Monday, January 13, 2014

Today's Links

Today's Quote:   "You know, a lot of people say, this is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending. And part of it comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.” Janet Yellen, the newly appointed head of the Federal Reserve defending its quantitative easing program

1---Federal Reserve Said to Probe Banks Over Forex Fixing , Bloomberg
(Bloomberg calls banks "cartel")
The Federal Reserve is investigating whether traders at the world’s biggest banks rigged benchmark currency rates, raising the risk that firms will be penalized for lax controls as regulators look for wrongdoing. ...

The Fed has discretion whether to and how much to fine the banks if deficient controls or lack of supervision resulted in traders at these banks manipulating currency rates,” said Jacob S. Frenkel, a former federal prosecutor and now a lawyer at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. ....

The Cartel’
Bloomberg News reported in June that traders at banks have been manipulating spot foreign-exchange rates for at least a decade, affecting the value of funds and derivatives. Britain’s Financial Conduct Authority, the Swiss Competition Commission and the U.S. Justice Department also are investigating.

At least a dozen banks have been contacted by authorities, and at least 12 currency traders have been suspended or put on leave. Companies including Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc have announced their own internal reviews of the matter.

Citigroup said last week it fired Rohan Ramchandani, who was head of European spot trading. Ramchandani was part of a message group other traders in the industry referred to as “The Cartel,” which is under investigation. He had been on leave from the New York-based firm for almost three months. Ramchandani didn’t respond to messages left on his mobile telephone, and his lawyer didn’t return a call to his office

2---Risk Off; Pension funds switch to corporate bonds, Bloomberg

“They’re taking more equity risk off the table” with fixed-income securities as their funding status improves, Zorast Wadia, an analyst at Milliman, said in a telephone interview. “Pension plans don’t want to give back the gains that essentially took over five years to accumulate.”
Public and private pension funds in the U.S. added $117 billion of debt securities in the three months ended in September on an annualized basis and sold $135 billion of equities, according to Fed data released on Dec. 9.
The disparity was the greatest since 2008 when comparing third-quarter data on an annual basis.

Equities are also the most expensive versus Treasuries since 2011. The earnings yield for S&P 500 companies, measured by profits as a percentage of the index’s price, was 2.9 percentage points higher than the yield for 10-year government notes, the smallest premium since March 2011...

U.S. pensions, which control $16 trillion, shifted out of equities and into bonds in the third quarter at the fastest rate since 2008, data compiled by the Federal Reserve show. The plans were more willing to own stocks after the Fed dropped its target interest rate close to zero and pushed down yields to record lows with its bond buying to support the U.S. economy crippled by the financial crisis.

After the 30 percent rally in the Standard & Poor’s 500 Index brought the biggest corporate pensions on the verge of closing shortfalls for the first time since before the crisis, they’re now pouring back into fixed-income assets to lower risk as the Fed’s move to taper stimulus causes yields to rise.

3---Regulators Cave: Basel Regulators Ease Leverage-Ratio Rule for Banks , Bloomberg

The committee will still require banks to hold capital equivalent to at least 3 percent of their assets, without any possibility to take into account the riskiness of their investments....

Yesterday’s changes are a “recognition of the possibility that the rules as originally tabled would mean banks having to find an additional amount of key capital of the order of $200 billion at a time when there are still widespread concerns about the supply of credit and economic growth,” Richard Reid, a research fellow for finance and regulation at Scotland’s University of Dundee, said in an e-mail...

“The usefulness of a leverage ratio comes from its simplicity and its inclusiveness,” Greg Ford, a spokesman for Finance Watch, an independent public interest advocacy group, said in an e-mail, prior to the Basel committee’s announcements. The more risks that are “excluded or hidden” from the rule, “the less useful the leverage ratio will be for regulators and investors,” he said.

Liquidity Ratio

The Basel group also amended a rule, published last year, designed to force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The amendments to the measure, known as a liquidity-coverage ratio, or LCR, widen the possibility for banks to use so-called committed liquidity facilities from central banks to meet the rule
Leverage ratios are designed to curb banks’ reliance on debt by setting a minimum standard for how much capital they must hold as a percentage of all assets on their books. A quarter of large global lenders would have failed to meet a June version of the leverage limit had it been in force at the end of 2012, according to data published by the Basel committee in September.

4--Zero rates costing savers "$100 billion per quarter "?, chris whalen

The trouble is, however, that “hot” policy like what the FOMC thinks it is pursuing is actually encouraging deflation in the US economy by robbing savers of badly needed income – this to the tune of about $100 billion per quarter just in terms of the return on US bank deposits. While low rates were helpful and entirely necessary early in the post-crisis response, today low rates are arguably a net negative for the US economy....

 low interest rates fuel bad asset allocation decisions – what we call “moral hazard.”.... Investors must be paid to take risk. The declining leverage within the US banking system, which was discussed in a Zero Hedge post about Q4 2013 bank earnings (“Are Large Cap Banks Ready to 'Break Out?'”), is a red flag that Congress ought to be discussing with Chairman Yellen on a weekly basis. Meanwhile moral hazard grows under QE, and Fed-induced bubbles proliferate in the equity and debt markets

5---Low rates are killing the consumer and demand for credit??, zero hedge
(a lot of ideology in this one)

U.S. Banks have total deposits of $11.02 trillion and $7.65 trillion in loans and leases. If you do the math, that's a 69.4% loans-to-deposit ratio.  Each bank is different, but we like loans-to-deposit ratios of 80-90% and maybe 100-110% if you're doing lots of asset selling like mortgage banking.”
What Joe is telling us in his usual gentlemanly fashion is that banks are severely under-leveraged...

Low rates are killing the consumer and demand for credit, even as regulations such as Dodd-Frank and Basel III have made it impossible for banks to fully deploy their deposit base.  Seeing that banks parked ~ $3 trillion in excess reserves at the Fed, the FOMC then decided to buy government and mortgage securities via QE.  This too is deflationary, however, since the “spread” earned by the Fed is simply transferred to the US Treasury.  If you measure “austerity” based on the budget deficit, then the Fed is responsible for austerity....

6---Goldman: "S&P 500 valuation is lofty by almost any measure, both for the aggregate market as well as the median stock ", zero hedge

Over 3 months our conviction in equities is now much lower as the run-up in prices leaves less room for unexpected events. .... Our US strategists have also noted the risk of a 10% drawdown in 2014 following a large and low volatility rally in 2013 that may create a more attractive entry point later this year.

7---Inflation, strangely low, holds key to 2014 Fed policy, Reuters

Stubbornly weak inflation is shaping up as the wild card for U.S. monetary policy makers this year, with top Federal Reserve officials stumped by why it has lingered so low for so long and at odds as to what to do about it....
But there is a hitch: inflation has been drifting down for much of the last two years, measuring a feeble 1.1 percent in November by the Fed's preferred gauge.

8---Housing: No shadow inventory?, oc housing

If you repeat something enough times, does it make it true?

One of the great Real Estate canards of the past year is the “myth of shadow inventory”. The realtor community had been drum beating this meme throughout 2013 in an effort to show how strong the market has been, and why you need to buy because inventory isn’t coming back. A simple Google Search for that phrase yields hundreds of articles posted just last year….

9---The outlook for the U.S. economy is as good as it's been since the financial crisis, but not so for the stock market.
After a near 30 percent gain in 2013, the S&P 500 index is up more than 150 percent since bottoming out at under 700 in 2009. The irony is that while the dismal post–financial crisis economy has consistently underperformed expectations, the stock market has soared. And now that the economy looks like it's picking up momentum, financial experts worry that stock prices could be headed for a fall.

9---Unindicted war criminal Ariel Sharon dead at 83, wsws

Former Israeli prime minister, general and unindicted war criminal Ariel Sharon was pronounced dead on Saturday, January 11 at the age 85......

Sharon is justly reviled by millions for his policies of provocation, murder and ethnic cleansing. His entire military and political career, for which he earned the nickname “butcher of the Palestinians,” was marked by a series of atrocities carried out against both the Palestinians and Israel’s Arab neighbors.....

A necessary concomitant of Sharon’s Greater Israel policy was the advocacy of communalist and ethno-religious politics, including ethnic cleansing that has involved countless attacks on Palestinians, Israel’s own Arab citizens and migrant workers. As the gap between rich and poor has grown, due in large part to the economic policies pursued by Sharon, the state has increased its reliance on right-wing settlers and extreme nationalist zealots, who provide the basis for the emergence of fascistic tendencies within Israel. Extreme nationalism is encouraged to divert growing anger over declining living standards and social inequality along reactionary lines....

Sharon was a criminal, responsible for the assassination of Arafat, and we would have hoped to see him appear before the International Criminal Court as a war criminal.”
A Hamas leader in Gaza, Khalil al-Hayya, said, “We will remember Ariel Sharon as the man who killed, destroyed and caused suffering for several Palestinian generations.

10---The real content of Obama’s “progressive” agenda---Democrats attack the unemployed and the poor”, wsws

11---US tested biological weapons in Japan’s Okinawa in the 60s – report, RT

12---Worst US jobs report in three years shatters claims of economic recovery, wsws

13--Americans Say Dream Fading as Income Gap Hurts Chances , Bloomberg

14---The Great Buyback Surge Is Over: Corporations Are Once Again Net Sellers Of Shares, zero hedge

At $500 billion in net stock buybacks in 2013, this was an immense amount of bidding power, equal to half of the Fed's entire annual liquidity injection. And while EPS was artificially boosted by an allocation of capital that most would say is the least efficient in terms of future growth (remember when companies spent on capital expenditures to fund long-term growth, not satisfy activist shareholders?) the only good thing that could maybe be said about the second highest annual corporate buyback in history was that companies still saw their stocks as cheap: after all, not even the most aggressive of CFOs would greenlight a massive buyback campaign if they expected their stock to plunge.

That is no longer the case.

As JPM's Nikolas Panigirtzoglou notes in his latest "Flows and Liquidity" weekly, "the S&P500 index Divisor rose in Q4 following a flattish pattern in the previous two quarters." This means that after buying back stock for rightly two years in a row, companies have once again turned to net sellers and as a result are increasing the divisor (aka the denominator in the EPS fraction) of the S&P500, which means two things: i) the boost to EPS from buybacks is now over and ii) even corporations view the market as overvalued and prefer to sell their stock rather than buy it.

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