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October, Thursday 13, 2011


DOW – 40 = 11478
SPX – 3 = 1203
NAS + 15 = 2620
10 YR YLD – = 2.16%
OIL – 1.10 = 84.47
GOLD – 7.90 = 1666.60
SILV – .76 = 31.92
PLAT – 16.00 = 1539.00
It’s earnings season and today it felt a little like rabbit hunting season. Today’s rabbit was JPMorgan Chase; the first major bank to report. They posted profit of $4.3 billion, or $1.02 per share, topping estimates of 91 cents per share but down from $4.4 billion in profit from the third quarter a year ago. Apparently, profit of more than $1 billion per month just isn’t enough. Of course, I look at the big banks’ earnings and I just don’t believe what I see any more. Part of JPMorgans earnings was largely due to an accounting quirk related to the bank’s debt falling in price. According to the Financial Times, the so-called debt value adjustment added 29 cents a share to JPMorgan’s after tax earnings, boosting its net earnings to $1.02 per share. Are the earnings based on mark to market or mark to make believe? Do we really have any idea what the true liabilities are? How many toxic assets still remain on the books? What is their true exposure to a European contagion? Do they just make this stuff up? What would happen if the Occupy Wall Street protesters swarm over Jamie Dimon’s house like a swarm of locust?
Fitch Rating placed bank of America, Morgan Stanley, and Goldman Sachs on review for possible downgrades. The ratings agency also put six European banks on review for downgrades.
Slovakia approved the plan to bolster the European Financial Stability Facility (EFSF) after voting to hold early general election as demanded by the opposition. The vote came 10 days before a European Union summit to approve a “comprehensive strategy” to fight the crisis, expected to include action to reduce Greece’s debt burden, a plan to strengthen European banks and measures to stop contagion spreading to larger economies. The fate of the entire global economy rested with the Slovakians, and we can all breath easier in knowing that in a crazy, mixed-up, dangerous world – the Slovakians got our back.
So now, the Europeans are looking at ways to shore up the balance sheets of Euro banks and compensate for the decline in the value of Greek and other European sovereign debt.. They are starting to figure out that they need to account for the current market value of Greek debt. The European Banking Authority, which coordinates the work of supervisors in Europe, is reviewing the results of stress tests conducted in July
Three months ago, the French-Belgian bank Dexia passed the European stress tests. By that measure, it was fine. Then it collapsed. France, Belgium and Luxembourg swooped in to save Dexia and pledged to figure out how to recapitalize European banks as a whole. The governmental solution to failed banks will likely involve wiping out equity holders, while forcing bondholders to take severe haircuts, and trying to do everything they can to protect counterparties so that the system doesn’t collapse.
There is huge skepticism that goes way beyond normal healthy doubt, about how reliable the banks numbers and guidance are. The accounting quirks and games are not just quirky; they are maddening. Do the banks really make an honest profit or are they just playing games?
It’s hard to have any faith in the global financial system. If you dig into the JPMorgan earnings report you won’t really find much about the nearly $80 trillion in derivatives.  Or how about Morgan Stanley – which probably has more than $50 trillion in derivatives. That’s face value – that’s gross number – those numbers don’t’ really mean much because they have offsetting trades that net out a much smaller number – still if just one-tenth of one percent of those derivative positions blows up – then it is lights out for JPMorgan. It doesn’t seem like a wide margin of error. What could go wrong?
Surely no bank would be so reckless as to accept dodgy collateral these days. It would hold out for something unassailable, like, say, Triple A mortgages on American homes. Wait, scratch that. It would accept sovereign debt, perhaps from some European realm that has been around for centuries. Whoops, no, no. Bloomberg news reports a Danish bank is now refusing to accept French sovereign debt as collateral. So, the problem isn’t just Greek debt.
Well, O.K., maybe United States Treasuries — and we’ll agree to ignore that one of the country’s two major political parties was willing to plunge the United States into default to achieve its aims.
So there’s concern about the collateral. But what about the hedges? Of course, they wouldn’t hedge with some bank like Dexia, which at year-end had $700 billion worth of loans, undrawn commitments, financial guarantees and the like. Some financial institutions have to be on the other side of Dexia’s commitments. Some might even be those supposedly strong and prudent banks that were supposed to have learned so much from the financial crisis. Did Morgan Stanley learn its lesson from the crisis?
You begin to see the problem.
There is a strong chance that the Europeans will contain the contagion; we should all be thankful the Slovakians are looking out for us, but there is also a very slim chance we could wake up one day and the whole thing has gone to hell in a hand basket. When we talk about uncertainty – we have to consider the source of uncertainty. And maybe we should ask why we allow the banks like JPMorgan, and Goldman Sachs, and Morgan Stanley to play such a risky game. Is there really any advantage?
Meanwhile, a survey by Time magazine found that 54% of Americans have a favorable impression of the protests, with 23% reporting a negative impression. An NBC/Wall Street Journal survey, found 37% “tend to support” OWS, while 18% “tend to oppose” it. You can count New York Mayor Michael Bloomberg among those in the “tend to oppose” category. Occupy Wall Street Protesters are being ordered out of Zuccotti Park in Manhattan. Protesters are taking down their encampment in the park after Mayor Bloomberg said they would start cleaning out the park tomorrow morning. The situation in New York will get interesting – Will the protest continue? Where? Will things turn ugly?
Meanwhile, the movement makes its way to Phoenix tomorrow with a scheduled march down Central Avenue and over to Cesar Chavez Plaza. If you want to find out the schedule for Friday and  Saturday – you can visit the website OccupyPhoenix.net.
Congress passed three free trade agreements – with South Korea, Columbia, and Panama- the trade deals have been in the works for a long time. The economic benefits are projected to be small. A federal agency estimated in 2007 that the impact on employment would be “negligible” and that the deals would increase gross domestic product by about $14.4 billion, or roughly 0.1 percent. Proponents of the trade deals predict that they will reduce prices for American consumers and increase foreign sales of American goods and services, providing a much-needed jolt to the sluggish economy. Opponents argue there will be job losses to foreign competition.
Last week, the 30-year fixed rate mortgage averaged 3.94% – an all time record low. This week rates popped higher – averaging 4.12%. Realty Trac reports foreclosure filings for the third quarter of this year – that would be default notices, auctions, and repossessions – were reported on 610, 337 properties – an increase of about 1% from the second quarter but a decrease of 34% from the third quarter of 2010. RealtyTrac attributes at least part of the decline in foreclosure activity to the robo-signing controversy which kicked in last October – They say they are seeing signs that foreclosure activity is starting to ramp back up.
Harrisburg Pennsylvania has filed for bankruptcy. It’s the largest municipal default since Vallejo, California went under in 2008. Remember Meredith Whitney, she’s the financial analyst who predicted hundreds of billions in municipal defaults. Not yet. Not yet.
A little over 2,00 years ago, the greatest depository of knowledge was the Royal Library of Alexandria; the largest and most significant library of the ancient world. By some estimates the library might have held up to 500,000 scrolls. Today we have — Google.
Today google crushed consensus, with Q3 EPS of $9.72 beating expectations of $8.76, while revenues coming at 9.72$ billion on expectations of $7.23 billion. Cash of $42.6 billion means lots of potential acquisition targets. Google says they passed the 40 million user mark. I am growing increasingly ambivalent about google. Google has grown into a behemoth, a monolith; so huge that it is a little scary, but I love a good library.



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