6/18/13…TBTF or TITF?

From the Friar’s Club Encyclopedia of Jokes: “If penicillin is such a wonder drug, how come it can’t cure bread mold?” – Ron Smith

Bloomberg Quote of the Day: “Never trust a computer you can’t throw out a window.” – Steve Wozniak, one of the founders of Apple…TB would add those that can be thrown out if you believe in GIGO (Garbage In, Garbage Out) – TB

Bloomberg Top Stories:

*Obama Says Bernanke Has Been at Fed Longer Than He Wanted, Signalling Exit – back at ya Barrack. Let’s throw everyone out and start over…couldn’t do any harm. TB

*Housing Starts in U.S. Rose in May to 914,000 Annual Rate as Permits Gain – but interest rates while still low are rising!

*Commercial Building Slowdown in U.S. Weighs on Economic Recovery

*Consumer Prices in U.S. Climbed Less Than Economists Forecast on Food Drop –???

*Yen Weakens With Bonds as S&P Futures Rise With Stocks Before Fed Meeting

*European Car Sales Slump to 20-Year Low as Joblessness Hurst GM Demand – !!!

*Danske Slapped With FSA Order Adding $18 Billion to Risk-Weighted Assets

*Draghi Says ECB Is Keeping an ‘Open Mind’ on Non-Standard Monetary Policy

*Jeffries Second-Quarter Net Income Falls 34% as Trading Revenue Decliens

*Fewer U.S. Workers File Long-Term Disability Claims as Economy Makes Gains

*Detroit Recovery Plan Would Dip Into Retiree Pensions to Keep City Afloat

*GM Vows to Show China that Cadillac of Vehicles Isn’t Audi – but Cadillac!

*Aston Martin Owner ‘Investment Dar’ Said Asking Lenders for 50% Cut on Debt

*Abenomics for Women Undermined by Men Dominating Japan Ruling Politicians

*Virginia Loses Republican Grip of Old Dominion With Newest Voters Emerging – the night they dragged Old Dixie down…all the GOP was crying – turning from red to blue!

Another day and one that could have posted 1% gains had the market closed at the highs. Still it was an ‘up’ day…but…DOWN Friday vs a BIG ‘up’ vs ‘down’.  Since June 4th we have now had EIGHT of these cycles…with a ‘barely changed’ one right in the middle…anyone want to put that rhythm to music? This is the first one where not one single index moved by >1% by at least one index, and almost all have been with virtually every index moving by >1%! Volatility, that’s what TB is talking about! Since May 30th  the S&P VIX has closed between 15.14 and 18.59 with a range of 14.36 to 18.60 – the 40/50/200 day m/a’s are 14.37/14.26/14.98…it remains elevated! It closed back above 17 on Friday then slipped to just under at 16.80 yesterday. New 52 week  highs surged again to 264 vs 170 vs 159 vs 140 while new lows declined again to just 62 vs  72 vs 459 vs 507 vs 363. The market is unable to get back to the record highs of late May…still struggling with the 40/50 day m/a’s. Advance/Declines and Breadth were both modestly positive. Volume rose only slightly from one of the lowest levels of the year on the NYSE and actual floor trades to just 679M vs 634M vs 756M, ranging from 595M-756M last week with an average of just 673M shares: compare to the prior week’s 792M-880M with an average of 787M vs the 12 month of just 720M. 

We are not ‘waiting for Godot’ but for the FOMC announcement on Thursday afternoon…just a day prior to options expiry. The Fed has made a muck of the markets with their dissent which is raising volatility – fully utilized by the high frequency traders and driving institutional investors nuts with just 9 trading days until quarter end…what’s a mother to do???

NYSE Financials, and the Nasdaq 100 were the two best performers, +0.9% while Dow Transports were the only loser, -0.2%…even the downtrodden Dow Utilities rose by 0.5%! Our continuing Nasdaq 100 watch continues: it rose by 27 points with 8 members combining for half the gain, net was 4:1 advancing! It was led by MSFT +4.1!!! vs -2.3 vs -2 vs -4.5 vs -1.4, AAPL -4.8!!! vs +3.1 vs -1; CSCO +2.8 vs -1.1; GOOG +2.6 ; ORCL +2 vs -2 vs +3 vs -2; AMZN/APPL +1.6; AMGN/QCOM +1. GILD was the only one to lose more than 1 index point (-1.6!).

So let’s see what else happened:

* Dow 30 -+0.7% vs 0.7%vs +1.2% vs -0.8% vs -0.8% vs -0.1% vs +1.4%!; Dow Transports -0.2%! vs -0.5% vs +1.9%! vs -0.7% vs -1% vs -0.3% vs +2.4%!!! vs +1% vs -1.9%!; Russell 2000 +0.7% vs -0.8% vs +1.8%! vs -0.9% vs -1.1%; Dow Utilities +0.5% vs +0.1% vs +1.5%! vs -0.9%! vs -0.7% vs -0.3% vs +0.8% vs +1.3%; S&P 500 +0.8% vs -0.6% vs +1.5% vs -0.8% vs -1% vs flat vs +1.3%; Nasdaq Composite +0.8% vs -0.6% vs +1.3% vs -1.1% vs -1.1%; NDQ 100 +0.9% vs -0.6% vs +1.3% vs -1.1% vs -1%.

*NYSE Volume rose only slightly to 3.08B shares from a very weak  2.91B shares (2nd lowest of 2013, 2.75B is the 2013 low), vs 3.41B vs 3.21B vs 3.41B. REAL NYSE Volume rose to a still below average 679M shares vs 634M vs 756M vs 692M vs 689M vs 595M (lowest since 5/24). The 12-month average is just 720M shares. The range since 2/11 is 558M to 1.825B on 3/15’s options expiry and a near 12 month high, second only to 12/21’s 1.88B shares. May 31st was only the fourth day this year to register over 1B shares! There have now been just 20 800M+ shares in 2013 – 7 up, 13 down, but on trades of less than that 81 have been up and 30 down…there have been 22 mixed sessions.

*New 52 week highs have ranged from 74-864. They rose to 264 vs 170 vs 159 vs 140 vs 141 vs 278 vs 227 vs 103 vs 74!!! New lows declined again to 62 vs 72 vs 459 vs 507!!! (recent high). Recent range 49-507.

  1. Advance/Declines were modestly positive: +2x vs -1.2x vs +5.6x! vs -4.2x! vs -6.4x! (recent range -7.1x to +4.4x) on NYSE and +1.8x vs -2.5x vs +3.2x! vs -2.3x vs -2.8x (recent -3.5x to +3x). Breadth was similar: +2.6x vs -1.9x vs +6.9x!!! vs -3.8x vs -4.4x! (recent -10.5x to +6.4x!!!) on NYSE and +2.6x vs -2.3x vs +3.9x! vs -3.2x vs -3.6x! (recent -12.8x to +6.2x)  
  2. NYSE Financials rose by 0.9% vs 1.2% vs +2% vs -1% vs -1.6%!; Brokers +2%? vs -1.8% vs +2.2%! vs -0.8% vs -1.6%; KBW Banks +0.8% vs -1.6% vs +1.4% vs -1.1% vs -1.7%; Nasdaq Banks +0.5% vs -1.3% vs +1.3% vs -0.8% vs -1.1%. BofA rose by 1.1% vs -1.1% vs -1.2% vs +1.2% vs -1% vs -1.4%….closed at $13.21 +.14 and has a double bottom at $12.97 which is now critical support! C +0.3% vs -2.1% vs -1% vs -3.8%! vs +2.1%; GE +1.1%. No other financial movers – the sector remains near their rally highs but very volatile.
  3. Volatility (S&P VIX) slipped to below 17 and closed at 16.80 -.35 with a range of 16.33-17.62! The high was 5/12 at 18.60, not seen since 2/25. The range since 4/12 is now 11.99 (multi year low) to 18.60, and it remains above the 40/50 day (14.25/14.10) and the 200 day (14.96)…ytd the range is 19.28 (2/25!) to 11.05 (3/14) – 12 mo. ave 16.10!

Global equities somewhat weaker, ex-U.K, Korea; UK +0.8%! vs +0.6% vs +0.1% vs -0.8% vs +0.2% vs -1.7%!; France -0.2% vs +1.5%! vs +0.2% vs -0.6% vs +0.5% vs -2%!!!; Germany flat vs +1.3% vs +0.5% vs -1.4%!!! vs -0.1% vs -1.7% vs +1.2%; Japan -0.2% vs +2.7%!!! vs +1.9% vs -6.4%!!! vs -0.2% vs -1.5% vs +4.9%!; Hang Seng flat vs +1.2% vs +0.4% vs -2.2%!!! vs closed vs -1.2%! vs +0.2% vs -1.1%! vs -1%; Korea UP 0.9%! vs -0.3% vs +0.4% vs -1.4%; India -0.5% vs +0.8% vs +1.9%! vs -1.1% vs -0.5% vs -1.5%! U.S. stock futures little changed: DOW +14; SPX +0.80; NDQ +5.75.

Bonds closed weaker again Monday and again overnight: 10 yr Treasury 2.20% -3/16 (recent range 2.25% to 1.63%!!!), and the 30 yr’s 3.37%!!! to 2.82%, now 3.36%!!! -3/16. The long TIP remains well above 1%! Currently 1.19% UP 5/32 – it has lost more than TWENTY points since May 2nd! – still the weakest link since a new (record?) low of 0.36% on 4/5, 12 mo. ave 0.65%!. Since the Bernanke announcement on May 7th the high yield has gone from 0.82% set on 5/22 to 1.22%! Libor update: 0.272% 3 mos., 0.409%! 6 mos. Foreign bond yields higher ex-Portugal and continue to be volatile: Germany 1.57% +5; UK 2.12% +4; France 2.13% +6, Italy 4.30% +4; Spain 4.55% -1; Portugal 6.00% -14!; Greece 9.80 -1 vs 9.77% vs 9.86 vs 10% vs 9.94% vs 10.27%!!! Recent range 7.94% to 12.57%.   

Gold closed slightly weaker on a nearly parallel session at $1383.10 -$4.50. 6/11’s session low was $1364.50, lowest since 5/23. It has closed above $1400 just once in the past 9 sessions! 5/30’s intraday high was $1417.70, highest since 5/15.  It has been down 15 of the last 26 sessions following 5/20’s intraday low of $1338, lowest since 4/18. 5/10’s high of $1487.20 was highest since 4/12. 4/16’s intraday low of $1321.50 – was lowest since Sept. ’10. Resistance remains at the 40 day/50 day: $1414-1423 – slipping again. Overnight it is lower at $1374.40 -$8.70, session low $1370. Crude closed almost unchanged ($97.89 +.12) just a day after a strong finish, +$1.01 with an intraday high of $98.25 – highest high and close since 9/17/12! It remains well above the 40/50 day …just 11 days after putting in an intraday low of $91.26 – lowest since 5/2! It remains well above the 200 day ($92.30) with just one day below since 5/1, making it major support. First support at the 40/50 day (94.73-93.82 – now crossed and rising!). Overnight it is $98.26 +.49…yesterday’s session high of $98.74, highest 9/17/12.  4/18’s low of $85.61 was lowest since 12/11! The range is $85.61-$97.80 since June 29, 2012!!!!

Some random thoughts:

…Too Big To Fail or ‘Too Important To Fail’ – that is the question!

In today’s The Baseline Scenario, Simon Johnson reports on a study by Goldman Sachs that found that TBTF provides no economic value and denied there is any such thing as downside protection provided by the official sector to creditors of TBTF financial conglomerates. Baseline Scenario

While it would be easy to claim a conspiracy as Johnson  points out it is more likely a group of players with the same objectives: stifle regulation and thus allow them to create the next financial crisis while enriching management…at shareholder expense of course. As Danny DeVito said in Other Peoples Money …nothing is better than OPM!

TBTF was the ‘brainchild’ of Ronald Reagan in 1985 when, over the objections of his treasury secretary, Don Regan (TB’s former boss as Chairman of Merrill Lynch), and bailed out Continental Illinois, then the 8th largest bank in the U.S. That simple move created TBTF and by extension created moral hazard for the biggest EIGHT banks in the U.S. This resulted in phenomenal growth as money flowed in from around the world for safety of a government guarantee…and domestically came at the expense of the smaller regional and worse community banks (which the Fed has long seen as a thorn in their side and tried to drastically reduce in number).

Perhaps Goldman could take a lesson and refute the Fed’s misguided conversion of them (along with Morgan Stanley and UBS). It is a disservice to the country and a liability that they be allowed to call themselves a ‘bank.’

One of the first statements out of Lloyd Blankfein’s mouth was ‘we will never make a loan or take deposits.’ Isn’t that the definition of a ‘bank’? Also, it’s interesting the Hank Paulson saw it critical to save Goldman (which enriched him) while letting the much more significant (as we now know), Lehman implode…still, I would not have done it if Dick Fuld had been allowed to remain CEO.

Then there is Stephen Friedman, former Goldman CEO and Chairman of the N.Y. Fed while remaining a director of Goldman (amazingly, it is required that a N.Y. Fed board member be a director of a financial firm). But while the debate was going on about making them a bank, Friedman was busy acquiring more Goldman Sachs stock – even as everyone else was fleeing financial firms. It was deemed a conflict of interest (seriously? …not insider trading???) and he was forced to divest the stock…wait…what about treble damages? If I was Martha Stewart I would be incensed.

In becoming a bank, Goldman had to shift its fiscal year end from November to December as required of all banks. Brokers use staggered months for their fiscal year end in order to keep liquidity from drying up at year end and thus disrupting markets. But it also allowed them to use November to ‘hide’ enormous losses and this misstate their financials. That was due to regulation not Goldman but they managed to utilize it fully to their benefit.

Lastly, this is the first time anyone took the same position I have on CIT Financial. It was more of a bank than Goldman for sure…it was the lender of last resort to hundreds of thousands of small firms and when it was allowed to fail credit dried up for many of these businesses further exacerbating the problem. Their sin: borrowing short and lending long. But it didn’t require one dime of public money to save CIT…merely an ‘obligation’ which would have been created by guaranteeing CIT’s commercial paper – they had no problem doing this for the banks which even profited by underwriting each others government guaranteed bonds…and worse, selling them to hedge funds in what was anything but bonafide public offerings – as an institutional buyer I never saw these offerings until the next day when they were grossly marked up in price. Consider that our guarantee was now costing us more and going directly into the coffers of the banks and the hedge funds they sold them to! True, none of the guarantees ever cost us money but at the time that was anything but a certainty.

Is this a great country or what?

Have a good one, y’all!

TB

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