7/5/12…bank on it!

From Keep Calm and Carry On: “Wise men don’t need advice. Fools Won’t take it.” – Benjamin Franklin    

TB’s Quote of the Day: “It is not our job to protect the people from the consequences of their political choices.” – Chief Justice John Roberts – that’s BOTH sides of the aisle

Bloomberg Quote of the Day: “A hotel isn’t like a home, but it’s better than being a houseguest.” – William Feather

Bloomberg Top Stories:

*ECB Reduces Rate to Record Low 0.75% as Draghi Detects Threat to Economy (yet market rallies as if this will solve the problem??? Hello!!!)

*China Lowers Interest Rates for Second Time in a Month to Bolster Growth (yet we are in denial that their economy is slowing~!)

*Fewer Americans Than Forecast Filed Jobless Claims in Week, Easing Concern (do you think the record hot weather could have been why? Besides Friday’s #’s trump!)

*U.S. Employers Added More-Than-Forecast 176,000 Workers in June, ADP says (has little correlation value to the official data to be released tomorrow.)

*Philly Fed Employment Gauges Signals Soft Payrolls – you pick ‘em, TB says SOFT!

*Wall Street Bank Investors Are Kept in the Dark on Libor Probes Liability (see below)

* Iran Oil Tankers Signal Bound for China in Sign Storage Plan May Be Ending (loaded ships have been sitting idle off Iran for months and more…helped create shortage)

*Congress Grabs $45 Million of Free Postage While Pushing Post Office Cuts – yawn!

Volume plummeted to or very close to a 12 month low on a short session: 2.06M vs 3.25B shares but that didn’t stop the high freaks from their high jinks! NYSE stocks executed without the aid of the ETN market also plunged to 466M shares vs 736M shares…160M of those came in the final half hour (one-third!). It was the lowest since 11/25/11 – day after Thanksgiving (442M shares). 36 of the last 63 sessions have been less than 800M shares (Corrected!) Since 2/29 there have been just 15 ‘average’ days (mostly down!), including 3/16’s high for 2012 of 1.65B (4.85B including ETNs) and just 14 have been above 900M – 942M is 12 month average. Since 11/1 there have been just 14, 1B share days…ten in 2012! Since 2/6 there have now been NINE sessions less than 700M shares. 148 of the last 167 sessions have been less than the 12 month average!

Advance/Declines were positive: +3.9x vs +2.4x vs +6.6x vs +1.3x vs +3.6x on NYSE and +2.7x vs +1.8x vs +5.8x vs -1.6x vs +2.3x on Nasdaq. Breadth was similar: +3.4x vs +1.7x vs +6.2x vs +1.1x vs +4.3x on NYSE and +3.4x vs +2x vs +5.9x vs -2.8x vs +3.2x on Nasdaq.. New 52 week highs rose yet again to 504 vs 463 (another new high), while new lows dipped even further to 24 vs 37. The ratio is now about +20x vs +12.5x vs +10x vs +1.2x vs 2x. The S&P VIX declined slightly to 16.65 -.15…the low for 2012 is 13.66 on 3/16!

Here are the results of last 5 sessions: Dow +0.6% vs -0.1% vs +2.2% vs -0.2% vs +0.7%; Transports +0.6% vs -0.1% vs +2.8% vs +0.8% vs +0.5%; Dow Utilities -0.3% vs +0.7% vs +0.7% vs +0.1%; S&P 500 +0.6% vs +0.3% vs +2.5% vs -0.2% vs +0.9%; Nasdaq Composite +0.8% vs +0.6% vs +3%! vs -0.9% vs +0.7%; Nasdaq 100 +0.8% vs +0.4% vs +3.1%! vs -1.1%! vs +0.8%; Russell 2000 +1.3%!!! vs +1.2%!!! vs +2.9%! vs -0.1% vs +1.5%; NYSE Financials +0.7% vs +0.8% vs +2.8%! vs -0.4% vs +1.2% (KBW Banks +0.4% vs +0.6% vs +2.7% vs -0.4% vs +1.4%; Nasdaq Banks +0.7% vs +0.8% vs +1.9% vs flat vs +1.5%). NYSE Financial Leaders: BAC +0.1% vs -1.6% vs +5.7%! vs -0.4% vs +2%; F +2.2%! vs -2.1%! vs -5%!!!; JPM -0.3% vs +1.5% vs -0.4% vs -2.5% vs +3%; GE -0.3% vs -1.7% vs +3.2% vs +0.4% vs +1.7%. Not leaders, but… C +0.7% vs flat vs +3.9% vs -2.6% vs +1.3%; WFC -0.2% vs flat vs -0.1% vs -0.8% vs +1.3%; USB +0.4% vs +0.9% vs +2.3% vs flat vs +0.3% vs +0.5%. NOTE:  USB has had new 12 month highs the last two sessions!

Global stocks higher, except Japan: FTSE +0.6% vs +0.4% vs +0.5% vs +1.4% vs -0.6%; CAC 40 +0.2% vs +0.4% vs +1.2% vs +2.6%; DAX +0.8% vs +0.7% vs +1% vs +2.5% vs -0.9%; Nikkei -0.3% vs +0.7% vs flat vs +1.5% vs +1.7%; Hang Seng +0.5% vs +1.5% vs +2.2% vs +2.2% vs -0.8%; Korean KOSPI +0.1% vs +0.9% vs -0.1% vs +1.9% vs +0.1%; Indian Sensex +0.4% vs +0.2% vs -0.2% vs +2.6% vs +0.1%. U.S. stock futures higher but giving up about half from highs: DOW +27; SPX +3.30; NDQ +4.

Bonds rallying after Tuesday’s do nothing session: 10 yr 1.60% +1/4 – record low 6/1 of 1.442%!; 30 yr 2.72% +3/8; Long TIP 0.50% +1/4. Record low yield of 0.347% on 6/1. The 5 yr TIP yields -1.12% – strong!; 10 yr -0.54%. Bills 0.07% 1 month; 0.08% 3 months; 0.14% 6 months. Reverse Repo 0.32% vs 0.38%. 3 mo. Libor 0.46%, and 0.73% – steady. European problem sovereign 10 years, Germany-benchmark: 1.47% +2 bp’s; Italy 5.80% +6; Spain 6.55% +21; Greece 24.77% -23; Portugal 9.73% +5; Ireland 6.00% +2!

Gold took advantage of the light volume and closed above $1600…but still lacks traction, closing at $1621.80 +$24.10 with an intraday high of $1625.70. 6/22’s intraday low of $1555.60 was lowest since June 8th! The hit is $153 since 2/28! 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/sup is $1590, the 40 day and $1603, the 50 day, then $1670, the 200 day. It is now $1622.30 +.50. 5/2’s o/n low of $1526.70 was lowest since 12/29! Crude had a huge rally closing at $87.66 +$3.91 with a session high of $88.04, highest since 6/20. The intraday low on 6/28 of $77.28 was lowest since 10/5/11. This is the first close above $85 since June 1!  RES/sup at the 40 day (86.87), the 50 day (90.15), then the 200 day (95.96), – caution as the averages have been plunging thus creating an artificially low 40 day which was easy to breach. First REAL res $89.17, the 11/1/11 low, then $92.52-54, the lows of 12/16-12/17, a prior double bottom, MAJOR sup remains at $74.95, the 10/4/11 low!!! It is higher overnight at $88.73 +$1.06!

Being  a short session, there is nothing meaningful to report for Tuesday. Note that as in prior ‘faux’ rallies all of the indices were up about the same amount: 0.6%-0.8% which is always suspect. The lone exception is the laggard Russell 2000 small cap which was up 1.3% and up 1.2% on Monday. Is it over-reaching?

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

…who caused the financial crisis? BANKERS! (with the benign/able assistance of Alan Greenspan and other regulators). Who has seen their personal earnings soar while their shareholders remain under water? BANKERS! Who has thwarted all efforts at serious financial reform? BANKERS! Who leads this motley crew? Jamie Dimon!

But that is on THIS side of the pond. It seems to be even worse on the other side of it. The Barclays LIBOR (London Interbank Borrowing Rate) fixing scandal is spreading like wildfire and will lead to the other British Bankers Association (BBA) members being pulled in. To understand the significance of this you have to understand just what the BBA does.

It determines the Libor rate which is the benchmark for all banks. In days of old, when TB was cutting his teeth it was the Fed Funds rate and the T-Bill rate that was the basis for short term lending. With the advent of truly global markets there had to be a common index and LIBOR was adopted.

Not only does LIBOR now set the rate on short loans it also determines floating rate mortgage rates (except long term mortgages which remain tied to the 10 year treasury). You still don’t care?

The ten banks who set the rate meet daily in London and held meetings within earshot of trading desks – guess they believed in transparency…to their own traders! Long before the financial crisis some bankers and investors questioned the validity of the rate. After the crisis, the strongest (perceived) banks were actually borrowing at that rate while weaker banks were borrowing at significantly higher rates. This slowly began to raise flags. But for most, it didn’t matter. Apparently it mattered little to the Bank of England and the FSA because nothing was done about it. But now we have the Barclay’s scandal.

If you believe Barclay’s they were told (with a wink?…implied?) to shave the rate. So what? Well…they ‘honestly believed’ they were only carrying out the regulators wishes. Really? Who benefitted the most from this? Barclays and other big banks. Who was (is) impacted? Holders of Libor-based paper…no small change as there are $350 TRILLION of LIBOR-based securities/loans out there! But wait, isn’t this good for borrowers? Maybe but not if the ‘spread’ is raised. So if a trader knows that the rate is artificially low he raises his required spread to buy more and the cost is passed on to sellers. Bid/offer spreads will therefore widen at the expense of potential ‘retail’ buyers.

Barclays has agreed to pay a $450 million fine to settle but as more is learned they got off easily (consider that Glaxo was just fined a record $3 billion – which ‘crime’ was more significant?)…although it cost them their chairman (Marcus Agius) and CEO (Robert Diamond, an American, not to be confused with Jamie Dimon), and now Agius is heading a committee to find a new CEO. Sources tell TB that when Diamond appeared before a Brit committee yesterday the grilling was medium rare at best.

So much for the LIBOR scandal…will it be swept under the carpet rather than ruin some government officials? Consider the way our Congress has gone out of its way to placate Dimon and the rest of the banking committee…don’t upset your backers!

It is incredible how the right is claiming that Chief Justice Roberts vote must have been due to threats – some claim on his life!…yet no one has challenged the Citizens United decision, which was just upheld in another case where a state (Montana?) challenged the right of Superpacs to interfere in state elections. What reasonable person believes a corporation is a person and furthermore should have no limits on its spending (or who is deciding how that money is to be spent), or even have to disclose their contributions which are in unlimited amounts? Wall Street is a huge contributor to these ‘slush funds.’)

IF we are to increase the accountability of elected officials we have to reverse what we are seeing done with the blessing of a partisan court. But if you are happy with it, good luck to all of us.

For it was the banks…and what used to be shadow banks (Goldman, Morgan Stanley) that created the demand for mortgage pools consisting of subprime loans and then packaged them into pools which they claimed diversified them and protected investors from losses…with the assistance of Moody’s and S&P. Wells Fargo proudly says it didn’t own any subprime mortgages, yet the mortgage sub was the biggest sub-prime lender. Wells however was happy to take the home equity portion (if the underlying mortgage is bad why would you take a subordinate position?), and the unsecured portion for a total of 105% of the purchase price! Their reasoning was simple: the loans would be refinanced at the first reset date and in the meantime they could ‘cherry-pick’ them for the highest yield portions…of course when the music stopped, they too had big losses.

Then when it came time to foreclose the banks resorted to paper mills that generated often bogus documents…often to cover up for the Wall Street created MERS (Mortgage Electronic Recording System), which resulted in millions of mortgages being in a nominee name making it difficult if not impossible to track down the true lien holder. The banks were fined for this and the system remains chaotic.

Then there is the account processing scandal in which (memos from Wells first emerged showing this was done), transactions were delayed then recorded late in the evening and ‘reordered’ so that the largest debits came first thus producing several overdraft charges rather than one or two. An internal memo noted that after the crisis the fees had declined sharply (most likely due to banks tightening restrictions on account holders) and they needed to offset this loss of income. The big banks were fined hefty sums. The latest was U.S. Bancorp which TB has felt was the best bank in the U.S. and still does but is appalled that they too participated in this. This begs the question: is it possible that independently all these banks developed the same strategy to fleece clients? You decide.

Once again: so what you say? Consider this…what is an economy without a sound, transparent financial system? If you can’t trust the banks who can you trust? Politicians? Trading partners? Are we to return to a barter society or attempt to pay for things in gold? At $1600 an ounce it is very difficult to make change…unless it is with paper dollars!

If you aren’t troubled by these events you live in a very rose-colored world…don’t leave it or you be sadly disappointed. TB was proud to be a banker…proud to work for a Wall Street firm…but is now sad for the people who work in either of these industries. When TB comments against them, it is his friends who work in the industry (his friends are honest and not part of the 10% or so who created the crisis), who rush to the defense and see no need for Wall Street reform…pity.

Have a great day!

TB

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