5/14/12…where to begin

TB is back and energized…the JPM shock is being felt around the world and the Dow is already down 140 points. Sell in May and go away may have been  too late…April? TB apologizes for this lengthy missive – 2800 words, but think you will be rewarded for reading it. It contains a lot of research…don’t you just love the internet, Mr. Gore???

TB’s Song of the Day:

The rich are gettin richer, the poor is gettin poorer,
It’s such a low down, cryin shame,
There’s so much dirty money, dirty dirty money,
You don’t get to get it, don’t you understand?

It takes money, to make money
It takes money, to make money

Oh that little donkey, he made an up-kick,
Made such a mess out of the place,
All ya people workin, clean it up now,
And when you’re doin it with a smile on your face

It takes money, to make money
It takes money, to make money

Go down to the bank, get on your knees,
Excuse me banker, I’m beggin you please,
I need some cash, for food in the pot,
Give me a little and I’ll pay you back a lot

It takes money, to make money
It takes money, to make money

The Uptones

(This is not the song TB was looking for…does anyone remember part of a song from the 60’s that had ‘it takes money’ in the chorus? Couldn’t find it by googling. TB)

This week’s economic calendar is more crowded than this week’s was with an emphasis on manufacturing activity. However, the highlights of the week will be April Retail Sales and the April CPI (Tuesday). We will also get the May Empire State Manufacturing Survey and March Business Inventories (also Tuesday), April Housing Starts and April Industrial Production (Wednesday), and the Philadelphia Fed Survey and April Leading Indicators (Thursday). In addition, the Federal Reserve will release the minutes to the April 24th & 25th FOMC meeting (Wednesday). Courtesy of Steve Wood, Insight Economics, Walnut Creek, CA

Bloomberg Top Stories:

 

*

 

Time for a recap now that TB is back from vacay. In last commentary from April 27th TB said, “Still holding convictions but you are on your own. The Dow hit a high of 13227 in a stealth rally into the close easily taking out resistance at 13131, the April 17 high, and closed at 13204. Only resistance now is the 4/2 high of 13297…but April is coming to a close and we know what happens in May – usually! Major support remains at 13048 (40 day m/a), 13027 (50 day), then 12205, the 200 day. Also, 12710, the 4/10/12 low.”

So what happened since then:

The Dow peaked at 13338 on May 1 (May Day…add this to TB’s S-O-S!), closing that day at 13279, highest since May 19, 2008, just after the crash began and has plunged to 12820 (Friday’s close) – a 3.9% drop. For the past 12 months the return has fallen to 5.04%, while year to date it is up 5.97%. You may recall being warned to watch out for returns as the stock market low was on 3/6/09, meaning that due to the rapid rise from that low, returns are going to be getting worse, not better for future three year periods. From 3/9/09-3/31/12, the Dow delivered an annualized return of 23.53% – an extraordinary performance. Thru Friday’s close that has slipped to 22.88%…not big but watch out when we come to June 30th. Also, for you lovers of mutual funds who follow those three year returns just remember: figures lie and liars figure!

As for volume:

NYSE stock volume was right around 4B shares – about average the day TB left, and while TB doesn’t have data since then it had been declining and fell to 3.74B on Friday.  NYSE shares executed on the Big Board were about 788M shares and Friday’s was 786 million (it ranged from 754M on 5/7 to 940M on 5/8 averaging 817M shares). Compare and contrast to the average of 962M for the past 12 months, and 1.03 BILLION for all of 2011- which included the high of 2.54B shares on 8/8, one of just 12 2B+ share days over the past five years…record is 3.15B shares on 12/18/09, a day the Dow gained just 20 pts! 17 of the last 26 sessions have been less than 800M shares!!! Since 2/29 there have now been just FIVE ‘average’ days, including 3/16’s high for 2012, but average has fallen to 808M and just six have been above 900M. Since 11/1 there have been just eight 1B share days…only four in 2012! Since 2/6 there have been FIVE sessions less than 700M shares. 119 of the last 131 sessions have been less than the 12 month average! Advance/Declines were negative (starting a new series today)::-1.5x on NYSE and -1.5x on Nasdaq. Breadth was similar: -2.3x on NYSE and -1.1x on Nasdaq. New 52 week highs were 119 (high was 420 on 3/26), while new lows ran 146! Ratio is negative by 1.2x.  The S&P VIX rose to 19.89. Since 4/26 it has ranged from 15.75 (low on 4/26) to 21.59 (high on May 9!). This is a clear warning that market is losing complacency…sell in May???

Here are the results (also starting a new series): Dow -0.3%; Transports +0.1x; Dow Utilities +0.1%; S&P 500 -0.3%; Nasdaq Composite FLAT?!?; Nasdaq 100 FLAT ?!?; Russell 2000 -0.2%; NYSE Financials DOWBN 1%, biggest loser! (KBW Banks -1.2%, Nasdaq -0.7%); NYSE Financial Leaders: BAC -2%!, JPM -9.3%; C -4% (note these are ranked by volume!

European stocks thrashed as was China, rest of Asia mixed and little changed … not with Euro crisis worsening and JPM to boot?: FTSE  -2%!; CAC 40 -2.1%!; DAX -2%!; Nikkei UP 0.2%; Hang Seng -1.2%; Korean KOSPI  -0.2%; Indian Sensex -0.5%.. U.S. stock futures also weak: DOW -88; SPX -11; NDQ -20! Bonds STRONG! BUT TIPS losing advantage!!! 10’s well below 2% and 30’s joined by closing at 3.01% Friday and now below – first time since 1/18’s 2.96%! 10 yr 1.78% +9/16, RECORD low 9/23 of 1.6855%; 30 yr 2.94%% +1-7/16; Long TIP 0.69% up 1 pt. It was 0.57% at high. The 5 yr TIP yields MINUS 1.18%; 10 yr -0.36%. Bills 0.06% 1 month; 0.09% 3 months; 0.14% 6 mos. – unchanged since 4/26! Reverse Repo 0.24%. 3 mo. Libor 0.47%, and 0.73%; also steady. European problem sovereign 10 years changes are since 4/26, Germany-benchmark: 1.44% -23 bp; Italy 5.71% +2; Spain 6.24% +1.02!!!; Greece 20.48% +5.59%!!!; Portugal had been under 10%!!!! 10.57%??? -59!!!; Ireland 6.69% +13 – beware of this one!!! Government is a mess and people are angry – gross understatement!

Gold closed below $1600 – it broke it on 5/8 and closed below on 5/9. It closed at $1584.00 -$11.50 – OUCH!!!, making the hit $207 since 2/28,  loss of 11.6%! 2/28’s $1792.70 intraday high was not seen since 11/16! The record high is $1923.70, a buying climax on 9/6. Res is $1649, the 40 day and $1657, the 50 day, then $1703, the 200 day. It is now $1564.00 -$20!!! Crude closed $96.13 -.95 and is in FREEFALL!!! On 4/26 it closed at $104.55 +.43…that is a 10% LOSS!!! We took out 4/10’s low of $100.68, worst since 2/15/12 on May 4, a day crude fell by $4.55, or 4%, with a low $1 below that! It is well below the range of $105-110 which held from to 3/28!!! RES at $96.26 THE 200 DAY!!!, the 40 day (102.94), the 50 day (103.60), and major support at $92.52-54, the lows of 12/16-12/17, a clear double bottom!!!. It is now $94.05 -$2.07!!! AND the overnight low was 93.65, lowest since 12/11! Better hope and pray we close above $92.54…unless you are a buyer of petrol!!! Aren’t we all???

To sum up, TB was rewarded for ignoring the whipsaw action dominated by high frequency traders (flash trading), as were his clients whose portfolios are up in value since 4/26…it’s good to be right…although the pain in the middle is no fun. As a former colleague used to say, he knew it was the bottom whenever he got that gut-wrenching feeling that tries to convince you that you are wrong.

Today will be ugly, courtesy of Jamie Dimon’s (der wunderkind’s) JPMorgan, aka Gip’Em. First they merged with Chase which had been a competing gunslinger with Citi, in a move that would have caused the old scoundrel himself, J.P. to turn over in his grave, and then got their CEO. Note that since getting his MBA from Hahvahd, and don’t think he isn’t smart, he worked in various firms from Smith Barney to AmEx to Travelers to Citi, under the tutelage of the one and only Sanford Weill…and you don’t gain moral principles from him. He was introduced to Weill by his father…lovely! Then they had a falling out and he went to Bank One which became part of Chase…and so we get to now.

As mentioned earlier, Dimon is smart as a whip…but TB believes has not the the same level of scruples. Just before TB went on vacation he told of the story of J.E. Staley, who engineered the buying of accounts from American Century THEN replaced the American Century funds with proprietary funds that performed WORSE…which opens them to client suits as well…within a month he broke this agreement, was sued by American, at a cost to JPM of $340 million. THEN JPM tried to have the records sealed…unsuccessfully.

What happened to Staley? Interesting as he was CEO of the Investment Bank and since has the added title of CEO International Business, and sits on the Executive Committee of the bank. Remember also that TB found out from Bloomberg article that Jamie Dimon’s compensation for 2011 of $27 million was not measured in terms of the average employee…no sir…it was equal to 67 of the firms investment bankers! Now THAT is a leap of faith! Those 67 bankers would report to Staley who in turn reported to Ina Drew, the Chief Investment Officer who was fired because of the scandal…but wait, it gets better…in the scramble to damage control the trading of ‘the whale’, six key officers were dispatched to London…among them J.E. Staley, and arguably heading the team which was preposterously dubbed ‘Seal Team SIX.’ (This is an outrage and defamation of the Navy Seals who earned that title and demeans them…nothing new here, right? TB has had the honor of knowing and working with two SEALs and they do not deserve to be in this company of greed inspired people). It is also interesting that as with Morgan Stanley, a woman was the fall guy for problems. True, Drew, an employee of 30 years was directly responsible for the actions of the trader, but what did she know and when did she know it? But just like Zoe Cruz…a woman was to blame. Note however that Cruz was then financed by MS in a hedge fund operation…to secure silence? It is likely that Drew will get similar treatment with a parachute of gold or better to insure her silence.

This bank STINKS from the top down. We read time after time of problems within this bank, worse than the American Century deal because they ripped off the taxpayers…Birmingham Alabama…countless interest rate swaps…municipal bond rigging…yet no one seems to be taken to task. One reason for this is that the bank is in violation of one of TB’s main principles of investing: the CEO should NEVER, under any circumstances also be the Chairman of the Board…a direct conflict of interest since the board is mandated to be the stewards for the shareholders! This is not the case, even in companies that do not combine these to titles, but worse when it occurs.

Remember that JPM stock fell by 20% in 2011…the year for which Dimon received that $21.5 million kicker (salary is $1.42M, bonus $4.5M, stock awards 12M shares, Options awards 5M shares but was up 9.1% annualized by March 31st…still…shouldn’t the bonus reflect the time period not the value at the time of the granting of the bonus? Heck, why not double count it for 2012 as the shareholders obviously won’t even notice…they didn’t last time, right? Now about the timing of the announcement…on April 27th, the day TB left there was a top story on Bloomberg that was included in the highlights of this missive.

As for Staley, his 2011 compensation was $17.6M (contrast this to Ina Drew at $15.5M, Mary Erdoes $15M, and CAO/CEO Mortgage Banking Frank Bisignano at $10.2M), making him number twoso it appears there was no fallout from his $373M expense on his dirty deed. Note that he surrendered shares with strike price above $53 and received shares at $21 or so…about 75% of the low price on 10/4/11 of $27.85. In other words, compensation is GROSSLY UNDERSTATED!

A BIG question is what did they know and when did they know it. Did they attempt to defer the discovery until after the shareholders meeting, which is tomorrow and will now be hot and ugly. In Europe, shareholders are attacking boards over compensation and performance…will we finally wake up? Note that most proxies are probably already in and professional money managers and hedge funds no longer challenge boards. The last TB can recall is CalPERS and they were laughed at for it. Wake up America…it’s your money! Don’t let Dimon, Citi’s Pandit (who is NOT also Chairman by the way!) destroy your investment value. When are we going to see a test of Sarbanes-Oxley?…or restoring the guts to Dodd-Frank. TB is not alone in calling for reducing the size of these ‘too big to fail’ companies and furthermore guaranteeing only banking activities…with NO intercompany transactions allowed OR borrowing from other banks! God, we are stupid!

Dimon fought and continues to fight the Volcker Rule. A friend and knowledgeable banker says it is a bad rule. I, along with Nouriel Rabini, Simon Johnson, and others strongly disagree. To the argument that it will make U.S. banks less competitive so be it…do we want to follow the European banks who showed their stupidity…or like former Fed Governor and now Columbia professor Frederic Mishkin, who authored a report ‘Financial Stability in Iceland’ which was used to argue the merits of deregulation – without disclosing he was paid to write it…hell no! Get mad as hell and don’t take this crap anymore. Dimon also has fought the financial protection agency and despite Elizabeth Warren’s attempts to reconcile with him on the points, he destroyed her chances of heading that agency. This is NOT free market capitalism, nor is it capitalism in any form…it is GREED, pure and simple.

Adopt the Volcker rule and limit proprietary trading to federal government securities and agencies and municipal bonds. No derivatives unless and until banks agree to have them listed on an exchange which will eliminate them for the most part since the fees will be decimated and folks, that is what it is all about: fees and compensation – period! The shareholders be damned.  This brings us to TB’s second rule: never buy a bank stock for anything BUT the dividend and know what you are buying…don’t enrich the bastards~!

Strong language today but after reading three outstanding books while on vacation, TB is charged since all were by experts and all were damning of the charlatan’s who purport to support free market capitalism. The next crisis is sooner than we think…JPM just proved it is MUCH sooner.

. . .   – – –  . . .  (SOS)   . . .   – – –  . . .  (SOS)   . . .   – – –  . . .  (SOS)   . . .   – – –  . . .  (SOS)

…you go on vacation to relax, and relax TB did. But he also wanted to find out more about the economy in both Ireland’s and Scotland, and he did. It is not promising but it is not Doomsday either. The rest of this week will be devoted to this wonderful trip along with some observations.

Also he took along his Kindle and read three books and a portion of a fourth. Here they are ranked in importance and what you can learn from them:

  1. Crisis Economics; A Crash Course in the Future of Finance, Stephen Mihm and Nouriel Roubini. – the best description of the financial crisis and how it developed. Written very clearly in laymen’s terms
  2. White House Burning, Simon Johnson and James Kwak. This is an incredible study of the history of debt in America and why the austerity measures prescribed by the GOP, Tea Party, and Grover Norquist will create another recession or worse. Also very clearly written
  3. Extreme Money: Masters of the Universe and the Cult of Risk, Satyajit Das. Don’t let the authors name fool you…just read the first pages and don’t worry about the confusion here as it soon develops into not only a great discussion of the problems but specific examples of companies that failed and the best description of the how the derivatives that destroyed our economy functioned. The crisis was caused by one and only one thing: GREED! Period with no concern of the consequences.
  4. From Bear to Bull with ETF’s, David Kotok. This book not only explains ETF’s and their risks but how a few of them can be used to create a portfolio and by switching them at opportune times control risk and increase returns. The last half of the book is a compilation of his newsletters with no punches pulled. It shows when he was right and when he was wrong which is a very difficult and gutsy thing to do.

I urge any serious investor to read these books or at least one or two of them because you need to understand this BEFORE you vote. It is important to know that a venture capitalist (private equity) is NOT an expert at running a business for the long run…and more importantly the last person who should run a country. Their business is about making a quick profit and then dumping the company…you cannot do that with the USA.

Don’t worry the rest of the week will be on the lighter side…in the lower portion of the missives anyway…the markets will determine the rest.

Have a great week…it’s great to travel but better to be back in America. Cheers!

TB

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