that DirecTV offers that no other national TV provider offers is a special deal for football fans; for $240 to $330 you can buy a special package that gets you all the NFL football games, including your hometown favorite no matter where you live. That’s why DirecTV paid an estimated $4 billion to the NFL for the latest Sunday Ticket contract; that deal expires at the end of the upcoming NFL season. If the Sunday Ticket arrangement were not to be extended, AT&T would reportedly have a legal out, according to terms of the takeover.

Part of the value of DirecTV is what it isn’t. DirecTV does not offer fixed-line or mobile Internet service, and its rights to airwave frequencies for satellite TV are not the kind that AT&T can use to improve its mobile phone network. If AT&T can convert DirecTV’s customers into high-speed Internet subscribers, they could have 25% of all pay TV subscribers and then two companies would control 55% to 60% of all Internet subscriptions in the US.

The board of AstraZeneca has rejected the improved, and apparently final $119 billion takeover offer from US drugmaker Pfizer. Pfizer, which is the world's second-biggest drugmaker by revenue, has been courting No. 8 AstraZeneca since January. Yesterday, Pfizer raised the offer 15% to $119 billion; that would be the richest acquisition ever among drugmakers and the third-biggest in any industry. AstraZeneca didn't take long to reject the new offer, its board arguing Pfizer is making "an opportunistic attempt to acquire a transformed AstraZeneca, without reflecting the value of its exciting pipeline" of experimental drugs.

Pfizer's offer comes amid a surge of other deals among drugmakers. Those deals include Switzerland's Novartis agreeing to buy GlaxoSmithKline's cancer-drug business for up to $16 billion, to sell most of its vaccines business to GSK for $7.1 billion, plus royalties, and to sell its animal health division to Eli Lilly for about $5.4 billion. Canada's Valeant Pharmaceuticals has also made an unsolicited offer of nearly $46 billion for Botox maker Allergan, which has turned it down, so far.

Law enforcement agents have arrested more than 90 hackers accused of infecting more than half-a-million computers worldwide with malicious snooping software. The suspects were charged with developing, selling and marketing a remote access tool, or “RAT,” that allowed users to infiltrate computers, view files and steal personal data from unwitting victims. Talk about creepy; the malware could even take over your webcam and take pictures and videos of you. The original creator of the software, who founded an organization called “Blackshades,” was arrested in June 2012, but investigators said an international ring of hackers continued to sell and disseminate the software after his arrest, reaching thousands of people in more than 100 countries; 19 countries participated in the arrests, and more than 300 searches had been conducted in what law enforcers described as one of the largest cybersecurity operations in history.

The United States charged five Chinese government officials with allegedly orchestrating cyber-attacks against six major American companies. It marks the first time the US has formally charged foreign government officials for explicitly acting at the behest of a foreign government in cyber-crimes. The companies targeted by hackers were Alcoa, Westinghouse, Allegheny Technologies, US Steel, United Steelworkers Union, and Solar World.

Attorney General Eric Holder said: “In some cases, they stole trade secrets that would have been particularly beneficial to Chinese companies at the time they were stolen. In others, they stole sensitive, internal communications that would provide a competitor, or adversary in litigation, with insight into the strategy and vulnerabilities of the American entity. In sum, the alleged hacking appears to have been conducted for no reason other than to advantage state-owned companies and other interests in China, at the expense of businesses here in the United States.”

The Justice Department has criminally charged Credit Suisse AG and two of its units with conspiring to willfully help Americans evade taxes. A Virginia federal court filing accuses Credit Suisse of conspiring to in part "advise the preparation and presentation of false income tax returns and other documents to the Internal Revenue Service.'' The four-page criminal information charges the bank with "assisting clients in using sham entities'' as the purported owners of secret offshore accounts and "soliciting IRS forms that falsely stated under penalties of perjury that the sham entities … owned the assets in the accounts.''

The criminal case follows a Senate subcommittee investigation that found the bank provided accounts in Switzerland for more than 22,000 US clients totaling $10 billion to $12 billion. The report said Credit Suisse sent Swiss bankers to recruit American clients at golf tournaments and other events, encouraged US customers to travel to Switzerland and actively helped them hide their assets.

Credit Suisse has apparently agreed as part of a settlement to plead to one count of conspiring to aid tax evasion. It would mark the first time in more than 20 years that a major bank has plead guilty to criminal wrongdoing. But make no mistake, this was a negotiated guilty plea that does not bear the consequences of criminal guilt. Credit Suisse will pay about $2.6 billion in penalties and hire an independent monitor for up to two years, which sounds exactly like a civil penalty. Recognizing that criminal charges could prompt regulators to revoke a bank’s license to operate, the corporate equivalent of the death penalty, prosecutors met with regulators to discuss punishing Credit Suisse without putting it out of business and imperiling the economy. The biggest challenge facing Credit Suisse could be that some of its own clients, such as pension funds, have internal requirements that prohibit them from doing business with an entity that has pleaded guilty to a crime.

Otherwise, this amounts to another slap on the wrist. The CEO and Chairman keep their positions. Credit Suisse will admit to a statement of facts that shows the U.S. tax evasion was widely fostered by the bank, the people said. The firm won’t have to disclose the names of US account holders under terms of the agreement.

The Credit Suisse plea won’t be the last. BNP Paribas is expected to plead guilty in coming weeks to doing business with countries like Sudan and Iran that the United States has blacklisted; BNP is also expected to pay more than $5 billion in fines. And eventually, we could see criminal charges brought against American banks such as JPMorgan and Citigroup, which are the subjects of criminal investigations, but those inquiries are at an earlier stage and it is unclear whether they would result in criminal charges. The Justice Department's highest-profile settlement over sales of risky mortgage securities in the run-up to the financial crisis — the $13 billion deal among the department, state regulators and JPMorgan Chase — was a civil case, and no bank executives were charged. Federal prosecutors in California have been conducting a related criminal investigation.

So for now we have a new strategy for controlling the illegality of the big banks: charge them with criminal activity and punish them with civil penalties. So what we have, in the end, seems to be a version of the anemic civil settlements and deferred-prosecution agreements that banks always get when they commit crimes. As usual, it is little more than the cost of doing business. Eric Holder can say that no bank is too big to jail, but then he folds like a tortilla when it comes to pursuing criminal charges that actually carry criminal penalties. For now, the government's message to banks remains the same: Go ahead and break the law. If worse comes to worst, your low-level bankers will take the fall, and your shareholders will pick up the tab.

Monday, May 05, 2014 - Riggers’ Propaganda

Financial Review with Sinclair Noe

DOW + 17 = 16,530
SPX + 3 = 1884
NAS + 14 = 4138
10 YR YLD + .02 = 2.61%
OIL - .38 = 99.38
GOLD + 9.10 = 1310.70
SILV + .13 = 19.69

Last week we told you about prosecutors and regulators preparing to criminally prosecute Credit Suisse and maybe BNP Paribas, and the slap on the wrist enforcement efforts of the past decade, and especially under the mis-guidance of Attorney General Eric Holder’s “Too Big to Jail” policy. The Swiss finance minister met Holder on Friday to discuss a US probe into Swiss banks that allegedly helped Americans evade US taxes, which includes Credit Suisse. Today, Holder posted a video on the Justice Department website saying that the DOJ is pursuing criminal investigations of financial institutions that could result in action in the coming weeks and months, and adding that no company was “too big to jail.”

A criminal conviction of an entity regulated in the United States could lead authorities to potentially revoke a charter, essentially a death sentence for a bank. In his video, Holder said prosecutors are working closely with regulators to address the issues before taking action, "Rather than wall off banks from prosecution, the potential for such severe consequences simply means that federal prosecutors conducting these investigations must go the extra mile to coordinate closely with the regulators that oversee these institutions' day-to-day operations."

It’s starting to sound like Holder is going after criminal charges without the consequences of criminal charges; maybe he can collect a slightly bigger fine, but still leave the bank charter in place. Otherwise, this is a big pile of baloney. And the proof will be in the putting. Until we see a banker jailed and a charter revoked, AG Holder is just spouting propaganda.

The propaganda mill is spinning fast in Washington DC these days. Securities and Exchange Commission Chair Mary Jo White flatly rejected claims that retail investors are being fleeced by high-frequency traders who can use their speed to jump ahead with buy and sell orders that fetch better prices.

White told a US House of Representatives panel last week, "The markets are not rigged." White reiterated that her agency's investigators are actively pursuing probes into high-speed traders and dark pools, or anonymous trading venues, but she also sought to dispel the notion that using high-speed technologies to trade ahead of others using stock quotes disseminated on public data feeds could meet the legal definition of "unlawful insider trading." She acknowledged at one point that the market is not "perfect" and told lawmakers that the agency's "data-driven" review of market structure issues surrounding areas such as order types, dark pool trading and data feeds was still ongoing. Even though the SEC has not concluded or barely even launched the investigation, White already knows the facts, saying: "I want to be very clear that the market metrics suggest that the retail investor is very well-served by the current market structure."

The rather unusual reason why SEC Chair White and Congress are suddenly concerned about rigged markets is because of Michael Lewis' latest book Flash Boys and HFT (high-frequency trading) and whether the markets are manipulated. What they're not talking about is how the markets have been set up for institutionalized rigging. And they are rigged; have been for a long time.

It goes back to the time when the NYSE was the only game in town, and prices were quoted in fractions: a half, a quarter, an eighth. Buyers and sellers of listed shares used brokers to send orders to the NYSE Floor for execution. On the Floor, "specialists" are in charge of every stock. Their job was, and still is, to match up buyers and sellers and "keep a fair and orderly market" as they facilitate "price discovery."

The specialist used to see all orders for the stocks they were in charge of because all orders had to come to them. Besides matching up buyers and sellers, specialists can also trade for their own account. That means they can try and make money trading the stocks where they are specialists. Here's how the specialist makes real money, besides getting paid a small fee for matching up orders.

The key to being the specialist is seeing all the order flow. Because specialists have knowledge of who is buying, who wants to buy and how much and at what prices, and the same is true for knowing the sell side, the specialist essentially gets to trade on inside information. The specialist could raise the bid if he wanted to buy stock because he knew there were more buy orders coming into his book, and if he was right and the stock moved higher, he could sell his position for a nice profit.

And that is pretty much how the system works today. Eventually, investors grew weary of having the specialists slice off profits on insider information. Even though we got rid of the fractional system, we still have the insiders slicing off small profits on each trade. Now the Nasdaq doesn’t have a specialist system because there is no central trading floor where dealers meet and call out prices, but in the automated, cyberspace world, each dealer is his own specialist.

Eventually, electronic communications networks (ECNs) sprang up. ECNs were and still are networks where dealers who weren't part of Nasdaq could place their quotes and buy and sell with each other. From there it wasn't long before Nasdaq dealers wanted to get onto all the ECNs and demands were made to trade NYSE and AMEX stocks on the computer networks. That's how technology changed the old specialist system into a mass of different trading venues that now includes entirely new exchanges like BATS, and dark pools where banks and crossing services trade for clients demanding anonymity.

The problem now is that there is no longer any one central place where all orders go to be executed. Orders are spread around based on cost, and services, and, most importantly, "payment for order flow." So, now the online brokerage firms like Schwabb, and Etrade, and whoever, don’t have their own traders to execute trades and they don’t have their own trading desks, so they have to route those orders to an exchange or a couple of exchanges to match up buyers and sellers. In order for exchanges and networks that offer execution of orders to be successful, they have to have orders coming in so they can match up buyers and sellers. Otherwise, if there aren't enough orders to allow matching of buyers and sellers at prices where customers want to transact, that exchange would have no "liquidity" and it would lose business.

So how do all these competing exchanges get orders? They pay for them. They pay Schwab, and Ameritrade and Scottrade for their "order flow." That's right; your order at your discount brokerage is sold to someone so it can be traded on their exchange. Who gets paid for your order? Not you. Your brokerage gets paid.

So, after the switch to decimalization in 2001, we had the rise of the market makers. Market makers are the same as specialists, except they are mini-specialists in the stocks they trade electronically for their broker-dealer or bank trading desk who trade on Nasdaq or on the ECNs or anywhere where an intermediary can interpose himself into a trade, and they will impose their trade ahead of your trade. That’s why they buy order flow, so they can create an internal “book” so they can have their own inside information on the order flow, so they can trade against it, or sell it to other traders.

HFT operators are looking at all the order flow going into all the different exchanges and trading venues they can peer into. They look into the total flow of orders, which no single exchange can see, and with their empirically modeled time sequencing of orders, spreads, and depth that they run through reinforcement learning algorithms, they come up with a trade that steps in to buy or sell shares before someone who intended to transact there gets a chance to.

Speed is critical to high-frequency trading. Exchanges rent HFT shops space next to their servers (co-location) so they get their data faster than everyone else. That's legal. They couldn't do it if there weren't so many exchanges and trading venues competing for orders. You can thank the SEC for making that a reality without sensible limits. They couldn't do it if there was no such thing as payment for order flow; yes, they get paid for their order flow too. You can thank the SEC for allowing that neat little scheme.  HFT shops can buy and sell at the same price (that's a zero profit or loss), but because they provided some venue "liquidity" by sending their super-fast order there to be executed, they get paid. That's not arbitrage in the traditional sense; that's just playing the game. They couldn't do it if they didn't have all the information at the speed they get it at from the exchanges the SEC regulates.

And so you pay whenever you make a trade; you lose about a penny per share, sometimes more, and you’re expected to accept this little slice in the name of liquidity, but it isn’t really liquidity, it’s really just volume. High-frequency trading has nothing to do with what liquidity is, what liquidity means to the market. Volume is not liquidity.

Everything is usually fine when markets are moving up or are relatively stable. We won't really notice HFT. But, in a wicked downdraft, when HFT players turn off their computers, we will see that there are no bids on any specialists' books or parked with market makers. There will be no stopping stocks from falling for that reason. We saw it in the May 2010 flash crash. That's what HFT has done to the market. It has made it a dark pool, and a dark pool is not required to yell out a price like the old-school specialists; instead prices come in at a more leisurely pace, when it suits the ECNs, after they scalped their share. What this means is that we don’t really know what the price is, and you can’t have a market without prices, which means one day we could have a catastrophic market failure; despite the propaganda otherwise.