11/11/11…an open letter to the SEC

Banks, government offices and bond market closed for Veteran’s Day 11/11/11

TB’s Quote of the Day: “You can lead, follow, or get out of the way.” – Lee Iacocca

TB Saiz: “In what kind of hell do you call our markets ‘investing’? Speculation is what it is! All made possible by high frequency trading courtesy of your SEC.

Bloomberg Top Stories:

*Stocks, U.S. Futures Rise as Europe Acts on Debt Crisis; Euro Strengthens
*JPMorgan Grabs Europe Loan Share as French Banks Pull Back – you go Jamie!
*ECB as Lender of Last Resort Will Resolve Debt Crisis for Portugal’s Silva
*Europe Rebuked Over Crisis by Asia-Pacific Nations Seeing Expansion Weaken
*MF Global Clients Left With Few Options as Bankruptcy Keeps Assets Frozen
*Amgen, Peabody Energy Lead Most U.S. Corporate Bond Sales in Five Months!
*Telefonica Reports First Loss in Nine Years as Spanish Phone Sales Decline
*Italy Debt Crisis Creates Buyers’ Best Opportunity for New Discounts on Cars
*Oil riches languish on China doorstep as military tensions delay drilling
*Invisible run on banks becoming conversation with Italian yields above 7%
*Italian Senate approves debt- reduction package as Chamber prepares to vote

Volume dipped from a well above average 4.67B shares to 4B shares on a mixed session where the Nasdaq indices were effectively unchanged while other indices were up about 1%. NYSE stocks executed on the Big Board also dipped to a below average 897M shares from 1.11B. Repeat after TB: DOWN big volume, UP average or less volume. Advance/Declines were positive but insignificant following Wednesday’s debacle: +2.3:1 va -9:1!!! vs on NYSE and +1.7:1 vs -6.9:1! on Nasdaq. Breadth was similar following possibly the worst TB has ever seen: +2x vs -60x!!! on NYSE and +1.6x vs -18x!!!! on Nasdaq. New 52 week highs RAN 42 vs 44 vs Tuesday’s 132, while new lows slipped to 111 vs 119 vs 69. The ratio is very negative for a second day: -2.64x vs -2.7:1 after a couple of puny positives. VIX declined but only about a third of Thursday’s 8.69 burst closing 32.81 -3.35.

Here are the results for the past two days, along with movers. Just another dead cat bounce, which is running out of lives and more evidence of high frequency trades! Dow +1% by 9:1 vs -3.2% by 30:0; Transports +1.3% by 2:1 vs -3.8% by 19:1; S&P 500 +0.9% by 4.6:1 vs -3.7% by 499:1!!!; Nasdaq Composite +0.1% by 1.4:1 vs -3.9% by 7:3; Nasdaq 100 DOWN 0.1% by 2:1 vs -3.6% by 99:1; Russell 2000 +0.9% by 3.9:1 vs -4.8% by 4.7:1; NYSE Financials +0.4% by 2.3:1 vs -5.6% by 63.5:1!!!

Global stock markets rallying, Asia not so much – praise the lord: FTSE +1% vs +0.3% vs -1.6% ; CAC 40 +1.5% vs +0.9% vs -2.2%; DAX +2.1% vs +1.5% vs -2.3%; Nikkei +0.2% vs -2.9% vs +1.2% vs -1.3% vs -0.4% vs +1.9% vs closed vs -2.2%!!! vs-1.7%; Hang Seng +0.9% vs -5.3%!!!; Korean KOSPI +2.7% vs -4.9%!!! vs +0.2%; Indian Sensex DOWN 1% vs closed vs -1.2%. U.S. stock futures rallying but compare to prior two overnight sessions: DOW +105 vs +121 vs -206!; SPX +13 vs +16 vs -27; NDQ +22 vs +28 vs -47!!! Bond market closed but got hit again yesterday; 10 yr 2.06%. RECORD low 9/23 of 1.6855%; 30 yr 3.13%; Long TIP 0.78% vs .57 at high Tuesday. The 5 yr TIP yields MINUS 1.08%! 10 yr -0.07%. Libor 0.46% 3 mo., and 0.66% 6 mo., still creeping up! Bills still yield zero percent out to six months where it is just 0.03% – 1 month T-Bill -0.01%!

Gold trading up over night but well below the $1804.40 Tuesday, highest since 9/21. It closed at $1759.60 -$32 and is $1768.40 +$6.80 overnight!!! The record high is $1923.70, a buying climax on 9/6. SUP is $1725, the 40 day. Crude continues to inch higher, trading to $98.53 yesterday, highest since 8/1, and closed at $97.78 +$2.04, and is up again overnight to $98.13 +.35. Support at the 200 day (95.07) which had been resistance for the past two weeks. Major support is the convergence of the 40 and 50 day m/a’s at $87.45-62, still moving up.

Groupon watch (GRPN) IPO Priced at @$20 11/3
Day1 $31.14-25.90 closed 26.11 +$6.11
Day2 $27.78-24.59 closed $25.97 -.14
Day3 $26.21-24.75 closed $24.90 -$1.07
Day4 $24.56-22.76 closed $24.02 -88 – gap down on open from $24.75-$24.56 – now res.!
Day5 $24.96-23.20 closed $24.41 +.39 – first up day and higher high, higher low!

…yesterday TB sent the following letter to Mary Schapiro, Chairman of the SEC (hopefully there will be no repercussions from it….but ya never know…

Dear Ms. Schapiro,

I was appalled to hear your response to the questioner from CNBC when you were at the regulatory conference at the NY Fed. You said there was no failure of regulation.

As if that was not bad enough, you answered her follow-up question, “what about the 41 times leverage, shouldn’t that have been a concern?” No, you were not concerned. Not my problem, not anybody’s problem. You, who previously headed the money-bleeding FINRA, before assuming your current position. During your tenure what did those organizations accomplish? FINRA is financed by the broker community and now is responsible for compliance issues over all RIA’s and FIA’s which is not exactly neutral. You earned huge compensation in that position and managed to get a nice severance package when you moved on. Is this what government regulation is all about?

At the SEC you are pursuing a path that may make you a worse chairman than Chris Cox, who followed in the footsteps of William Donaldson. Donaldson, unlike you saw a need to oversee the top five banks periodically, since the ill-advised repeal of Glass-Steagall made them exempt from ANY regulation. Chairman Cox, did not engage in one audit. When you answered the questions about leverage, it was, to me, dereliction of duty.

I have been in the investment business for forty years and have experience in banking and both sides of the street as an institutional salesman and investment advisor. I have never witnessed wrongdoing in any firm while I was associated with it, nor do I believe there is in the vast majority of managers. I testified twice before a federal grand jury on the Orange County bankruptcy…against my former employer, Merrill Lynch. Every other manager refused to testify the second time over fear of reprisals from Merrill. That is a very sad commentary.

The Fed made MF Global a primary government securities dealer, yet since 1992 has provided no oversight over these select firms so long as they have $150 million in capital and participate in every treasury auction. Splendid! So who is monitoring them? What is worse, the public perception is that the Fed knows the financial condition of these companies yet it says it not only does not, but is not required to. Even when these are the biggest participants in the repo market! Doesn’t the credibility of the Fed and judgment of who they select as a primary dealer matter? (David Kotok of Cumberland Advisors recently exposed much of this.)

Apparently not. The first primary dealer I knew to go out of business under less than reputable circumstances was E.F. Hutton & Co. Drysdale Government Securities, a subsidiary of a sleepy 91 year-old stock and bond firm, used guarantees from Chase Manhattan Bank, and while Drysdale wasn’t a primary, Chase was, and those I knew only did repo with them with Chase’s guarantee. Drysdale’s downfall, and a huge loss to Chase, was a ‘coup’ on a 20-year bond auction where they took down virtually the entire issue, but couldn’t liquidate the position. This was a trick of Salomon Brothers who after a series of mergers ceased to operate in 1993, after actions in treasury auctions that were clear violations of bidding rules.

Now, at a time where our nations debt levels increase the need for oversight of all firms to maintain international credibility, especially primary dealers, it is virtually non-existent…yet you apparently see nothing wrong with this, despite the third leverage caused crisis beginning with LTCM in 1998.

I just learned today that FINRA granted Jon Corzine a waiver from retaking the exams…after all he was a former co-chairman of Goldman Sachs, not to mention a senator and governor. Is this normal for someone who was to be chairman and CEO of a major government and corporate securities dealer? I know of people who have re-entered the industry and had to retake the Series 7 exam, if there are exceptions to this I am unaware.

The point here is that all three of these agencies rely on only the reputations of ‘some’ people and when they discredit themselves the regulators tighten the restrictions on smaller firms and individuals who have done nothing wrong. The first case I recall was Ray Dirks, the securities analyst, who was convicted of insider trading just after I entered the industry, and only after more than a decade was he able to exonerate himself. He was up against Goldman Sachs on the Equity Funding debacle, despite notifying the SEC two weeks before publishing his report. If he provided insider information, Salomon brothers who took positions based on the report while Goldman who contacted executives at the company and took their side were both guilty of insider trading too, yet they were never prosecuted. The SEC was warned multiple times about Bernie Madoff, and did nothing…after all he was a former NASD President. But they then tightened rules for smaller investment advisors. When does the good old boy network end? When will regulators face up to their failure to do their jobs?

If I was in your position I would resign over this and the failure of the SEC to protect the participants in the securities markets. At least that might be a wake-up call. Someone with your background should be an asset in the war, not look the other way. Look at the recent stock market volatility which is clearly due to high frequency trading, yet there isn’t even a peep for your agency.

For all of this who operate honestly and openly with our clients, the state of regulation in this country is a travesty.

Sincerely,

William J. Darusmont
Excelsior, MN

. . . – – – . . .

TB just started reading Tom Brokaw’s excellent The Time of Our Lives: A conversation about America; Who we are, where we’ve been, and where we need to go, to recapture the American dream. This is an unpolitically motivated (he gives it to both parties) book that tells it like it is. Stop listening to FOX News or MSNBC and think for yourselves…that is all he, and TB, ask of you!

When TB was growing up, today was Armistice Day. He learned in history that this ended World War I – on the 11th hour, of the 11th day of the 11th month (November). Later it was changed to honor all who served as Veteran’s Day. But with the significance of the 11’s in the original treaty, and that today is 11/11/11, it has an even deeper significance.

A year ago while at a memorial service at the Alamo for my ship’s reunion (USS INGERSOLL DD-652)…on 9/11 by the way, I was amazed at the number of people who came up to us and said, “thank you for your service.” This was especially meaningful for us as well as all Viet Nam era vets who got no thanks when we returned home. I am not talking about for myself, but the true heroes, the ‘boots on the ground’ while we conducted shorebombing from a ship with three squares, showers and a clean bunk every night.

Now think about this: the servicemen…especially reservists who have been sent to Iraq of Afghanistan multiple times, for the reservists, hurting their career advancement, and incomes. Yet most members of Congress have kids in the military. Many of them never served. So in this talk of budget cuts without raising taxes, who is going to repay them for their sacrifice? You see, these people have no problem sending someone off to war for what, to them, is a just cause (to TB Afghanistan was but now isn’t, Iraq never was, no matter how bad Saddam was he was never a threat, just a bully). For their own purposes they are falsifying events, as they attempted to do with Pat Tillman to create support for the war. So now they want to cut the budget but remain in both countries, criticize Obama for Libya which was the proper way to handle it and still not do anything for those who have served us courageously and at great personal cost.

Fly your flag proudly…for them, not for those who sent them there,

Have a wonderful weekend! We had the first snow flurries yesterday!

TB

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