Financial Review

Financial Review for Tuesday, July 30, 2013 – The Bus Doesn’t Go There

The Bus Doesn’t Go There
by Sinclair Noe
DOW – 1 = 15,520
SPX +0.63= 1685
NAS + 17 = 3616
10 YR YLD + .01 = 2.61%
OIL + .22 = 103.30
GOLD – .50 = 1327.70
SILV – .12 = 19.83
This might turn out to be a very interesting week, even if the markets were absolutely somnambulant today. Tomorrow morning we’ll get a report on second quarter gross domestic product and it is widely anticipated that it will show the economy growing at 1%, which is down from 1.8% in the first quarter and is generally pathetic, but remember that this number will then be revised a couple of times until they get it right.
Tomorrow afternoon the FOMC will wrap up it’s two day meeting; Ben Bernanke will come down from his ivory tower and announce that the economy is modestly moderate and the Fed is watching it with keen interest and they will do whatever they do, which is more of the same depending upon economic conditions as seen from the long range telescope high atop their ivory tower. Of course, there is always the possibility the Fed could surprise us; they might take away the punchbowl and the kids on Wall Street might throw a temper tantrum and break your 401k, so we’ll all tune in tomorrow.
Then on Friday we have the jobs report, which is the first Friday of each month. If there is strong jobs growth the kids on Wall Street might throw a temper tantrum and break your 401k, just because they’re perverse little rug rats. If the jobs report is weak, the Wall Street gang will run to the Fed punchbowl to wash away their sorrows.
Also, it’s earnings reporting season, and this week brings reports from Big Oil, including: ExxonMobil, Chevron, ConocoPhillips, and BP. This afternoon, BP’s reported profit for the period fell to $2.7 billion from $3.6 billion a year earlier, which was sharply below analyst forecasts of $3.4 billion. The company blamed lower oil prices compared with a year earlier. Yes, oil prices were lower for a while, but not by much, and the Big Oil companies will be looking at higher prices but not until the third quarter reports. Even if oil prices move higher, BP still has a problem with the Deepwater Horizon Gulf of Mexico oil spill disaster; they’ve spent down to the last $300 million in the compensation fund, and the claims are still rolling in.
The Federal Energy Regulatory Commission said JPMorgan used improper bidding strategies to squeeze excessive payments from the agencies that run the power grids in California and the Midwest. The JPMorgan energy unit used five “manipulative bidding strategies” in California between September 2010 and June 2011, and three in the mid-west from October 2010 to May 2011. The agency said JP Morgan has agreed to the penalty, although the company disputes the violations. The penalty includes $285 million for the federal government, and $125 million for ratepayers.
The agency recently levied a $453 million penalty on Barclays, Britain’s second-largest bank, for manipulating electricity prices in California and other western states. Barclays is disputing the allegations.

Yesterday, we talked briefly about the role of the banksters in the demise of Detroit. Not surprisingly, the banks were involved in derivatives deals as the city started slipping into debt. Detroit went the extend and pretend route by borrowing $1.4 billion in 2005 to address its pension shortfall.
According to a report from the Financial Times, the city established a couple of trusts to sell Pension Obligation Certificates of Participation to investors, essentially IOUs against the underfunded pensions. Then the city bought credit insurance to protect investors if the city didn’t make its payments and the trusts defaulted. Merrill Lynch and UBS sold the derivatives. Then, in 2009, Detroit’s credit rating was downgraded and that triggered a clause to force the city to buy itself out of the deal, at a cost of several hundred million.
In and of itself, the derivatives deal did not destroy Detroit, but it hastened the end. Merrill Lynch and UBS are considered secured creditors to the tune of $340 million, but the losses by the city may be much bigger; there was the original $1.4 billion in underfunded pensions; then add in more than $500 million in interest, and then the cost of paying for the derivatives deals is nearly $800 million, putting the total cost at about $2.7 billion. While the derivatives bets weren’t big enough to create the bankruptcy of Detroit, it’s hard to see how these financial instrument that purport to mitigate risk did anything to actually help mitigate risk; just the opposite; they increased risk.
And this is becoming a common theme whenever there is a municipality in trouble, and Jefferson County, Alabama is a recent example, whenever there is a municipality hanging on for its economic life, there is a banker with derivatives in hand recommending blood-letting to cure the patient.
Morgan Stanley has agreed to pay a $100,000 fine to New Jersey state securities regulators for selling exotic exchange-traded funds to unwary investors. The New Jersey Bureau of Securities says improperly trained Morgan Stanley financial advisers sold non-traditional funds, such as leveraged and inverse ETFs, to elderly investors seeking investments that would provide income. The investments resulted in losses for those clients. Leveraged and inverse ETFs might be good tools for some people, but you have to be careful and it certainly isn’t for everybody. In a statement, Morgan Stanley said they were “pleased” to reach a resolution. Yea, a $100,000 fine – they were absolutely peeing in their pants ecstatic.
Dallas Federal Reserve researchers have a new paper out in which they attempt to calculate the true cost of the 2007-2009 financial crisis and recession. They write: “The 2007-09 Financial crisis was associated with a huge loss of economic output and financial wealth, psychological consequences and skill atrophy from extended unemployment, an increase in government intervention, and other significant costs.” In reality, the losses are so monumental that an accurate accounting is nearly impossible, still the researchers gave it a shot. They figure the loss at about $14 trillion, which happens to be the average annual output of the entire US economy; one year of GDP, just vanished. There were some intangibles that they admit they couldn’t count.

President Obama took his traveling Economic Plan on the road; today visiting an Amazon warehouse in Chatanooga to tout what he’s calling a “grand bargain” for the middle class. Obama is offering what he’s calling “new incentives to manufacturers,” which  calls for a reduction of the top corporate tax rate from 35% to 28% but the President says this cut would need to be “revenue neutral.” That means lowering the tax rate to 28% would require closing loopholes to cover the expense. While taking out things like deductions for corporate salaries exceeding $1million would certainly be popular they won’t cover the difference. The grand bargain would try to lure money sitting offshore back to the US, where it might actually start circulating through the economy and creating demand. It’s a good idea but there is no bipartisan support, so that’s that.
Obama’s message and the site from which he’ll deliver it are dissonant, given Amazon’s prominence as a massive importer and employer of temporary workers, two truths that make it harder than ever to find a middle class job in this country. But in many ways, this is an Amazon-driven economy. Want a new TV? Click here and it can arrive at your doorstep in a day. Just charge it to your card. But would you like a good job? Wait in line. Yes, I know that Amazon just announced they were hiring 5,000 workers nationwide, but I said “good” job.
Still, many people would consider working for Amazon at about $11 an hour with benefits to be a good job; it’s certainly better than no job. But the first part of landing a job is getting to the workplace. Getting to the Amazon warehouse is a formidable challenge for anyone lacking a car: The Chattanooga bus system doesn’t go there.
This disconnect between available jobs and the public transit system is a problem across many major American cities. Nearly 40 million working-age Americans reside in parts of metropolitan areas that effectively lack public transportation. The president has injected talk of economic inequality into the national conversation — a helpful thing. Last week the president said: “If we don’t do anything, then growth will be slower than it should be. Unemployment will not go down as fast as it should. Income inequality will continue to rise. That’s not a future that we should accept.”
All true, but inequality is not simply a question of spending power. It has physical dimensions, and the bus doesn’t go there.
A military judge has found Pfc. Bradley Manning not guilty of “aiding the enemy” for his release of hundreds of thousands of military and diplomatic documents to WikiLeaks. But she convicted him of multiple counts of violating the Espionage Act, stealing government property. The “aiding the enemy” charges were the most severe, but the other charges could result in a maximum sentence of 136 years. The sentencing phase begins tomorrow.

WikiLeaks, in a Twitter post, called the Espionage Act convictions “a very serious new precedent for supplying information to the press.” Private Manning is one of seven people who have been charged with leaking information to the press for public consumption under the Obama administration. Under all previous presidents combined, there were only three such cases. 


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