Financial Review

Gulliver’s Travels

Financial Review by Sinclair Noe

DOW + 92 = 18,209
SPX + 5 = 2115
NAS + 7 = 4968
10 YR YLD – .07 = 1.99%
OIL – .29 = 49.16
GOLD – .50 = 1202.30
SILV – .01 = 16.41

 

The Dow Industrials and the S&P 500 hit record high closes. The Nasdaq rose for the tenth straight session, its longest streak since July 2009. The Russell 2000 Index of small cap stocks closed at a record 1233.

 

Fed Chair Janet Yellen testified today before the Senate banking committee in her semi-annual report on monetary policy. Yellen said the Fed is preparing to consider interest rate hikes “on a meeting-by-meeting basis.” Yellen described how the Fed’s rate-setting policy committee will likely proceed in coming months: first by removing the word “patient” in describing its approach to rate hikes, then entering a phase in which rate hikes are possible at any meeting. That approach could open the door to an interest rate increase as early as June, but short-term rate futures contracts showed traders had shifted their expectations of an initial rate hike from September to October. And the yield on the ten year Treasury note slipped down below 2%. So, the markets players are placing their bets.

 

Yellen said she felt labor markets and other key economic indicators “have been increasing at a solid rate.” However, she said she still feels the job market is not fully repaired. The lack of inflation has made some Fed policymakers hesitant to commit to raising rates. Whether Yellen was more hawkish or dovish than in the past is a matter of interpretation or even wishful thinking, but it seems clear the Fed will rely on incoming data and they will communicate their intentions well in advance. Yellen will appear before the House Financial Services Committee tomorrow.

 

Greece sent a list of economic reform plans to the Eurogroup of euro zone finance ministers around midnight, just making a deadline set by its international creditors. Euro-region finance ministers approved Greece’s package of economic measures and paved the way for a four-month extension to the country’s bailout agreement, keeping its financial system afloat. The list of commitments includes maintaining current state-asset sales, consolidating pension funds to reduce costs and revamping tax collection and administration. In other words, the Greek Syriza party just agreed to the status quo for the next four months. But there is a problem; the status quo has been a horrible failure; it was what the upstart party ran against; the status quo is what the Greek electorate voted against.

 

The text of commitments states: that “the Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.” The agreement goes on to state:  “The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.”

 

And to assure there is no rollback, the funds will be held by the European Financial Stability Fund and only released on request by the ECB. So, the Greeks don’t actually get the money, it will be dished out to recapitalize the banks, and only then if the Greeks don’t get uppity.

 

It is hard to imagine that this will go over well with the voters in Athens.

 

House prices edged up 0.1% in December to take the year-on-year change to 4.5%, according to the S&P/Case-Shiller 20-city composite. Miami and Denver saw the strongest monthly advance. Compared to year-ago levels, San Francisco saw the strongest growth with 9.3% gains. Phoenix house prices were up 0.2% for the month, and up 2.4% year over year.

 

HSH.com took the median home price data from the National Association of Realtors for major cities and then compared that to the median income to determine housing affordability. In 11 of 27 major cities, people need to earn more than the median income to afford a house. The median household income was $54,417 in December 2014. The median household income in Phoenix was $43,960 in 2011. And the new data suggest you would need income of $40,658 to buy a median priced home. San Francisco is the least affordable major metro area. Pittsburgh is the cheapest, but then you would have to live in Pittsburgh.

 

Meanwhile, a new report from Zillow shows rents are increasing by 3.3% year over year, as of January. According to Zillow, monthly rents have grown at roughly twice the pace of wages in the U.S. since 2000. That means Americans are having to spend a greater share of their income on rent, about 30%, versus 25% in the past. Nationwide, you would need to stay in a home for about 2 years before ownership becomes cheaper than renting.

 

The Conference Board’s consumer confidence index fell to 96.4 in February from a revised 103.8 in January, which marked a 7 ½ year high. A slight bump in gasoline prices might be responsible for curbing enthusiasm.

 

Financial data firm Markit said its preliminary, or “flash,” reading of its Purchasing Managers Index for the service sector rose to 57.0 in February from 54.2 in January.

 

President Obama issued his third veto today, rejecting legislation that would allow construction of the Keystone XL pipeline. The Senate has agreed to hold a vote on overriding the veto.

 

 

It was Investors Day at JPMorgan Chase, but apparently not Depositors’ Day. JPMorgan is preparing to charge an array of financial firms, including hedge funds, private-equity firms and foreign banks, for some deposits, citing new rules that make holding money for the clients too costly. Certain deposits are less profitable to handle than they used to be due to new federal rules that can penalize banks for holding deposits viewed as prone to fleeing during a crisis or a stressed environment. So, the bank will eliminate about $100 billion of deposits that it holds for international clients. JPMorgan will is also reducing expenses and “simplifying” its biggest business lines. And part of the cost cutting plan is to close 300 branches, or about 5% of the total, over the next 2 years.

 

And on Investor’s Day, once again management had to field questions about a possible breakup of the bank. Naturally, the bank concluded that a break up would be terrible. So many synergies would be lost — synergies that JPMorgan’s peers don’t enjoy because they’re simply not as big.

Two agencies, the US Department of Justice (DoJ) and the Commodity Futures Trading Commission (CFTC), have launched separate probes into at least 10 major banks for the possible rigging of precious-metals markets. The banks are accused of collusive behavior, whereby personnel from various establishments communicate with each other and coordinate trading behaviors so that prices move according to what they decide. Banks historically set the price of precious metals, which include gold, silver, platinum and palladium, twice a day using the daily precious metal fixes, also known as the London Fix.

 

If it all sounds familiar, it is because it follows the same pattern as the manipulation of the Libor, Euribor, ISDA or derivatives, and Forex markets.

 

One of the 10 banks under investigation for rigging precious metals markets is HSBC. They just reported earnings that badly missed estimates. Part of the reason for the miss, is all the money they have to pay in fines. HSBC has set aside another $550 million to cover potential fines for alleged manipulation of foreign exchange markets and warned it could face a $500 million bill to compensate US customers for debt protection products it offered before May 2012. HSBC paid $611 million to global regulators in November when it was one of six institutions fined over allegations of price fixing and manipulating benchmarks in the $5 trillion-a-day forex market.

 

HSBC has also come under fire for helping clients hide their income from tax authorities. Meanwhile, the CEO of HSBC has been engaged in some fancy footwork to explain his own secret Swiss bank accounts. Stuart Gulliver explained that in the 1990s, when he lived in Hong Kong and worked as a banker at HSBC, employees received lump-sum bonuses whose amounts could be viewed by other employees through a computer system. In an effort to protect his privacy he put the money in Switzerland to hide it from the prying eyes of his Hong Kong colleagues. But he then had to hide it from his curious Swiss colleagues, so he created an anonymous Panamanian company. Gulliver was the top earner at HSBC, and he felt he had to protect his privacy from his Lilliputian colleagues.

 

HSBC has countered that Gulliver’s accounts were actually opaque and transparent. And for a bank that has been fined more than $1 billion for laundering money for the Sinaloa drug cartel, I suppose combining Panama and Swiss tax havens to ensure secrecy is the new “transparent” in banking. But for anyone who is not drinking Kool-Aid, it carries a certain stank of greed and sleaze.

 

 

 

 

 

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