FINANCIAL REVIEW

Forget Complacency

Sinclair Noe — October 13, 2014

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Financial Review

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DOW – 223 = 16,321
SPX – 31 = 1874
NAS – 62 = 4213
10 YR YLD closed 2.28%
OIL – .69 = 85.05
GOLD + 14.10 = 1238.10
SILV + .10 = 17.60

The major indices were up and then down; small moves earlier in the session; then, in the final hour stocks slipped and kept falling. The S&P 500 has fallen 6.8 percent from its Sept. 18 record, making this the worst pullback in two-and-a-half years. The Russell 2000 sank 4.7 percent last week. The small-cap index entered a correction after sliding more than 10 percent from an all-time high in March. The Dow Jones Industrial Average has dropped 5.5 percent from its record last month, while the Nasdaq Composite Index has slumped 8.3 percent from a 14-year high reached in September. The Volatility Index, or VIX, rose 13 percent today to 24, the highest level since June 2012. Forget complacency.

The final hour collapse coincided with a report that an Emirates Airline plane in Boston was surrounded by medical crews and they removed five passengers over concerns about Ebola. But there is more to today’s trading than an Ebola scare.

Oil prices continued to slide. Saudi Arabia is saying they are comfortable with oil prices in the sub-$90 range. The Saudis don’t necessarily want prices to slide further, but they are unwilling to shoulder production cuts unilaterally and they are prepared to tolerate lower prices until others in OPEC commit to action, and that probably won’t happen until oil hits $80.

Commodities have taken a beating recently, and it’s not just oil. Coal stocks were trashed last week when China announced that it would reinstate tariffs on certain types of imported coal that were scrapped a decade ago. The tariffs threaten to slash coal imports and boost China’s domestic coal industry.

And if you don’t like fundamental explanations and if you don’t buy exogenous events, you can just look at the charts; the technicals are breaking down. If you look at the Dow Industrials, you will probably see a rising wedge pattern. Let me explain; if you print out a chart for 2014, and draw a straight line across the tops (that’s your upper resistance line) and another straight line across the lows (that’s your lower support line), you will have a wedge that start out wide in January and narrows; until the past couple of days, where the Dow dropped below that lower support line. A rising wedge formation is pretty bearish. The next levels of support come in at 16,025 and then at 15,370. Last week, the Dow dropped below the 200 day moving average and we did not get a bounce today; that would be considered bearish.

The S&P 500 broke down below the 200 day moving average, which is your primary trend line. While it is possible to see a bounce, I don’t know that you want to hold your breath. You might think the S&P is oversold and a bounce is in order, but that doesn’t guarantee anything. The only positive is that today was a fairly light volume day, because of the Columbus Day holiday, which isn’t much of a holiday. The next levels of support for the S&P are around 1815 and then at 1740.

Sell-offs are always brutal and this past week is no exception. There are many things to cause concern but it seems the biggest red flag is the warning of a global depression, complete with deflation in the Eurozone. Over the weekend, Federal Reserve Vice Chairman Stanley Fischer and Chicago Fed President Charles Evans said, in essence that the Fed was in no hurry to raise rates and might be very patient and might wait a bit because of concerns about slow global growth. The International Monetary Fund cut its forecast for global growth last week and said the euro area faces the risk of a triple dip recession.

The catalyst last week looks to be the weak economic numbers coming out of Germany. One reason Germany had such bad export figures is because of the sanctions imposed on Russia, a major trade partner. And so now Germany will have to make a move, and the longer Germany waits to take fiscal action, the more the entire Eurozone will slip into Japanese style deflation, and that won’t just be the peripheral countries, but it will affect Germany as well. The thinking is that Germany would stick with the failed idea of austerity until the German economy contracts; that is now happening; plus we might hear tomorrow that Germany will cut its forecast for this year and next year, and it might be a sharp cut from the already weak 1.8% growth projections; plus, Germany in a weakened economic position actually serves the ECB’s interests. And today we are getting a test of German resolve for austerity.

It comes from France. Eurozone finance ministers are trying to avoid a clash with France, which must formally submit its budget for scrutiny by the European Union authorities. The French government has recently announced a “no austerity” budget for 2015, even if that means missing the EU mandated deficit target by a wide margin. Over the next couple of weeks France will likely make its case that a weak economy, including the threat of deflation is creating exceptional challenges.

We are seeing that monetary policy is getting worn out. The publication of the FOMC minutes last week managed to pump up the equity markets for one day, then the bloodletting continued. The ECB also tried to goose markets, and failed miserably. And so the markets have swooned, and investors have turned their back on the “buy the dip” mantra of the past couple of years. For the past few years, QE and ZIRP managed to pump up stocks and junk bond funds and asset backed securities and housing and whatever the Fed was selling, but at a certain point they seem to have run out of buyers.

It’s time now for today’s edition of “Banks Behaving Badly”. Today’s bankster is the Royal Bank of Canada, and specifically the investment banking arm, RBC Capital Markets. Today’s story is a familiar story of conflict of interest and playing clients against each other. While advising the ambulance operator Rural/Metro on its $440 million sale in 2011, RBC was also pitching to finance the buyer, the private equity firm Warburg Pincus. The lure of loan and advisory fees and the potential for promoting the transaction to win similar clients led the bank to advocate a lowball offer. A judge in Delaware has ruled that Rural/Metro shareholders deserve an extra $76 million. The theory behind the fine is that the adviser aided and abetted the board’s breach of a duty to shareholders.

This is not the first example of conflict of interest and breach of fiduciary duty. Barclays Bank had a conflict advising Del Monte on a sale while also financing the buyers. In 2011, the bank and Del Monte paid some $90 million to settle. And in 2012, Goldman returned its $20 million fee for helping pipeline operator El Paso sell itself to Kinder Morgan. Turns out Goldman owned a $4 billion stake in the buyer. In the case of RBC, a $76 million dollar fine is small potatoes, but it is a stain on reputation and a warning to companies in the future to demand transparency.

Meanwhile, the data breach at JPMorgan finally caused Jamie Dimon to wake up from his London Whale induced slumber (he was napping at the time) and he now realizes the bank needs help. JPMorgan will spend $250 million a year to increase security and prevent future breaches. He also pointed out that JPMorgan was not the only bank to have this problem.

There were no domestic economic reports today due to Columbus Day. This week’s economic calendar includes a report on Retail Sales on Wednesday, also the Fed will publish its Beige Book; Friday brings a report on housing starts and consumer sentiment. Also, earnings season kicks into gear.

Jean Tirole, a French economist, has won the 2014 Nobel in economic science for his work on the best way to regulate large, powerful firms in industries including banking and communications. Tirole has called for increased regulation of the banking industry. In an interview broadcast after the announcement, he applauded new liquidity regulations and said that governments needed to pay particular attention to the connections between regulated banks and unregulated parts of the financial system.

In an interview with Bloomberg Television, Tirole said that banks receiving government support should face tougher rules; calling for strong rules “to prevent banks from gambling with taxpayers’ money,” adding that “if they are to be bailed out, they have to be regulated”.

Tirole has done work on many, many areas of the market, yet one of the concerns is the idea of monopolistic power. The government worries mainly about “horizontal” mergers in which one company buys another that does the same thing. But there’s also risk in vertical combinations. A monopolist in one part of the production chain; such as a computer operating system, might be able to extend its market power to neighboring links on the chain.

The Chicago School of antitrust economics, personified by the likes of failed Supreme Court nominee Robert Bork, argued in the 1970s and 1980s that attempts to extend a monopoly “vertically” would be irrational because a company could get all the benefits of its market power without merging with one of its customers or suppliers. The Chicago School’s theory was so influential that it caused the Justice Department to remove “vertical integration” from the things to watch out for in its official merger guidelines. Tirole was among a group of economists who showed, using game theory, that it was in fact possible to make a bigger profit by extending a monopoly to higher and lower links on the production chain. And the result is we now have banks that are too big to fail and communication companies that have snuffed out competition, resulting in higher prices and worse service.

Should the Feds Create Inflation? This Time It Is Different

Through the bombs bursting in the Korean Peninsula’s air, minutes of the FOMC meeting were released Wednesday. The division over Quantitative Easing II (QE II) wasn't as intense as the 58 year old NoKo/SoKo conflict. However, I have reservations with this logic in 2010 of affirmative voting Fed members’ confidence behind QE II theory of inflating asset prices will put a halt to deflation. 

That QE II will create a wealth effect and stimulate consumer spending, the easy stuff like the dubious weekly Jobless Claims dropped to 407,000 from a previous week upward revision to 441,000, from 439,000 is showing a positive trend. 

Also, The Reuter's/University of Michigan's Consumer sentiment index rose for November to 71.6 and third quarter GDP growth was revised up to a 2.5% annual growth from an estimate of 2.4%. The hard stuff, physical things like durable goods and housing (found below) tell a different story. Durables orders in October fell 3.3 percent, a figure below the median market forecast decline of 0.1%.  

Unfortunately, the Fed’s beautifully elegant thesis isn’t growing inside a sealed petri dish with exact ingredients from the 1930’s or 1970’s. Therefore, past performances do not guarantee future results.  

For those of us old enough to remember the 1970’s it was a far different world. During that period, current dollars had greater purchasing power than holding them until tomorrow, so it was logical for consumers to spend money immediately. However, the basic financial infrastructure for consumers was the opposite of what it is today. 

Take credit cards; this was a relatively new consumer product. Interest rates were fixed, unlike today. Shoppers would hand their credit card to a merchant and the merchant would pick up the phone and call an authorization center for approval. Then, the card would be placed in a manual charge card machine to make an impression on carbon paper for the shopper to sign after approval was granted. 

Holding and servicing fixed debt during “normal” inflationary times is easier to do if incomes are rising, mirroring the change in inflation. Virtually every credit card issued today has a variable rate. Wages have been stagnant in the US for ten years and Ireland just announced an austerity plan which includes cutting minimum wage which could become a harbinger of things to come in America. 

If we experience prolong inflation, the interest rate on consumer debt will be adjusted upward to cover issuers rising costs, accordingly. This will cancel any presumed benefits for creating inflation. 

Mortgages were different then, too. Adjustable rate mortgages did not exist. When you purchased a 30-year fixed mortgage, you could plan for your next 360 mortgage payments. This became problematic during the real estate bubble of 2003-2007. Teaser rates tied to Prime, LIBOR, the 11^th district, T-bills, COSI, etc, that allowed borrowers to qualify disappeared after 12, 24, or 36 months. Real mortgage payments undermined the false real estate prosperity of the day.

In the 1970’s mortgages were also assumable in many instances. The fixed mortgage came with your home. Think what our current housing market would look like if residential real estate came with mortgages. Would housing markets have experienced 30%, 40%, 50% in value or more, with assumable loans attached? Is a house easier or harder to sell with an assumable mortgage? 

Maybe this is an opportunity for the Department of Treasury to self-refinance mortgages directly with borrowers. New Home Sales reported the average price fell 8.0 percent to $248,200 while sales of new homes which fell 8.1 percent to a much lower-than-expected annual unit rate of 283,000. The median price of a new home plunged 13.9 percent in October to $194,900, a seven year low. 

Existing home sales were even worse. Sales fell 2.2 percent in October to a 4.43 million annual unit rate. The year over year change is a staggering 25.9%. Supply on the market has returned to 10.5 months. The median price fell an additional six tenths to $170,500. The average price moved two tenths higher to $218,700. 

Consumers were protected in other ways. In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws. Heretofore, banks were limited by law as to what interest rate they could charge customers. 

Then, there was collective wage bargaining. The apex of organized labor existed in this time frame. For employees, price inflation was met with multi-year wage contracts, negotiated wage increases, and Cost Of Living Adjustments (COLA). Employers could better plan their labor costs and workers would not fall too far behind, too quickly. In retrospect, these automatic triggers helped exacerbated moderate inflation as it fulfilled structural price increases. 

Manufacturing as well as capital was neither nimble nor mobile in the pre-digital age. Employers were more inclined to sit down with workers and arrive at a schedule of wages and benefits both sides could live with. Relative labor peace in the US resulted from this tack verses a more confrontational civil disobedient approach on the European continent. 

The America I just described no longer exists. Instead of a fairly closed economic system capturing Ben Bernanke’s domestic asset price inflation action, the global economy will absorb our inflation, spilling into overheating emerging economies. This will cause resentment toward our predatory monetary policy. 

At home, stubbornly high unemployment continues as more hiring of temporary and contract workers identify firms that are practicing company before country, and a deteriorating financial system that is biting disproportionately into financially vulnerable consumers’ thinning disposable income. 

Municipalities are moving closer to default, just like Europe, under the weight of this radical redistribution upward of capital since the repeal of Glass-Steagall Act. The probability of a double-dip recession followed by uncapped interest rates and a widening chasm between Tiffany & Co. and Target customers, and rising corporate profits grows. 

The Ben Bernank offers other lesser reasons why QE II is necessary, such as a goal of optimal employment, without any major tax or infrastructure jobs initiatives coordinated with other quarters of government. I think their reasoning and aiming needs more work. 

An Alternative to the Trillion Dollar Deficit

Am I the only one who thinks that a trillion dollar deficit, proposed by the President-elect, is financially insane?

True, as we head into the deepest recession since the Great Depression of the 1930's, we may succeed in becoming the Great Depression II. However, before we touch a lit match to a fuse on a trillion dollar budget deficit (not to mention funding for the wars in Iraq and Afghanistan occuring outside the annual budget, which will surely detonate our country in the future), let us try to address the original problem.

We all agree residential real estate began this current economic slide and that residential real estate's recovery is necessary to end this slump. So, let us rethink the solution.

Since a trillion dollars is on the table, why not try the following; The US government enacts a new program to refinance the following mortgages: 1) all sub-prime mortgages that have reset and will reset. 2) Any mortgage that is underwater by more than five percent; 3) mortgages of homes repossessed in the 4th quarter of 2008 and currently unoccupied, if the previous owners are interested in returning.

Once the government has identified these mortgages, borrowers may apply for a new, 30-year, fixed-rate mortgage, issued at one percent over the current 30 year T-bond.

Do not stop reading. Here is how we save residential real estate and America.

All refinanced mortgages are backed by the full faith and credit of the US government. All refinanced mortgages are assumable.

Yes, I said ASSUMABLE.

Catalog the benefits. Currently, a raging debate about mortgage cram-downs by banks is taking place. Both sides have valid points. By refinancing existing mortgages and paying off lenders immediately, investors holding MBSs are "made whole", per the terms of the mortgage, and contract law is preserved.

Is a home more valuable or less valuable with an assumable loan? The current inventory of vacant and unsold homes would quickly reduce while prices stabilized. Ask a real estate agent if a home with a 30-year, fixed rate mortgage, at 4.25%, completely assumable, is marketable.

Banks' capital requirements and their need to raise cash for 2009 is lessened. Banks will also have fewer assets on their books. Retirees living on fixed income investments are starving for yield. T-bills and CDs today only reduce investors' disposable income and subtract purchasing power from the economy.

On a $200,000 mortgage, refinancing a 6%, or 8%, 10% mortgage, down to 4.25% mortgage is like getting a stimulus check, for several hundred dollars, every 30 days. Would a small business owner rather receive a lower tax rate and fewer customers or 10 or 20 homeowners in his neighborhood with additional money in their pockets?

Vacant homes lower property values. Vandalism occurs to individual properties, squatters break in and stay illegally, and crime can increase in the neighborhood.

The government could begin taking applications 30 days after Congress approves such a bill and begin issuing checks within 90 days, for immediate repayment of mortgages to lenders and injecting more disposable income, through lower mortgage payments, throughout the economy. The psychological benefits to the country alone, with such a program, are incalculable.

Mortgages are public records. This program is completely transparent. As the money is spent, its final destination is available for all to see.

Lastly, if the government is going to destroy the dollar by issuing two trillion dollars in obligations this year, why not try this approach first.

It is just as insane as a trillion dollar deficit for years to come.

Monday Morning

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Last week, the markets continued its volatile decline.  The DJIA and the S&P 500 indices tested their October 10 lows, Thursday, but rebounded, to close up 552.59 and 58.99, respectively, for the day.  For the week, however,  they were both down following an about face by Treasury Secretary Hank Paulsen on buying toxic mortgages from troubled banks; deteriorating economic and housing data; and the impending showdown between congress and the auto industry.  At stake, another taxpayer bailout for the challenged carmakers versus bankruptcy for General Motors and the loss, of perhaps, millions of auto and auto-related jobs.

For income investors, fear is currently keeping treasury yields low prices high.  The public is piling into municipal bonds as the last safe haven for cash, too.  In 2009, headwinds will appear that will disturb all fixed income markets.  The US, next year, will issue two trillion dollars in new treasury obligations.  Markets will not be able to absorb this much debt without raising yields.  The Chinese domestic stimulus package of 500 billion dollars will inhibit one of our largest buyers of treasuries.  The collapse in oil prices will take petrodollars away from Middle Eastern oil producing countries that deposit those dollars into US banks and purchased treasuries.  At some point, our issuance of debt will also weaken the dollar.

I wish that there were more positive news items to report.

This morning in Barron’s, Jacqueline Doherty wrote a story on which defensive stocks to own in a severe recession.  Colgate Palmolive (CL), Clorox (CLX), Procter & Gamble (PG), and Kimberly-Clark (KMB), sell products people use in good times and bad.  I know stock investors are salivating current prices and yields, but I believe the stocks will go much lower over the next six months.  Still, we can improve on her strategy by using long-term options (LEAPS).  Look at the chart below:

Stocks versus LEAPS

Stocks	Friday Closing Price	500 Shares	LEAP Call Jan. 2010 Strike Price	Friday Closing Ask Price	5 Contacts	Difference
Colgate Palmolive	62.06	$31,030	WTPAM - 65	8.80	$4,400
Clorox	59.30	$29,650	WUTAL - 60	10.00	$5,000
Procter & Gamble	63.11	$31,555	WPGAM - 65	8.70	$4,350
Kimberly-Clark	57.37	$28,685	WKLAL- 60	7.10	$3,550
Total Cost		$120,920			$17,300	$103,620

 

By using LEAPS, you are risking $17,300 to control two thousand shares of high quality stocks until January 2010.  In addition, the difference of $103,620 is available to invest in deeply discounted closed-end equity income funds such as Nuveen’s non-leveraged JPZ, JSN, JLA, or JPG, yielding 13.84%, 15.56%, 16.07%, and 14.01%, respectively, as of Friday’s price.

The Dow futures are lower this morning, and its Monday.  Buckle up; this morning could be a bumpy ride in the markets.

Slipping Into Darkness

From October 29, 2008

The Federal Reserve Board today, at 2:15 pm, announced their obligatory 50 basis point cut of the Federal Funds Rate, from 1.5 per cent to 1 per cent. This is the latest action taken to assuage investors’ fears about the hydra-bear market that has engulfed all capitalism. A triple digit rally was quickly vaporized with an erroneous General Electric rumor concerning the company’s 2009 earnings.

What are not mistaken rumors are the disastrous economic data that continues to flow. On Tuesday came the U.S. consumer confidence index, by the Conference Board, reporting an all time low of 38, down from 68 the previous month. That same day, the S&P Case-Shiller home price index fell 1 per cent, in August from July, and 16.6 per cent, from the previous year. The Census Bureau estimates for the 3rd quarter of 2008, of some 130 million housing units, nationwide, 18.6 million stand empty; 13.8 million year-round, 4 million for rent, and 2.2 million for sale.

On Wednesday, Durable Goods Orders were reported a curved up .8 per cent versus an expected decline of 1.8 per cent. For Thursday, the October 25th week Initial Jobless Claims are announced. Expect a drop of 3,000. Why, I’m not sure.

A General Motors -Chrysler shotgun merger is one step closer to happening, according to reports. If completed, it may add an additional 25,000 auto blue and white collar auto workers to the unemployment line of fixed income investment bankers recently cashiered.

Employment is rising, however, in villages and hamlets across the land as Investment Advisors and Money Managers are deploying their minions to hotel banquet rooms and restaurant’s private cubby holes, armed with clever four-color handouts, PowerPoint Presentations, and empty explanations, as to why their propriety indicators and models could not see the greatest bear market since the Great Depression, sneak up behind them.

I have a feeling that the traditional holiday feathered vertebra – turkey; will not be served this Thanksgiving. Instead, investors will be dining, if they can still afford a meal, on black swan; only recently very, very popular fowl of spenders of others-peoples-money. Of course, it’s too late to sale stocks with portfolios down 30 to over 50 per cent. But, if these Money managers are wrong again, keep some Gray Goose handy.

The Lost Decade: Widespread and Furious

Last Friday morning before the US stocks markets opened, the American financial system was staring into the abyss – again. Complete liquidation had occurred throughout the night in Asia and Europe, and now it was our turn. The US was given a death row reprieve, at least for now.

Virtually every measurement for wealth, even if casually examined since the year 2000, shows a decline in value or no change. The S & P 500, the DJIA, and NASDAQ, closed on December 29, 2000, at the levels of 1,320.28, at 10,786.85, and 2,341.70, respectively. Friday, October 24th, their respective levels were 876.77, 8,378.95, and 1,202.27.

Also on December 29, 2000, the Wilshire 5000 Composite Index closed at 12,175.88 versus 8,806.20, October 24th; the 10-year Treasury note at 5.12 per cent versus 3.69 per cent, October 24th; and Value Line – Geometric closed at 393.47 versus 226.82 last Friday.

REITs, open and closed end mutual funds, individual stocks, and all classes of equity assets have been savagely beaten up by the Great Bear market of 2008, with the same ferocity as it counterpart, the Great Bull Market of 1982-2005, rose. Leverage and deregulation ushered in 30 years of miraculous wealth and prosperity. Now, the tide has reversed. Asset values, first real estate, ultimately all assets, in the short term, have nowhere to go but down.

The federal government is using all of its power to soften the landing, but historically, expansionary monetary policy will only debase our currency and opens the door for massive inflation once we exit the impending recession.

This summer I wrote about the inevitable pain deleveraging would inflict on the economy and why it had to occur. I think we are far from the end of this cycle. Municipal Market Advisors reported municipal bonds staged one of their biggest one day rallies in history on October 22 and the 30-year Treasury bond traded at an unbelievable 3.96 yield Friday. The cash price for gold is currently being pushed lower through forced liquidation.

Baby Boomers, still traumatized by their 3rd quarter retirement account and September brokerage account statements, are having a collective epiphany about their upcoming retirement years. Their careful planning and hard work to secure a comfortable 'golden years' lifestyle has been robbed.

What's next for the economy? Just as all other assets are unwinding, in time, so will the bond markets and the US dollar. By then, TIPS, gold, and non-credit dependent stocks should be your first line of investing defense.

Macro Trends Spell Doom for Banks and Their Profits

The rise and fall of debt is continuing without abatement. In the U.K., bankers refuse to write new mortgages. U.S. consumers are tapped out. Businesses are finding their cost of borrowing prohibitively expensive to continue certain lines of business, i.e. consumer auto leasing at Chrysler Financial, all the while asset-backed portfolio valuation is tenuous and overvalued, at best.

After 30 years, two generations of consumers and businesses relying on hyper-credit to generate an enviable lifestyle for the middle and working class, trumpeting painless capitalism – all winners, no losers, and endless increasing corporate profits, that bubble has burst.

This perspective should be viewed from two positions, first, historical and secondly, relative to global living standards. The U.S. is the largest economic engine in the world. Household debt has tripled in the last 25 years.

In 2008, the inability to service debt is akin to the credit depression of the 1830's. Europe in the 1820's became mesmerized with transcontinental travel by train and flooded America with credit. The term transcontinental attracted money then the way dot.com attracted funds in the 1990's. A land rush, sponsored by the government, coincided with this period. Between servicing the railroad bonds debt and the leveraged real estate debt, remaining disposable income left little domestic spending for growth. Expansion became contraction. The great depression of the 1930's was more a function of technological advances increasing output, relative to consumption, thereby collapsing demand.

Our savings rate is the lowest in the developed world. It has dropped below 1 percent. Yet, we also buy more things than anyone else using maximum credit. Credit cards, home equity loans, secured and unsecured personal loans, loans against retirement accounts; any loan that continues the buy now, pay later, merry-go-round, until recently, without question and interruption, was marketed and consumed. Ironically, brokerage firms' margin accounts, the villain of the stock market crash of 1929, is our most conservative usage of debt, today.

Currently, home equity, which rose on cheap capital and hid stagnate wages this decade, has reversed while its cost has risen. Homes that were once ATM machines only three years ago are being repossessed in the tens of thousands each month by banks. Equity in an individual's home once was his or her greatest investment. Servicing debt on growing negative equity is becoming harder to do, both financially and philosophically, for underwater consumers. Prosperity from the mirage of supply-side economics has vanished for the masses.

Looking back, in the 1980's, deregulation through supply-side economics redefined risk and value. In the 1990's, heretofore, imprudent levels of credit, a peace dividend from the end of the cold war in the 1990's, and the integration of cheap global labor, provided the west a temporary and significant head start re-imagining comfort and convenience for the working and middle class.

Looking forward, new banking regulations, regardless of the outcome of the November elections, will restrict the future of credit and leverage for commercial and investment banks. The defense industry peace dividend was consumed years ago by the endless war on terror. Wages in developing countries are rising, and so is the cost of limited natural resources. And, the true bill on previous runaway debt created and consumed in a lax atmosphere is past due.

We are heading into a global recession. The IMF projects at least $1 trillion in total write downs. Total U.S. residential single family home real estate value is expected to fall another 5 per cent to 20 per cent; easily another $1 trillion in value. Bankers are considering reducing outstanding credit lines in the next two years by at least $2 trillion dollars.

Yes, banks and their profits are in dire straits.

Thursday Market Action

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After shaking off a worrisome inflation report before the opening bell and a dismal real estate report soon after the opening, the Dow rose steadily throughout the morning and settled into positive territory for the remainder of the day. The DJIA closed up 82.97 or .72 per cent at 11,615.93. The S & P 500 also closed higher 7.10 or .55 per cent to 1,292.93. NASDAQ likewise ended the day up 25.05 or 1.03 per cent to 2,453.67.

Volume on the NYSE was 1,003,398,038; advancing shares were 663,931,108 and declining shares were 332,074,290 with 7,392,640 unchanged. NASDAQ volume was 1,842,236,076; 1,414,017,121 shares were up, 358,110,252 were down, and 70,108,703 were unchanged.

Bond yields fell and prices rose as the market digested the early morning four week average jobless claims number which increased by 19,500 to 440,500 and the and a much higher consumer price number of 5.6 per cent, year over year. The Two-Year Note closing yield was 2.43 percent; the Ten Year Note was 3.89 per cent; and the Thirty Year Bond was 4.51 percent.

Foreclosures were up 55 per cent from a year ago, July. More than 272,000 homes received at least one notice, compared to 175,000 last July. This was eight per cent higher than June, as reported by RealityTrac. Lenders reprocessed 77,000 homes in July.

Existing home sales fell 16 per cent to 4.91M, annualized, in the 2nd quarter while prices fell 7.6 percent to $206,500 from $223,500 last year. One in three home sales was a short sale or sold out of foreclosure, according to the National Association of Realtors.

Crude oil finished the day at $114.70 a barrel and Gold closed at $807.4 an ounce.