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October, Thursday 27, 2011


DOW + 339 = 12208
SPX + 42 = 1284
NAS + 87 = 2738
10 Yr. YLD +0.19 = 2.39%
OIL – .21 = 93.75
GOLD + 20.20 = 1746.70
SILV + 1.72 = 35.19
PLAT + 40.00 = 1643.00
Over the past few weeks I’ve been reading newsletters and blogs that seemed to have a recurring theme and similar screaming headlines: Euro collapse, Euro Crisis, Euro Armageddon, Global Meltdown.
I didn’t read much saying the Euro leaders would play a game of extend and pretend and we’ll probably see an imperfect deal and there will probably be a rally on Wall Street, but that was my conclusion – that’s what I’ve been telling you – You’re welcome.
The S&P 500 was up 3.4% sending its October gain to 14 percent, the biggest monthly gain since 1974, and erasing its 2011 loss. The 20 percent monthly advance for the Dow Jones Transportation Average, a proxy for the economy, is the biggest since 1939. Benchmark gauges in France, Italy and Germany rose more than 5 percent as German and emerging-market stocks extended gains from this year’s lows to more than 20 percent. The euro surged the most in more than a year and 10-year Treasury note yields rose 17 basis points to 2.38 percent.
Maybe I’ve been too kind in calling it an imperfect deal; it is a lousy deal; it will result in more problems down the road.
So the Euro leaders worked until the wee small hours of the night to hammer out a Grand Plan; shortly after midnight they called in the bankers and laid down the law. I can’t wait to watch the mini-series.
Here are the basics: bondholders will be forced into accepting 50% writedowns on Greek debt, the EFSF rescue fund will be pumped up to $1.4 trillion dollars (Sarkozy made a point of expressing the amount in dollars, just to be sure we know it is still safe to spend dollars in Europe), European banks will be recapitalized, The International Monetary Fund will take a bigger role, Italy will commit to reduce its debt, the European Central bank will make bond purchases in the secondary markets.
Let me simplify: banks must show losses but then the ECB will pass out free money created out of thin air, the IMF will try to privatize big chunks of the economy, and the peons and serfs in euro land will have to tighten their belts.
OK, that’s not exactly the language they used but let me break down some of the key points from last night’s statement:
The statement said: “All member States of the euro area are fully determined to continue their policy of fiscal consolidation and structural reforms.”
Translation: More austerity measures; more belt tightening.
The statement also said: “ “We commend Italy’s commitment to achieve a balanced budget by 2012 and a structural surplus by 2014, bring about a reduction in gross government debt to 113% of GDP in 2014, as well as the foreseen introduction of a balanced budget rule in the constitution by mid 2012.”
Translation: We tried austerity on Greece. It didn’t work. Now we’re going to do the same thing to Italy. It won’t work but we won’t have to deal with it for at least 9 months.
The statement said: “We invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount on notional Greek debt held by private investors.”
Translation: Greece is in default. Busted. Broke. Toast. It’ll cost 50% – and if you don’t take it, if you trigger the Credit Default Swaps –  it’ll cost you 100%.
Statement says: “If necessary, national governments should provide support, and if this support is not available, recapitalization should be funded via a loan form the EFSF in the case of Eurozone countries.”
Translation: FREE MONEY for banks. Too Big to Fail lives on in Europe.
Statement says: “We will make further progress in integrating economic and fiscal policies by reinforcing coordination, surveillance and discipline.”
Translation: You are all very, very naughty and we will punish you. We will not allow you out of the European Union. This is verboten.
After the announcement that a Grand Plan had been reached, ECB president Jean Claude Trichet said the measures agreed “have to be fully implemented, as rapidly and effectively as possible.”
Translation: We bought some time. The whole thing could fall apart if anybody sneezes.
Don’t sneeze.
Actually, this whole crisis will now be much bigger and if it fails or when it fails, it will be a bigger catastrophe. This does not solve the fundamental problem of a 30% gap in the competitiveness between North and South; it does not address the intra –monetary union German trade surplus with the deficits of the Mediterranean states. It talks about austerity but does not realistically address the inevitable defaults of Italy, Spain, and Portugal. It does not address the whole deflationary downward spiral or the recessionary impact of all these cuts, but hey – it’s a Grand plan, you know – except for the details.
And so my advice to you is: be very cautious with this rally. This is not the rally where you bet the farm.
Back in the USSA, economic growth picked up in the third quarter. Total output, or GDP, grew at an estimated annual rate of 2.5 percent from July to September, still modest but almost double the 1.3 percent rate in the second quarter. The American economy has finally reached the size it was before the depression began four years ago. It has taken 15 quarters for the economy to merely recover the ground lost to the depression. That is significantly longer than in every other downturn/recovery period since World War II. In the previous 10 recessions, the average number of quarters it took to return to the pre-depression peak was 5.2, with a high of 8 quarters after the recession in the 1970s.
It’s not enough to lower unemployment; there are still plenty of problems.  What we’ve really lost here is the trillions in output between potential GDP (how the economy would have done absent the recession) and actual GDP. That’s the actual cost of the downturn—the output, jobs, incomes, opportunities, even careers, that were lost – but the GDP was up 2.5% in the third quarter and that beats a poke in the eye with a sharp stick.
More than half of the companies in the S&P 500 have released quarterly results since Oct. 11, and about three- quarters have beaten the average analyst estimate. Net income has grown 16 percent for the group on an 11 percent increase in sales.
Yesterday, I talked about the Catholic Church coming out in support of the Occupy Wall Street ideas. I said, that issues of economic justice should be much more common in more churches around the country. One of you guys sent me an email saying that in your church, the preacher had indeed done a sermon on this issue. Sent me a copy of the sermon. It’s a good sermon. But that was all you guys sent me – one sermon.
My email address is Sinclair@moneyradio.com
I’ve had a lively little email debate going with one of our listeners. I wrote that we’ve seen no prosecution of the bankers. I wrote: Still, no prosecutions (except for the insider trading and such) compared to about 1,000 prosecutions from the S&L crisis. Injustice serves as salt on the wound of inequity.
Then I ran across this news item – so I have to make a correction. We have a prosecution.
A few years back, Wall Street bankers turned C.D.O.’s into vehicles for their own personal enrichment, at the expense of their customers. C.D.O.’s are Collateralized Debt obligations. They take a whole bunch of debt, credit card debt, car loans, student loans, whatever, and toss them into a big pool or fund, and then they trade that big pool of debt.
These bankers brought in sophisticated investors to buy pieces of the deals that they could not sell. These investors bet against the deals. Worse, they skewed the deals by exercising influence over what securities went into the C.D.O.’s, and they pushed for the worst possible stuff to be included.
The investment banks did not disclose any of this to the investors on the other side of the deals, or if they did, they slipped a vague, legalistic disclosure sentence into the middle of hundreds of pages of dense documentation.
In a case brought last week, Citigroup was selling the deal, called Class V Funding III, while its own traders were filling it up with garbage and betting against it. So last week, the Securities and Exchange Commission announced it had agreed to a measly $285 million dollar settlement with Citigroup over the bank having misled its own customers in selling an investment created out of bad debt that was intended to fail.
In addition, the S.E.C. accused one person — a low-level banker. The SEC complaint makes clear that the low-level Citigroup banker that it sued, a Mr. Stoker, had multiple conversations with his superiors about the details of Class V. At one point, the guy’s boss pressed him to make sure that their group got “credit” for the profits on the short that was made by another group at the bank.
Pause, and think about that. The boss was looking for credit, but as far as the S.E.C. was concerned, he got no blame. Based on the major cases the S.E.C. has brought, a pattern has emerged. It is making one settlement per firm and concentrating on only the safest, most airtight cases. The agency’s yardstick seems to be, who wrote the stupidest e-mail? Mr. Stoker of Citigroup wrote an incriminating e-mail that recommended keeping one crucial participant in the dark. Goldman’s Fabrice Tourre, the other functionary the agency has sued, wrote dumb things to his girlfriend.
Several of the big banks did this kind of sleazy deal, including Goldman Sachs, JPMorgan chase, and Citigroup. John Paulson, the hedge fund guru made a fortune at this scheme. These weren’t isolated cases. This was a business model. Goldman, JPMorgan and Citigroup were all able to settle without admitting or denying anything, which, of course, is part of the problem.
So, now the SEC has prosecuted this Fabricio guy, and they’re going after this guy Stoker at Citi. I think we can all breathe a huge sigh of relief. We finally caught the guy that caused the financial crisis.
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