1/18/13…an advocate for the people

From the Friars Club Encyclopedia of Jokes: “One and one is two, and two and two are four, and five will get you ten if you know how to work it.” – Mae West…and:

“A verbal contract isn’t worth the paper it is written on.” – Louis B. Mayer

Bloomberg Quote of the Day: “If you can’t explain it to a six year old, you don’t understand it yourself.”  – Albert Einstein

Bloomberg Top Stories:

*Morgan Stanley Beats Estimates on Increased Revenue From Retail Brokerage

*Yen Weakens to 2-1/2 Year Low as Pound Drops; Metals Rise on China Economy

*GE Profit Better Than Estimated as Industrial Units Gain for a Second Quarter

*China’s Economy Exits Two-Year Slowdown as 7.9% Growth Exceeds Estimates

*McCafferty Says BOE Should Be Ready to Use New Stimulus Tools – hmmm?

*Morgan Stanley Sets Aside 7.6% Less for Investment Bank’s 2012 Pay Costs

*RIM Climbs After Jeffries Raises Rating to Buy on Software

*Scotiabank Targets 20% Increase in Micro Loans to Mexico

*Boeing 787 Plane of the Future Faces Grounded Present Along With Troubled Past

*Algerian Forces Surround Gas Plant as Some Hostages Die in Rescue Attempt L

*Obama Promise to Raise Middle Class Living Standards Already Seen in Peril

*Patent Trial Jury Awards in U.S. Soar in 2012 With Biggest Cut or Cancelled – patent miners buy up old patents of dubious difference in intellectual property and file suits which hurts productivity. Now international courts are going to let them do it too!      

Finally a solid up session but it is the eve of the first options expiration of 2013 and the volatility which started high in the period is now bouncing around a 12-month low. Is that complacency? With three Congressional battles to be fought TB would say so. Despite Apple weakness again – off but held at $502, both Nasdaq indices rallied(0.6%/0.5%) and the Russell 2000 small cap took the honors with a 0.9% gain. All other indices except Dow Utilities (+0.3%) were up 0.5% or more. The NDQ 100 only had four stocks gainin more than 1 point with 3:1 advancing and only Apple making a dent losing 2.8 index points. GOOG was the only other stock that lost anywhere near 1 point (-0.9)! NYSE Financials rose 0.2% – Brokers +0.8%; KBW Banks +0.2%, Nasdaq Banks +1.3%! BofA was most active stock as usual – -4.2% vs +2% vs 0.7% vs -1.4% vs -1.3%, closing at $11.28. Citi fell 2.96%, both on earnings misses. JPM lost 0.5% after rising 1% on good earnings and ‘halving’ of Dimon’s excessive compensation as he was blamed for the London Whale. Total NYSE volume rose to a still weak 3.68B shares vs 3.16B vs 3.13B vs 2.96B – recent range 2.96B-4.2B. Trades executed on the floor of the NYSE also rose to 710M shares, not strong but highest in last 7 sessions, from 499M vs 598M vs 590M – lowest since 12/28. Recent range 590M-859M. Advance/declines and Breadth were all modestly positive. New 52 week highs hit 713 a week ago and after bottoming at 308 last Friday, finally got back to 552 likely due to options from 270 vs 304. Recent range 270-713. New lows were steady at a weak 12 vs 13. After closing at 22.70 on 12/28, the S&P VIX volatility measurement continues to register complacency ahead of the first options expiry of the year and that could change…fast! It remains near the 12-month low (13.32 on 8/17) barely rising to 13.57 +.15. Play at your own peril!

Global stocks generally higher, mainly Asia, but Germany -0.2%! Japan +2.9% (weak yen will do that), Hang Seng +1.1%. U.S. stock futures slightly higher ex-NDQ in a quiet session ahead of options expiry: DOW +7; SPX +0.60; NDQ DOWN 7.50 – a bad sign for tech today?

The bond market continues to try to gain back its recent losses and is up overnight after a lackluster day yesterday and remains weak. The 10 yr note is 1.86% +3/16 vs 1.87%, and the 30 yr 3.05% +1/2 vs 3.07% – the old 3% high set on 12/18! Long TIPS also better at 0.43% +5/8 vs 0.46% but way off the 0.22% record low set on 12/6! Reverse Repo rate at 0.15% vs 0.20%!. Libor 0.302%, 3 months, and 0.485% six months. Foreign bond rates are lower across the board by 1-7 basis points, while Portugal (6.02% -11) and Greece (10.79% -25) are significantly lower. Japan 0.74% +1.

Gold rallied right through the 40 day and touched the 50 day at $1697.80 before closing at 1690.80 +$7.60, almost on the 40 day, safely above the 200 day m/a ($1667). Can it take out $1700? the 40/50 day are key sup/res. The $1636 low on 12/21 – lowest since 8/21 is key support. It is up slightly overnight at $1691.50 +.70. Crude rose $1.25 to close at $95.49 (highest since 9/17) with an intraday high of $96.04 – wow! Overnight it is $95.37 -.12…pacing itself!

…did you know that someone at the IRS loves you? Yep…and they are mandated to look after your interest (this is in addition to their personal advocate program which can be very helpful if you have a problem…TB can attest to that). This is the National Tax Advocate which must prepare two reports to Congress each year to set the stage for tax reform. Ever hear of it before? Probably not because generally it is a ho-hum report. But it seems the advocate,  Nina E. Olsen has made waves in Congress by thinking the unthinkable…well, not exactly since it was Ronald Reagan who envisioned filing your tax return on a postcard! Ah, but this America…land of free market capitalism and all it entails…EXCEPT… creative destruction when it comes to the tax code. Despite reform after reform aimed at simplifying it, it gets more complicated and more in favor of the wealthiest Americans. Here is a well-written column from the NYTimes by Catherine Rampell that explains Olsem’s report (this is no Mrs. Olsen from the TV commercials).

Lawmakers need to overhaul the tax code completely to reduce the “significant, even unconscionable, burden” placed on taxpayers just to file a tax return, the Internal Revenue Service’s ombudsman told Congress on Wednesday.

In her legally required annual report to Congress, the national taxpayer advocate, Nina E. Olson, estimated that individuals and businesses spend about 6.1 billion hours a year complying with tax-filing requirements. That adds up to the equivalent of more than three million full-time workers, or more than the number of jobs on the entire federal government’s payroll.

And filing is only becoming more complicated as lawmakers haggle over new tax breaks.

Since 2001, Congress has made nearly 5,000 changes to the United States tax code, or more than one a day on average. Nine in 10 taxpayers now pay money, for professional preparers or often-expensive commercial tax software, to figure out how much money they owe the government.

One of the advocate’s suggestions for streamlining the tax code was to repeal the alternative minimum tax, a parallel tax system intended to make sure rich Americans pay a fair amount in taxes, which is increasingly engulfing middle-class taxpayers. Another was to reduce the number of income exclusions, deductions and credits, known collectively as “tax expenditures,” that clutter up the tax code.

For the current fiscal year, the Joint Committee on Taxation has estimated that these tax expenditures total about $1.1 trillion, whereas individual income tax revenue will be about $1.4 trillion.

The national taxpayer advocate, an independent position with the I.R.S. that Congress created to assist taxpayers in resolving problems, also criticized Congress’s recent budget cuts to the I.R.S.

On a budget of $11.8 billion in the 2012 fiscal year, the I.R.S. collected $2.52 trillion, meaning it brought in $214 for every dollar it spent. On the margin, the I.R.S. is estimated to bring in about $7 for every additional dollar it spends or, put another way, it costs the federal government $7 for every dollar that is cut from the I.R.S.’s budget. The I.R.S. will receive even less money if Congress allows across-the-board spending cuts to materialize in March as currently scheduled.

“It is ironic and counterproductive that concerns about the deficit are leading to cuts in the I.R.S. budget, when those cuts are making the deficit larger,” Ms. Olson wrote in the report. “No business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors.”

The I.R.S. already lacks money sufficient to meet taxpayer needs, the report said. In the last fiscal year, the I.R.S. answered just two-thirds of calls from taxpayers, and the average person who got through had to first spend 17 minutes on hold.

Among the more serious problems for which taxpayers need assistance is tax-related identity theft. This occurs when criminals steal Social Security numbers and then use them to claim other people’s tax refunds, which average $3,000. Stolen Social Security numbers are also used to gain employment under false pretenses.

Tax-related identity theft has risen 650 percent over the last four years, and the I.R.S. had almost 650,000 identity theft cases in its inventory as of Sept. 30, 2012. I.R.S. employees are currently advising identity theft victims that it will take 180 days to resolve their cases.

“The I.R.S. has established numerous task forces and Lean Six Sigma teams focused on improving identity theft processes,” Ms. Olson wrote in her report, which attacked the I.R.S.’s decision to decentralize its identity theft investigation efforts. “Despite all of this attention, victims who need their tax accounts corrected quickly and effectively still face many of the same issues they did five years ago — a labyrinth of procedures and drawn-out time frames for resolution.”

The report criticized other I.R.S. practices, including its failure to provide tax refunds to many people whose preparers initially stole their refunds, and its high audit rate for taxpayers who claim the adoption tax credit.

The upshot of this is we could eliminate all tax deductions, all filing except your total income, and lower tax rates across the board by 44% and still produce the same amount of revenue! Let’s do it! Ah, but wait…there is a ‘cottage’ industry out there of tax lawyers, tax preparers, and other special interest groups who don’t care if you are prevented from getting ulcers, losing your mind, becoming depressed, etc. so long as THEY make money. Not only that but their wealthiest clients would pay a lower RATE but be forced to pay more in taxes – would love to hear their defense of that one (want proof? Of course our wonderful congressional representatives would not like to cross them either as it would cut into their donations…big time. So we will likely be stuck with this forever. The Danes are the highest taxed people in the industrial nations. Despite that in surveys they are also the happiest with health care and retirements guaranteed. They also don’t have to play with their taxes and become violent over it. You just pay it!

We just had a huge transfer of wealth from parents to children over fears the Bush tax cuts would expire and estate taxes would rise sharply. Hope they made the right decision…money has been known to split up families…right?) On the other hand there is this to consider: these people pay a lot of taxes, and think of all the jobs that would be lost. Ever read Catch-22? If not, might be a good time to pick it up. Right, Mr. Heller?

A friend of TB’s had a colleague that was a partner in a major CPA firm. He was appointed Director of the IRS…was excited about the changes he would like to see. A year later he quit, failing to get anything through.

Don’t we all just love computers? They have made our lives so much simpler, don’t you think? Well…maybe. But we have also forgotten the motto of the early programmers: GIGO or Garbage In, Garbage Out. Furthermore, many programs have been written by people with no knowledge of the subject matter. Why has Bloomberg been so successful? Because every single programmer he hired had financial markets experience. TB was at Merrill in those early days and it was so refreshing. We would learn of a new ‘ap’ they had added and would immediately check it out. When we found bugs…as we always did, we would call them and instead of grumbling they were excited that someone was paying attention. A few minutes later they would call us back and ask us to try it again. Invariably, success!

TB brings this up because of the BATS scandal where system problems over the last FOUR years have caused them to fail to get the best execution price on trades. This morning James Kwak of The Baseline Scenario wrote on the problem. More than this one case, think of all the programs you use that you assume are accurate…how could they not be? TurboTax? Your bank website? The list goes on and on. Garbage in, garbage out.

“Last week BATS admitted that its software suffered from systematic problems for four years, failing to obtain the best execution price for about 250 customers and costing them about $400,000. That should be a giveaway: no self-respecting company would break the law just to steal $400,000 from its customers. This was a programming error, pure and simple.

Also last week, a RAND study revealed that, despite billions of dollars of investment, electronic medical records have done little to reduce costs for healthcare providers. This is more complicated than a simple programming error. The issue here is that projected savings of this kind are typically based on some model of how operations will be done in the future, and that model depends on perfectly-designed software functioning perfectly. Medical records systems apparently fall far short of this ideal: as the Times summarized, “The recent analysis was sharply critical of the commercial systems now in place, many of which are hard to use and do not allow doctors and patients to share medical information across systems.”

The common feature to these stories, however, is that big, complex, business software is really, really important—and a lot of it is bad. In many niches, it’s bad because there aren’t that many companies that serve that niche, it’s hard for customers to evaluate software that hasn’t been delivered and installed yet, and there are all sorts of legacy problems, particularly with integration to decades-old back-end systems. And most of the incentives favor closing the sale first rather than making sure the software works the way it should.

I don’t have much to add that I didn’t  put in my Atlantic column on a similar topic last summer. Nothing has changed since then. So I’ll stop there.”

TB cannot say enough about the work of Simon Johnson and James Kwak at The Baseline Scenario. They are intelligent and wise…rare qualities these days.

Just get through options expiration…hopefully unscathed…then enjoy your weekend!


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


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