8/12/13…it all began with Mikey

From The Friars Club Encyclopedia of Jokes: “He writes so well, he makes me feel like putting the quill back in the goose.” – Fred Allen

Bloomberg Quotes of the Day: “Experience is the teacher of all things.” – Julius Caesar

Did he have a knife in him at the time? Curse you Cleopatra!

Bloomberg Top Stories:

*Blackberry says It’s Exploring Alternatives Including Sale of the Company

*Euro Area’s Longest-Ever Recession Seen Over With Champagne Staying on Ice

*Yen Slips on Japan Data; Gold Climbs as European Stocks, U.S. Futures Drop

*Bond Hubris Overwhelms Fed Taper Talk in Riskiest Parts of Credit Markets

*Pound Bears Reject Carney Rally With Forecasts for Currency to Weaken 9% – !!!

*Ireland Slowdown Belies Status of Poster Child for Austerity – needs growth!

*Europe Equities Cheaper than Last Recovery as Profit Rebound Seen for 2014 – or…

*London Financial Services Job Openings Fell 37% in July as Firms Cut Costs

*Cash-Starved in China as Teamaker Shows Small Businesses Shut Out by Banks

*Israel Plans 1,200 West Bank Homes, Release of First Palestinian Prisoners – Oy Vey

*Republican Primaries Risk Repeat of Missed Opportunities in Majority Quest

*Married Same-Sex Couples With Kids See IRS Tabs Rising After Ruling

This week’s economic calendar is packed with important indicators. The highlight of the week will be the July Retail Sales (Tuesday), July PPI (Wednesday) and July CPI (Thursday). We will also get July Treasury Budget (Monday), July Import & Export Prices and June Business Inventories (Tuesday), August Empire State Manufacturing, July Industrial Production and August Philadelphia Fed Survey (Thursday), Q2 Productivity & Costs, July Housing Starts and August Consumer Sentiment Preliminary (Friday). Courtesy of Economic Advisory Service

Thank God for options expiry…in case you forgot it is this Friday! The last two weeks have been impossible to trade…intelligently that is…and have created the necessary swings to insure a proper expiry! Not that all indices closed lower Friday and the Dow closed at a 5 week loss, albeit it minor, while the S&P was below two weeks ago! The funny thing is that both are near their record highs…does that say anything?

The Nasdaq 100 lost 12 points after gainin11 points: just two members lost more than one point (APPL -5.5 vs -3.3, MSFT -1.4, and CSCO/BIIB -1), while only PCLN (+1.6) gained more than one. Losers bested by 1.5:1…nothing to see here.

Advance/Declines and Breadth were DIW (dead in the water)…still no ‘mojo’ here. New 52 week Highs rose slipped to 261 vs 293 while New Lows rose slightly to 152 vs 140. The VIX, rose above 13 again from 12.73 to close at 13.41 +.34 while the trading range widened from 12.37-12.98 to 12.71-13.66…high 3 days ago was 13.91!

…here’s the book:

* Dow 30 -0.5% vs +0.2% vs -0.3% vs -0.6% vs -0.3%; Dow Transports -0.6% vs +0.8% vs -0.7% vs -1.3% vs -0.8%; Russell 2000 -0.1% vs +0.5% vs -0.1% vs -1% vs +0.3%; Dow Utilities -0.5% vs +0.3% vs -0.7% vs -0.5% vs -0.8%; S&P 500 -0.4% vs +0.4% vs -0.4% vs -0.6% vs -0.2%; Nasdaq Composite -0.3% vs +0.4% vs -0.4% vs -0.7% vs +0.1%; NDQ 100 -0.4% vs +0.4% vs -0.3% vs -0.7% vs flat.

*NYSE Volume PLUNGED again to a very weak 2.94B shares vs 3.25B shares vs 3B vs 3.1B vs 2.52B (4th weakest of 2013…1.96B is the low). NYSE Volume also declined again to a very weak 637M shares vs 686m vs 617M vs 658M vs 533M vs 678M (482M on 7/3 in a shortened trading session is the low). The 12-month average is 714M shares. The range for the entire week was 533M-689M shares and that folks is WEAK!!! The average since 6/30 is now 675M shares, ranging from 482M to 906M. There have been just SEVEN 1B+ share sessions! There have been 30 800M+ shares in 2013: 12 up, 17 down, and one mixed, but on trades of less than that 93 have been up and 39 down …the down days are starting to increase! There have been 30 mixed sessions.

*New 52 week highs have ranged from 33-864. They dipped to 261 vs 293 vs 161 vs 280 vs 450. New lows rose slightly to 152 vs 140 vs 240 vs 280 vs 145 – 27 is the recent low.

  1. Advance/Declines were modestly negative: -1.1x vs +1.9x vs -2.2x vs -3x! vs -1.4x (recent range -17.5x to +4.4x) on NYSE and -1.5x vs +1.5x vs -2.1x vs -2.5x! (recent -3.5x to +3x). Breadth was similar: 1:1 vs +2.8x vs -2.2x vs -3.3x vs -1.2x vs +1.1x (recent -18.6x!!! to +6.9x!!!) on NYSE and -1.2x vs +1.7x vs -1.9x vs -2.5x vs +1.2x (recent -12.8x to +6.2x)  
  2. NYSE Financials were flat and remain anemic vs +0.6x vs -0.7% vs -0.8% vs -0.3% vs +0.2%. BofA was most active plunging 1.1% vs +0.6% vs -0.8% vs -1.1%! vs -0.3%, closing at $14.45 -.16. It has been weak since hitting $15.03 12 days ago – highest since Jan. 14 and major res. Brokers +0.3% vs -0.1% vs -0.4% vs -1% vs -0.1%; KBW Banks -0.4% vs +0.3% vs -0.9% vs -1% vs -0.4%; Nasdaq Banks -0.4% vs +0.4% vs -0.7% vs -0.9% vs +0.2%.   
  3. Volatility (S&P VIX) rose above 13 and has only declined once in four sessions to 13.41 +.34 with a range of 12.71-13.66!!! Note the recent low of 11.84, the recent range is 11.83-13.91 but with 7/31’s high being 14.14!!! VIX peaked at 20.49, plunged to 18.90 on June options expiry then closed at 20.11 on 6/24 and has been down below 14 since! 6/24’s session high of 21.91 was highest since 12/31/12 (22.72)!!! The range since April ‘12 is 11.05 (multi-year low o n 3/14/13) to 21.90. It is well below the 40/50 day (15.03/15.22) and the 200 day (14.85)!!!…ytd the range is 11.05 (3/14) to 21.92 (6/24)!

European stocks weaker, Asia mixed, Hong Kolng STRONG!: UK -0.3% vs +0.3% vs -0.4% vs -0.8% vs flat; France -0.2% vs -0.1% vs +0.7% vs +0.6% vs flat; Germany -0.4% vs flat vs +1% vs -0.4% vs -0.1%; Japan -0.7% vs +0.1% vs -1.6%! vs -4%!!! vs +1%! vs -1.4%!!! vs +3.3%!!! vs +2.5%!!! vs -1.5%! vs +1.5%! vs -3.3%!!! vs -3%!!! vs -1.1%!;  Hang Seng +2.1%!!! vs +0.7% vs +0.3% vs -1.5%!!! vs -1.3%!!!; Korea +0.2% vs -0.2% vs +0.3% vs -1.5% vs -0.5%; India +0.8% vs +0.7% vs +0.7% vs -0.4% vs -2.3%. U.S. equity futures weaker in yet another very narrow trading range: DOW -60; SPX -7.70; NDQ -10.50.

Bonds had modest gains for a third straight session and are higher again overnight: 10 yr Treasury 2.56% +1/8 (recent range 2.74% to 1.63%!!!), and the 30 yr range of 2.82% to 3.77%, currently 3.61% +1/2. The long TIP is 1.21% +5/8!. The (record?) low of 0.36% was set on 4/5. Recent high 1.53%! Libor update: 0.264% 3 mos, 0.396% 6 mos, steady. Both remain near the Jan. 2010 record lows (0.245% and 0.382% respectively). Foreign bond yields mixed with no major changes – again: Germany 1.69% +1; UK 2.44% -1; France 2.23% +1, Italy 4.16% -3; Spain 4.46% -2; Portugal 6.45% -1; Greece 9.54% +4 vs 9.49% vs 9.59%. Look at some of its recent big moves: 9.64% -18; 9.81% -10; 10.02% +19; 9.95% +17; 9.86% -13;  10.02% -16; 10.27% -19; 10.33% -25!; 10.85% +28!; 10.54% +40!!!; 10.85% -37!!!. Recent range: 8.04% to 12.57%.  Japan 0.74% -1.

Gold closed slightly higher but held above the critical $1300 at $1312.20 +$2.20 – don’t write it off yet! Friday’s high was $1316.50 following Wednesday’s session low of $1271.80 – lowest since 7/17! 7/23’s session high was $1349.20 – highest since 6/20! 6/27’s intraday low was $1179.40 – lowest since at least 2011 and now critical support. $1300 is again psychological res, and it remains between the 40 day $1294 and the 50 day $1314 – both still falling. The 200 day is a distant $1537!!! Overnight it is STRONG at $1328.40 +16.20, high $1333. Crude closed sharply higher after declining for 3 sessions at $105.97 +2.57! yet lower for the week – and with a high of $106.24 and low of$103.62. It is now safely above the 40/50 day m/a’s (102.62/101.04), both rising. The 200 day ($94.17) is distant support. MAJOR SUP, broken Thursday, is $102.61, the 7/30 low. Minor sup is $104.21-36 – a triple bottom from 7/10-7/12. 4/18’s low of $85.61 was lowest since 12/11! It is weaker overnight at $105.52 -.45. The high of $108.93 on 7/19! The range is $85.61-$109.32 since March 1, 2012.

Some random thoughts:

…when TB entered the once-respectable financial services industry in 1972, he had the good fortune to be mentored by a man who treated him like a son: F. Alden Damon.

Al Damon was the most principled (a not uncommon trait in those days from the people he introduced me, a rookie, to. There were people like Don Moulton (R.H. Moulton & Co. the most respected municipal bond firm on the West Coast despite being small), Frank Stockbridge (head of investments at Security Pacific National Bank), as well as honest municipal bond salesmen.

At that time, the bond business was a good business to make a living…not to get rich and you could make more as a doctor…but there was camaraderie…and your word was…well…your bond. The junk bond market did not exist…until…

Mike Milken came along and was hired by Drexel Burnham and convinced him to let him run his own business in Los Angeles (Beverly Hills actually…on Rodeo Drive). His strong suit was an understanding of what was wrong with junk bonds (he proposed doing this for E.F. Hutton and was rejected by a friend, Mike Ingraham), was a lack of liquidity. There were no derivatives in those days, so you had to have buyers and sellers. Furthermore, Milken understood risk…beyond that he was a conniving thief – ripping off both issuers desperate for funds to survive and buyers of a ‘new’ product. Those that rode with him profited…those that didn’t…well…

After receiving his MBA from Wharton in 1973 he joined Drexel and created a junk bond desk. Five years later he moved the operation to Beverly Hills. Thus there was a total lack of supervision. He built up a group of investors including Savings & Loans, most notably Tom Spiegel’s Columbia Savings & Loan, and Fred Carr’s Executive Life. Both propered from his ‘pyramiding’ of clients and essentially became parking lots for Drexel-issued bonds, then sold them back to Milken & Co. to be resold at market-up prices to another tier and possibly another. Think of musical chairs!

There was a term used in bond issuance that is now a relic…thanks initially to Milken: a bona fide public reoffering. The bonds were allotted before the announcement making potential buyers get filled in the secondary market which was controlled by Milken. Sell your bonds to someone else and you would never get them again! Ever! Today it has become commonplace…as happened with the TARP bonds issued on early 2009 to price the deal late NY Time, sell to hedge funds and then announce the deal as sold out the next day…this caused issuers to pay more and put the taxpayers at even more risk due to higher interest costs.

Worse, was what he did to issuers (and buyers). First, if they needed $25 million he told them they would have to issue $50 million and ‘invest’ the rest in other junk bond issues of Milken’s – further increasing their risk! Second, he told them that the bonds could not be sold without attaching warrants. They had no choice and Milken not only bought bonds into the principals 401(k) but clipped the warrants and retained them! FRAUD!!!

Read The Predators Ball for more disturbing information about how Milken & Co. did business. One of the worst though was the Wall Street Journal whose investigative reporters filled the front pages with the sins committed while the editorial page was critical of the government and defensive of Milken. The editor then was Jude Wanniski who came to his employers offices and spoke to us – until he interrupted with the fact that he had to go as he was having lunch with ‘Mike’ at Pleasanton – the state prison!

The point of this exercise is this marked the beginning of the end of honest bond dealing. That led to derivatives, products no one understood and which had documentation of several hundred pages which was seldom, if ever read…and that folks, is how we got to where we are today where the vast majority of people in the financial services industry are hardworking and honest and receive good but not exceptional wages. But it is that top 1% or so…who are increasingly becoming the wealthiest Americans that are not content with enriching themselves but destroying the American dream.

In closing, how have we allowed this to happen and cancel all of the advances of the 20th century which made this country great? No wonder people are denouncing their citizenship due to taxes being too high on their millions and billions and of course to avoid prosecution…which they won’t as it is after the fact…too late suckers!

I spoke with Michel Lewis a few years ago. He said when he wrote Liars Poker his objective was to get young people to think about doing something productive with their lives not just try to make the most money. Yet when he spoke at universities, specifically Ohio State, but others too, the question they wanted answered was: how did you get the job! That was disturbing to him…and to me…and it should be to all of you, unless you are beyond saving.

Hope you all have a terrific week…just keep things in perspective!

TB

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