XERXES Bernanke Strikes!

Cash is definitely trash

Negative yields on 1 Month Treasuries.

Bid Yield  = 0.015
Ask Yield = -0.015

If you want to park your money in US Treasuries for the next month, you would have to pay Tim Geithner for the pleasure.

This is what happens when you have a centrally planned economy. 

Basel Speaks And Its Not Non Sense....

Over the weekend global banking regulators came to an agreement on a proposal to hit bigger TBTF financial institutions with an extra capital surcharge. What does this mean? Will this be a panacea to stop all of the banker shenanigans? Of course not! But its a strong first step. Let me tell you why. We all know that there are many forces in play when we talk about systemic risk and economic catastrophe. There is not just one policy decision that can make every one feel warm and fuzzy inside, thinking as such is just short sighted, but this decision is very important as it sets up future policy recommendations. Basel has proposed a surcharge (extra) that will range from 1% to 3.5% the amount of capital a TBTF bank has to hold on top of their normal capital requirements. This was in line with the current expectations, this is no surprise, but what was a surprise was the quality of capital  the surcharge has to be comprised of. Banks can't use contingent capital. The sliding scale is also an important factor as this will take away the incentive for these institutions to get bigger.

Again, this wont end TBTF and its not a magic bullet, its a strong first step. Capital surcharges and levels will not prevent forest fires like Smokey says. Basel needs to institute toothy leverage caps and hammer down on off balance sheet/SIVS, with the eventual idea of having all of these banks properly price their inventory to proper marks. Once this is established:

1-Leverage Caps
2-OBS/SIVS take down
3-Hard Capital Requirements
4-Proper Marks on Inventory
5-Hard and Clear liquidity rules.

We can be on our way to having a more robust banking sector. Remember this. Capitalism needs to go back to being capitalism. Failure has to be dealt with. We are not going to have a financial world that is going to be an less safe for failure. This is not happening. What we need to do is - punish stupid behavior. Failure needs to be acknowledged and yes it will come. What we can is once failure does happen its not catastrophic in nature.  Markets are always pro cyclical, changing this changes the very nature of capitalism and human behavior.

Instead of incentivizing TBTF, we need to dissuade these type of actions. In short we need to make getting bigger less profitable.

The advantage of getting too big is that everyone knows that Joe Taxpayer will bail out ludicrous financial dealings all through the world, but now there is a major price to be paid in terms of these surcharges. In short a very strong first step of reigning in TBTF. Banking Institutions are like people because they are run by people. They can't be changed just like you can't change people's actions and behaviors.  They need to change themselves and only within changes in themselves will there be true change everywhere else.

Watch The Transports

One of the main beliefs and principles of the Dow Theory is that major stock market indices when powering higher need to confirm with each other.

So far we have seen more of the same in the Dow, SP, and NASDAQ. All moving higher and making new highs. BUY THE DIP!

But one of the most widely used and followed tenets of the Dow Theory states that when the Dow moves higher and is hitting new highs It should be confirmed with a higher Transportation average.

What we have been seeing of  late is that the Transports have been lagging the major indices. This can be for many reasons such as higher energy prices or I can be that we have a major divergence.

So when the SP is ramping and hitting new highs the Transports should also be powering higher and we have not seen that as of yet, in fact the Transports are now below its 50DMA. This to me is disconcerting.

What to make of this? We an go obviously two ways here. Either this is a temporary blip for the Transports due to the ramp up in Oil because of whats going on in North Africa and the Middle East or this will just lead to a general breakdown for the SP.

Also of note, going back to last Fridays sell off. That day was one of the first real distribution days in the market for some time. There was almost 90% more selling going to the down stocks then up, this also needs to be monitored because generally after a distribution day, the averages tend to rally for a few more days until they don't.

Clueless Leaders

I tell you somewhere Alicia Silverstone is smiling because if you back out all of the pomp, circumstance, rhetoric, and emotion from last night’s State Of The Union Address, what we have is basic governmental incompetence on how the economy really works.   

Between Obama's fear mongering over the deficit and Paul Ryan comparing us to Greece, we can confirm that our elected leaders are completely and heart breakingly clueless as the day is long. Both of these guys have zero idea of how the US monetary system and importantly the economy works.


Why in the world is Obama comparing the government with households is beyond me? The US Government is not revenue constrained. It never was and never will be. Consumers, State & Municipal governments are revenue constrained. Why is this? Simply, sovereign governments with a monopoly power over its supply of currency never ever needs to save or raise funds for spending. We can go all day long about the intricacies of Treasury auctions and the such and I will get into that in an upcoming post, but let’s be clear the government of the USA doesn't fund itself via Treasury auctions.

Lets recap:

Households have a revenue problem.
Municipalities have a revenue problem.
State governments have a revenue problem.
US Government has NO revenue problem


To this end Dick Cheney is correct when he said "deficits don't matter", but what they do portend is much higher borrowing costs for profligate spending. So far China, Japan, and most importantly the Fed, is buying Treasury debt and trying to keep rates down. Let’s be honest, I would rather have lower rates than higher ones to this end the cost of financing will rise if others believe you don't have a handle of your finances. Again, it’s a psychological situation we are dealing with here, its ultimately a confidence thing. That's all.


Obama also made this point:


"So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years. This would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president."


Bam is the man! But is he serious here?


Does Obama know that Eisenhower presided over three recessions in his 8 years? How did he do it? Yes! He promoted two budget surpluses that immediately sent the country into recessions in the late 50's. This country can't afford austerity, because it needs to grow because there is far too much private sector debt on consumer and business balance sheets.


Now we get to Representative Paul Ryan.
He states in his retort....

“Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody. Their day of reckoning has arrived. Ours is around the corner. That is why we must act now."


How many times do I have to say it. The USA is not Ireland or Greece! Ireland and Greece have no monetary sovereignty .They can't print up Euro's. The US can print up greenbacks.

Lets recap again.

Greece can't print up Euro's to fix their problems.
Surprise! Germany and France can't either.


The UK can print up British Pounds, but they for some reason are in fiscal austerity mode and soon will be driving off of a cliff because when you comingle huge debts and austerity the results are at the bottom of the Grand Canyon.

If Paul Ryan is the best that the GOP can do then the GOP is already dead.

Gee Really?

NY Times DealBook Is running this story this afternoon.

Merrill Lynch Settles S.E.C. Fraud Case

http://dealbook.nytimes.com/2011/01/25/merrill-settles-s-e-c-fraud-case/

First of all, if there is a Chinese Wall between traders, bankers, and analysts on Wall Street then one must believe in the Easter Bunny and the Lochness Monster as well.

Take it form me. Coming from a former trader who used to work for three huge investment banks.

Wall Street investment houses and banks routinely front run client orders. This is not new and is quite honestly the cost of doing business on Wall Street. This is pure market making at its finest.

I find this one quote so fascinating and emblematic of the Wall Street culture.

"Merrill has since adopted “a number of policy changes,” Bill Halldin, a Bank of America spokesman, said in a statement. Mr. Halldin added that the policy changes, which include enhanced training and supervision, “address the S.E.C.’s concerns.”



You telling me that this wasn't a policy before?

Case Shiller Tells Us What We Already Know

The November SP Case Shiller 20 city home price index fell to the lowest level since March 2010. It fell 1.6% YOY, which was within expectations. Home prices now have fallen for five straight months. 

The biggest declines were in Atlanta, Chicago, and Detroit.
The biggest gainers were in SF, LA, San Diego, and DC.

Las Vegas which is the benchmark for housing excess saw prices drop 3.4% YOY.

Yada...Yada...Yada...Net. Net, the headline index is now just 3.5% above the April 2009 lows. This is after all that has been done via trying to stabilize housing. We are talking about housing tax credits, HAMP, and the MBS/toxic sludge buying program that the Fed instituted in 2009. What do we have? This shows the absolute horrible condition of housing finance in this country.

BTW...Housing prices as a whole are down 30% from July 2006 highs.

What this means is just more of the same government policies going forward. The Fed will look at the state of housing and keep stepping up the liquidity.

The lack of governmental involvement in housing has caused continued declines throughout much of the country. This is because the consumer is tapped out and the private sector is dead.

The tax credits have stopped. HAMP was a tool for Treasury to temporally stop foreclosures not for homeowners to refinance. Most importantly, the Fed is not bidding for MBS. The MBS purchasing plan ended on 4/1/2010, and we have seen what housing prices have done since then.

I still see some 5-10% further housing declines across the country, suite simply because housing is overvalued and employment has not picked up. If the economy weakens then all bets are off.

This is why the Fed will keep QE2 in place. This is why liquidity will continue to flow. This is why ZIRP will be the official monetary policy going forward. The Fed knows what happened to housing when they tried to disengage, they can't afford to disengage from the broader economy.

Quite simply the private sector is dead. It can't support a 14T economy. It never could. There is no free market. That is a myth. The private sector needs to deleverage just as much as consmers do. There is currently $8T of debt on corporate balance sheets, roughly $2T of cash. WOOPTI DAM DO!

The government is the economy. Better get used to it.

Got Stagflation?

Every economy's best friend is back. Yes! That is right. Our good old buddy from the 80's, Stagflation is back, at least in the UK it is. If you remember last week UK DEC CPI came in YOY of 3.6%, today the UK economy unexpectedly contracted by .5% Q to Q vs. an expected gain of .5%. So you have higher inflation and a contracting stock market. Which is perfect for the banking elite as monetary policy will be accommodative and fiscal policy constrained. The liquidity will flow like fine wine and the brutal austerity on the rest of the idiots that support the banking elite will continue for the foreseeable future. The Pound Sterling is dropping vs the USD like a stone this morning which is portending more money printing from Mr. Osborn. So what we have basically is more of the same.

The US economy which has been patched up by ludicrous spending, tax payer bailouts, and the Fed is showing much better resilience. The FOMC starts their central planning meeting today and we should hear from them tomorrow that they have the banking elite's back once again for the 75th straight month. What the FOMC should do is not to ignore the inflation pressures in food and energy, but then again why focus on these non core items?

The FOMC should lay out a plan to exit this monetary play land called ZIRP. They have to let the economy stand on its own two feet or even try to make an attempt. The US economy is getting better and recovering modestly, how much of that is directly attributed to the FED?  That was a trick question! What is clear is this, The FED has engineered an increase in asset prices directly via QE, we need to have a clue when this policy will end and we need help from Benny and the Ink Jets.

It's All Good At Intel Except For The Stock Price

Intel started the tech earnings season with a serious bang, blowing away estimates last week. INTC reported revenue of $11.5B above estimates of $11.37B. They posted earnings of .59 cents per share vs the estimates of .53 cents per share. If you back out some $300MM in tax gains, INTC still beat the street. Like Apple, Intel gave stronger guidance going forward. They are now guiding revenue at $11.5B which is sequentially even with 4th Quarter, this is impressive as 4th quarter is seasonally very strong.

OK. NOW. One would expect INTC stock to rally on these results, and the stock did rally but very modestly the next day and the stock has since drifted lower over the last week or so.

The question is WHY?

Very simply, it cant get any better than this for the Semi King! Intel is already running at full capacity and is running on all cylinders - gross margin wise. This was the thought after Intel blew past estimates last quarter when many were pointing to a cyclical peak in gross margins. When you are at the peak or on top of Mount Everest the only way to go is down unless you are able to cut costs aggressively or sell more into your sales channel. Intel's growth story is in tact and that PC's are not going away anytime soon. The product pipeline is strong on the low and high end. They are seeing growth in emerging markets and the business refresh cycle will drive the PC business through 2011 and into 2012. Tablet, mobile computing, and smart phones will assist INTC as more and more servers will be needed to run cloud based computers.

I ask you again WHY can't the stock rally?

I think the big question is revolving around Intel's plan for capital spending for 2011. INTC announced significant increases in their capital spend through 2011, up to $9B from $5.1B in 2010, this will benefit Applied Materials, KLAC, Lam, and others but many are now worried about over spending and over capacity. Let me be clear. The semiconductor business is a boom bust business, where the down periods are brutal and typically the down periods are followed by periods of over capacity. When more and more fab plants are added to meet demand, once that demand starts to tapper off this industry has problems. Also a problem was the increase in inventory. The Days of Inventory increased from 83 to 94 days.

All an all Intel had a fine report but thoughts  and concerns of over capacity in the semiconductor industry have grounded the stock for the last few months.

Why Have Stock Research Analysts?

Apple Computer crushed earnings estimates last night. Was this ever in doubt? We all knew that Apple's numbers would be way above what the mutton head analysts on Wall Street had expected them to make. The estimates were for Apple to hit $5.38 on earnings and $24.3B in revenues. Apple safely beat those numbers and even beat the dreaded whisper numbers.

In short, Apple crushed it. They came in at $6.43 per share on revenues of $26.7B. If you remember last quarter, Apple gave very very conservative guidance of $23B and EPS of $4.80, and the stock sold off pretty nicely.

In the quarter, they sold:

4.13M MACS - up 23%
16.24M IPHONES - up 86%
19.45M IPODS - down 7%
7.33M IPADS

They surprisingly gave better guidance for the upcoming quarter. They now see revenue of $22B vs expectations of $20.9B and eps of $4.90 vs expectations of $4.47. The stock which at one point was down to 326 or so in the morning, rocketed all the way to 357 or so in the after hours before settling in at around 345. Now! We all know that Apple at the rate they are executing will easily beat their own raised expectations, not unless the world blows up in the next few months, but do you actually think the minions on Wall Street will suddenly get it right on Apple? Absolutely not! You see its a game on Wall Street to keep the feed bag going. Understand that the high paid analysts who are tasked with following Apple on a day in and day out manner have a job to do. Their job is to keep the estimated low enough so that when Apple does beat them, they can go out and sell the hell out of it to their sales force. Now of course, every analyst will raise their estimated to where Apple's management has guided to, but not a penny more. You will have a few independent analysts who will aggressively model but by and large the big wire houses will model what management is forecasting. This is again because the wire houses need to keep their best clients which happen to be the biggest hedge and mutual funds in the world happy. Always under estimate and over deliver, or not do your job and rig the game in your favor. This is not shocking behavior and it shouldn't be shocking to anyone who has followed Wall Street for the last 25 years. The small retail investor believes the game is rigged and the Apple earnings announcement is no better example of the shenanigans that occur every day.

What typically happens is this. Apple management typically low balls analyst expectations. They do this for one simple reason. Pressure to perform! They low ball fully knowing that they will beat expectations comfortably. This keeps the analysts and shareholders inline. The analysts will always follow managements lead because after all why upset management by being the lone wolf? The analyst community needs to be in the good graces of management for any type of future investment banking fees. What is also important is that the analyst community is a bridge for Apple to their shareholder base which is every single large mutual and hedge fund in the world.  So what we have here is an analyst community that is incentivize to keep Apple moving in the right direction which is currently vertical. The incentive here is to under estimate so that management looks like they are hitting the ball out of the ball park. All the while the wire houses are collecting commissions from the same shareholder base.

What the Apple earnings announcement basically tells us that:

-Apple is HITTING IT OUT OF THE BALLPARK
-The Shareholders are happy
-The Analyst community continues to add zero value to almost anything.

All you have to do is read the blogs to find out how Apple is doing. Why read MS, GS, or Citigroup's version? There is no better way to read an honest and reliable account of a company's worth then going to a random blog on the subject.

The only reason Wall Street research exists is to feed the supply chain.

Back Door Bailouts Continues & Confirmation

Yesterday Bank Of America settled numerous MBS push back claims with both Fannie and Freddie.

The travesty of the settlement has been my on going complaint that every single government program to help homeowners is really a back door bailout for the banks. The GSE's are front and center a continuous backdoor bailout mechanism for Wall Street's absurd toxic pipeline machine that fed the credit beast for the past 15 years.

http://noir.bloomberg.com/apps/news?pid=conewsstory&tkr=BAC:US&sid=aRboobH0Ekv4

What the settlement did for BOFA is basically settle all future claims from Freddie Mac for $1.28B. This settlement will cover some $127B in loans that Countrywide made and packaged to Freddie. Do the math. This comes out to exactly 1 penny on the dollar. Freddie Mac should be ashamed of themselves over this tax payer heist.

Fannie Mae settled for $1.52, but BOFA still has liability for future claims. What this shows is that Wall Street along with the government is 100% firmly entrenched in a permanent bailout mechanism with the tax payer as the sucker.

What do we have to look forward to with a GOP Congress in 2011? More of the same as Congressional Republicans are looking to roll back many parts of Dodd-Frank as inhumanly possible. Dodd-Frank was a joke to begin with, rolling it back only brings us back to the days of handing out mortgages to parrots and pets. Why not? When the sucker tax payer is on the hook.