Archives for April 2014

Sense on Cents Instant Classic: SEC Commissioner Stein Accuses Agency “Strayed From Its Mission”

Courtesy of Larry Doyle.

“Financial institutions that are ‘too big to fail,’ combined with politicians who are too compromised to govern and regulators who are too captured and corrupted to protect, produce an incestuous cabal that is simply too big to trust.” pg 187, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy

America is now well attuned to the fact that Wall Street banks that are ‘too big to fail’ are also ‘too big to regulate’, ‘too big to prosecute’, and ultimately ‘too big to trust.’ Of this there is absolutely no doubt.

As if those injustices were not too much to bear, we learn this morning that these banking behemoths are now also ‘too big to bar.’ How is that? With major props to one of the few lone voices crying for integrity inside the regulatory ‘tollbooth’ that is the SEC, I welcome giving SEC Commissioner Kara Stein real credit for standing up and speaking out on this ‘too big’ topic. The following statement is a little lengthy but oh so worth it. Let’s navigate as Commissioner Stein issued a dissenting opinion on the SEC website that qualifies as an instant Sense on Cents classic: 

Commissioner Kara M. Stein

April 28, 2014

I respectfully dissent from the Order, approved by a three-to-two vote of the Commission, to overturn the automatic disqualification of Royal Bank of Scotland Group, plc (“RBS”) from eligibility as a “Well-Known Seasoned Issuer.”

In January 2014, a subsidiary of RBS was criminally convicted for its conduct in manipulating the London Interbank Offered Rate (“LIBOR”). The scheme profited RBS to the detriment of individuals, businesses, and governments around the globe. Under federal securities laws and regulations, this criminal conviction automatically precluded RBS from eligibility as a Well-Known Seasoned Issuer (“WKSI”) and the attendant benefits that our rules provide to WKSI filers.

Since the inception of WKSI nearly a decade ago, the Commission had not granted a WKSI waiver for criminal misconduct. Last fall, that changed when the staff, through delegated authority, granted a waiver to another large issuer despite its criminal wrongdoing. Last Friday, the Commission compounded that error when it granted a waiver for another criminal wrongdoer.

The arguments in both instances implicate a structural problem with our policy, whether dealing with criminal or civil misconduct. They rest largely upon the notion that the triggering conduct is insignificant when considered in the context of a large financial institution with global operations. I fear that the Commission’s action to waive our own automatic disqualification provisions arising from RBS’s criminal misconduct may have enshrined a new policy—that some firms are just too big to bar.

Over the years, Congress and the Commission have adopted numerous disqualification provisions, intended to protect investors and the markets from “bad actors.” Yet the Commission routinely waives them. We need to step back and think broadly about what these provisions are intended to accomplish, and ask ourselves — are we achieving the intended goals? Are they being fairly applied to all firms and individuals? Large institutions should be treated no differently, neither better nor worse, than small and medium-sized issuers.

Sound policy arguments have been made that we need more tools to police and regulate our markets. But, we also need to ensure that we correctly and fairly utilize the tools we have. These disqualification and bad actor provisions have the potential for deterrence at large institutions that no one-time financial penalty could ever wield. Yet, we repeatedly relieve issuers of the supposedly automatic consequences of their misconduct.

Our website is replete with waiver after waiver for the largest financial institutions. Some large firms have received well over a dozen waivers of one sort or the other over the past several years. One large financial firm alone, in the last 10 years, has received over 22different waivers — often making the argument that it has a “strong record of compliance with federal securities laws.”

Just last summer, the Commission adopted a bad actor provision mandated by Congress for Rule 506 offerings. Yet, we have already granted five of those waivers, all but one to large banks and broker-dealers, RBS among them.

Since 2010, the Commission has granted at least 30 WKSI waivers. Twenty-nine of them went to large financial institutions and broker-dealers. In many cases, these issuers are receiving their second, third, and even fourth WKSI waiver in less than four years.

It is true that large financial institutions may have vast operations and thousands of employees, making certain types of civil or even criminal misconduct statistically more likely. However, their size and complexity should not insulate them from the same regulatory consequences that other issuers must bear. The kind of reasoning that is used to support waivers in this context has led the Commission, by inches and degrees, to where it is today, almost reflexively granting waivers of all types, and most often to large financial institutions.

Last Friday’s Order exemplifies this problem. Among the many disqualification and bad actor provisions enacted by Congress and the Commission, loss of WKSI status may have the fewest ramifications. Nevertheless, when, as here, a subsidiary of a large financial institution is convicted for committing a crime that helped skew the value of trillions of dollars’ worth of financial instruments and contracts worldwide, we still grant relief. Say what you will about how isolated or insignificant this conduct was within the context of the entire institution, it still managed to wreak havoc on financial markets across the globe. Yet we provide our implicit “Good Housekeeping Seal of Approval,” and tell the investing public that this issuer is still deserving of reduced Commission review and subject to fewer investor protections.

If we are going to abrogate our own automatic disqualification provision on these facts, then we should consider discarding these disqualification and bad actor provisions entirely, along with the pretense that they have any real meaning.

In my view, nearly every factor in the “Division of Corporation Finance’s Revised Statement on Well-Known Seasoned Issuer Waivers” weighs strongly against a waiver for RBS. The egregious nature of the misconduct weighs against a waiver. This is criminal conduct, part of a widespread scheme undertaken by multiple banks to manipulate LIBOR for profit. LIBOR affects in some way nearly every financial market across the globe — consumer and corporate loans, interest rate swaps and derivatives, mortgages, college loans, futures and options. LIBOR rigging impacted millions of American families, businesses, and communities. And all of this occurred at a time when the global economy was facing its worst crisis in decades.

This conduct has led to fines and penalties at RBS of roughly $1 billion. In addition, nine individuals at various banks have been arrested by UK authorities, and the Department of Justice (“DOJ”) has charged eight individuals at banks and brokerage firms. DOJ’s press release notes that the criminal investigation continues. In fact, one of the individuals charged is mentioned by name throughout the Statement of Facts attached to the RBS Deferred Prosecution Agreement as directly colluding with RBS traders. If additional arrests are made, or this individual or others decide to cooperate or otherwise provide additional information, we could be faced with even more damaging information relevant to our waiver analysis.

The misconduct also hurt many banks at a time when governments around the world were trying to ensure that banks could continue to provide the credit needed to keep our economies moving. In fact, the Federal Deposit Insurance Corporation (“FDIC”) filed a complaint last month on behalf of 38 failed U.S. banks.

The FDIC’s allegations reveal disgraceful conduct at relatively high levels. For example, the FDIC Complaint quotes from telephone transcripts revealing that RBS’s London-based Head of Money Markets Trading, and its Head of Short-Term Markets for Asia, knew of the rigging. The Head of Money Markets Trading is quoted as saying: “People are setting to where it suits their book. . . . LIBOR is what you say it is.”

Suffice it to say, this is egregious criminal conduct with far-reaching consequences in the United States, in the markets the Commission oversees, as well as in global financial markets. This factor weighs strongly against granting a waiver.

The duration and extent of the misconduct also weighs against granting a waiver. The manipulation was relentless and protracted, occurring hundreds of times over the span of four years. The criminal conduct involved at least 21 different employees, some of them market-desk heads. How could management not know? Did no one question the source of these profits? Alternatively, if management did not know, this too is a problem.

As for the impact of denying a waiver, RBS has failed to offer evidence that would show any significant impact from loss of WKSI status. RBS’s waiver request simply lists all of the capital raising it has done through takedowns from its WKSI shelf registration over the past few years. However, these same types of offerings could be made from a non-WKSI shelf, so they have not isolated any effect from the loss of WKSI. This will not prevent RBS from raising capital. It will simply protect investors by requiring a higher level of review of RBS’s registration statements.

I am also unpersuaded that the remedial steps taken justify a waiver. Remedial steps are important, and deserving of credit because their implementation should represent a necessary condition for even considering a waiver. However, if a WKSI issuer is able to secure a deferred prosecution agreement, and its subsidiary pleads to a felony, then thorough remedial steps are usually required and almost certain to have occurred. If this is heavily weighted in favor of a grant, as opposed to serving as more of a baseline for consideration, it will nearly always result in granting a waiver for criminal misconduct. This should not be the case.

Finally, the Division’s revised statement on WKSI Waivers accords much weight to the question of whether the conduct at issue relates to disclosures.[21] This conduct does implicate false disclosures. RBS artificially boosted its profits by submitting false LIBOR rates and misleading counterparties. The scheme was designed to, and did, inflate trading profits. Moreover, these false disclosures created the impression to investors that RBS was more creditworthy that it actually was.

The FDIC’s complaint describes that the manipulation “artificially increased [the] ability to charge higher underwriting fees and obtain higher offering prices for financial products.” Further, “had market participants and purchasers of the [] financial products known the true credit risk and liquidity issues…some market participants would have declined to do business with them or would have demanded more favorable terms.”

The misconduct is directly related to disclosure, and this weighs against granting a waiver.

Setting aside how closely this conduct may be related to disclosures, we should not give the issue so much weight as to effectively circumvent the language of our own rule. Almost all of the enumerated crimes in the rule that trigger WKSI ineligibility do not, on their face, relate to disclosure. They include, for example, larceny, theft, robbery, extortion, forgery, counterfeiting, embezzlement, and wire fraud. The touchstone in this context is not disclosure as much as it is honesty and integrity. On that measure, RBS’s misconduct weighs against granting a waiver.

As to any significance that could arise from the fact that most of this conduct occurred at a subsidiary of a subsidiary, I am unpersuaded. Rule 405 specifically provides for disqualification based upon the misconduct of subsidiaries, and for good reason. Large institutions often have complex structures operating through dozens or even hundreds of subsidiaries. Why would we encourage large issuers to structure around our rule by creating ever more complicated business organizations?

In the end, this should be simple. We have a rule that confers a special benefit to issuers that have a good track record. And we have a rule that calls for automatically rescinding that benefit when the issuer misbehaves. Here, the Commission waived that common sense rule despite egregious criminal misconduct. RBS failed to justify why we should do so. In granting this waiver, I believe the Commission has strayed from its mission, and strayed from a careful and prudent course. Accordingly, I cannot and do not support the Commission’s Order.

Commissioner Stein not only gets a gold star for her stand for justice, but also gains immediate induction into the Sense on Cents Hall of Fame in the process.

Stein’s compelling opinion begs the question how SEC Chairperson Mary Jo White can continue to pretend that she is upholding the rule of law and her mandate to protect investors.

Navigate accordingly.

With friends like these… who needs enemies?

With friends like these… who needs enemies?

By Paul Price of Market Shadows

Typical, backward-looking brokerage house advice, can actually cost you money.

In the opposite of ‘value added’ advice, brokerage firm Raymond James took Boardwalk Pipeline Partners (BWP) off the SELL list and went to NEUTRAL today.

BWP bottomed in March at $11.99 and closed Monday at $16.16. It took a 34.8% move up from the 6-week ago nadir to elicit the change.

BWP YTD 2014

How high will BWP have to go before Raymond James decides it’s okay to buy? BWP was indicated at $17.11 or + 92-cents a share in early premarket trading. 

Raymond James was not alone in giving bad advice regarding this MLP. Zacks made Boardwalk Pipeline Partners its “Bear of the Day’ on April 11, 2014 with the shares already rebounding, at $13.92.

BWP - Zacks Bear of the Day

BWP Bear of the Day chart

Those who sold because of that widely distributed alert missed a 15.7% move over the next 17 days, not counting this morning’s indicated premarket jump. Anyone who shorted on their advice is probably getting ready to jump off bridges or building roofs.

Unusual option action had tipped savvy traders to what the ‘smart money’ was thinking about BWP while the public was being told to unload or avoid it. See my earlier article on this topic: Beware of Rear View Mirror Analysis.

Market Shadows provides useful and unbiased information that has proven to be profitable. Check out all our equity and option results: Market Shadows Virtual Portfolios.

Talk Markets Contributor Badge

Slow Motion Bust – The Long Goodbye – One-Sided Incentives

Courtesy of Mish.

In The Long Goodbye, economist Andy Xie says People around the world will only begin to question their economic policymakers when they realize living standards are slowly worsening.

The recent tumbling of Internet and biotech stocks may indicate that the speculation in such stocks has peaked. But, unlike in 2000, the bursting will occur in slow motion. The financial market structure has radically changed in the past 15 years. Too many money managers have a one-sided incentive to long such stocks.

The global financial system has experienced one bubble after another because major central banks have kept monetary policy loose. Prolonged loose monetary policy has made the financial system extraordinary large relative to the real economy. This change forces central banks to respond to negative shocks, like the bursting of a bubble, from the financial system. Such responses make the financial system even bigger. This vicious cycle explains why speculation has become such a powerful force.

A bubble cannot expand forever, even in an environment of loose monetary policy. The balance between fear and greed can tip over when the price of an asset becomes too high, like Internet stocks now relative to the average. The subsequent deflating bubble, in a continuing environment of loose money, just shifts air into other assets.

The talk of monetary tightening in the United States or China will not be followed up with strong enough actions. Real interest rates will remain negative until another crisis, like high inflation or hyperinflation or political crisis, force the hand.

Gold is the safe asset in today’s environment. As paper currencies lose credibility, the demand for gold will surge. The alternative digital currencies are fool’s good, really scams to take advantage of people’s fear over the potential collapse of paper currencies.

Facebook trades at 100 times earnings and US$ 150 billion in market capitalization. No company grows forever. When it stagnates, its stock can trade at 10 times earnings. Hence, Facebook needs to increase its profit 10 times to justify its current stock price. How many media companies make US$ 15 billion in advertising today? Zero.

Two changes in the past 15 years have made bubble formation a constant feature of financial markets around the world. The inefficiencies in capital allocation and income redistribution to finance are the main reason for today’s sluggish global economy.

At the macro level, globalization has made inflation slow to emerge, as multinational companies can shift production around the world in response to cost pressure. This force has given central banks more room in increasing money supply without facing the inflation consequences for years. Hence, central banks around the world have become more active in response to economic fluctuations. The consequence is a rising ratio of money supply or credit to GDP. By definition, this means a bigger and bigger financial system, which needs more and more income to survive.

This is an excellent article by Xie. Inquiring minds will want to read the entire piece.

I am in Sonoma now, preparing for Wine Country Conference II. Looking forward to seeing all the speakers and attendees.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Continue Here

ECB, BOE want to resurrect shadow banking in Europe

ECB, BOE want to resurrect shadow banking in Europe

Courtesy of SoberLook.com
 
Recently, the ECB and the Bank of England published a joint paper calling for the return of securitization markets in Europe (see below). This goes completely against the grain of the latest Basel accord which has started imposing much higher capital requirements for holding securitized paper. The media called it "bringing back the toxic sludge" (see story). What's going on here?

With the Eurozone banking system on its back (see post), someone else needs to provide corporate and consumer credit. The central banks want to see the securities markets (shadow banking) take on that role. Some are outraged because securitized products are viewed to be one of the key causes of the financial crisis. However this is the case of "throwing out the baby with the bath water." It was a specific asset class, namely US subprime mortgages, that did most of the damage. But the media and many regulators have been applying the term "toxic" to all securitized credit.

ECB/BOE: – Despite the low issuance and the modest take-up by investors, most European structured finance products performed well throughout the financial crisis, with low default rates. According to an analysis by Standard & Poor’s, the cumulative default rate on European structured finance assets from the beginning of the financial downturn, July 2007, until Q3 2013 has been 1.5%. Some asset classes such as consumer finance ABS, SME Collateralised Loan Obligations and RMBS have experienced default rates well below this average and the performance of European structured finance products has also been substantially better than US peers.2 By way of comparison, ABS on US loans experienced default rates of 18.4% over the same period, including subprime loans.

The goal here is to get investor capital to the borrower without materially expanding the balance sheets of EU commercial banks (who are undergoing deleveraging). One of the obstacles to growing this business in Europe (and to some extent in the US) is the so-called Risk Retention Rule which was implemented in 2011. It requires that the structured bond issuer retains some "skin in the game" by buying a part of the origination (usually part of the most junior tranche). It's less of a problem for bank issuers, but creates barriers for independent managers who are not well capitalized. And since the ECB wants non-bank issuers to step up, this rule will cause some difficulties. Given the declines over the past few years in European ABS and other securitized credit product issuance, it will be a while before private securitization can materially supplement bank credit.

Enjoy:
THE IMPAIRED EU SECURITISATION MARKET

THE IMPAIRED EU SECURITISATION MARKET.pdf

Prosecutors Explained Congressman’s Alleged Tax Cheating With Two Handy Charts

Prosecutors Explained Congressman's Alleged Tax Cheating With Two Handy Charts

There's a lot going on in the 20 count indictment against New York City Congressman Michael Grimm for allegedly perpetrating a "scheme" designed to help him maximize profits and avoid taxes at a health food restaurant he once partially owned. So, when U.S. Attorney for the Eastern District of New York Loretta Lynch held a press conference to discuss the charges Monday, she brought a pair of charts to illustrate the allegations. [Below via BI]

Keep reading Prosecutors Explained Congressman's Alleged Tax Cheating With Two Handy Charts – Business Insider.

 

 

Been There, Done That, Did it Again

We added to our Franklin Resources Position

By Paul Price of Market Shadows

Sometimes, obvious is best. Money management firm Franklin Resources (BEN) has been a huge money maker over the long term. It has a cash-rich balance sheet and a wonderful business model.

Despite the impact from the Crash of 2008, BEN’s earnings per share surged by 410% in the decade from 2003 – 2013 as they lept from $0.66 to $3.37 (fiscal years end Sep. 30th). Today’s fiscal Q2 earnings report was just a penny shy of estimates ($0.89 versus the $0.90 consensus view) but the stock sold off by more than 2% intra-day.

On Monday afternoon BEN was trading more than $7 below its 2014 high of $58.87. The market seems to have overreacted. For the record, first half EPS totaled $1.85 versus $1.71 a year ago. Trailing 12-month profits have never been higher.

The well-covered dividend was increased twice in the past 12-months. The quarterly rate has climbed by 25% since the middle of 2012.

Franklin Templeton’s relative P/E hasn’t registered this low in decades. BEN’s nominal P/E averaged 15.2x in the full seven year period from 2007 through 2013, which spanned both bull and bear market conditions. The stock sells for around 13.7x current fiscal year estimates and just 12.5x next year’s projections of about $4.10 to $4.13.

The company’s record fundamentals are not being reflected in the current share price. During times when the market mood was more upbeat BEN often sold for 17 – 20x multiples (see chart).

BEN  2007 - 2014   Value Line data

continue reading the full article by clicking here  http://www.gurufocus.com/news/256984

 

The government is now liquidating seized bitcoins before convicting their owners of any crimes

 

The government is now liquidating seized bitcoins before convicting their owners of any crimes

By  

The US government has once again seized large sums of bitcoin from those involved in the online drug trade. Late last week the US Attorney’s office announced that it had seized $3,030,000 million worth of bitcoins from 22-year-old Dutch citizen Cornelis Jan Slomp, aka “SuperTrips,” who is accused of being one of the largest drug dealers on the now-defunct Silk Road marketplace. Slomp has agreed to plead guilty to a federal drug conspiracy charge.

What’s unique in the Slomp case is that, unlike in the past where federal officials held bitcoinpending the outcome of the underlying case before ultimately selling them, in this instance the virtual currency was “exchanged” – with little explanation of where or how – into cash, seemingly immediately.

The mechanics and implications of this currency exchange are fascinating. Surely the government didn’t sell these seized bitcoins on a public exchange, but rather via a private auction. If the coins were sold as a single lot, then it’s reasonable to assume that they were sold at a slight discount to the “retail” market value for a single bitcoin, such as the price quoted on the Coindesk Bitcoin Price Index. If the coins were sold in multiple smaller lots then the auction may have brought in close to this index value.

The issue is, Bitcoin’s price fluctuates, often dramatically, on a daily and even hourly basis. How did the government decide when was the right time to sell and at what price? Are there cryptocurrency experts within the various federal departments involved in making this decision? And what is the government’s duty, both to its citizens and to the still accused but (at the time) not yet convicted owner of those assets to maximize their value?

Continue The government is now liquidating seized bitcoins before convicting their owners of any crimes | PandoDaily.

Debt Rattle Apr 28 2014: Why A Market Collapse Would Be A Good Thing

Courtesy of The Automatic Earth.


Russell Lee Love Shack, South Side Chicago April 1941

I’m not going to argue here that a market collapse would be a positive thing no matter what, because the implications of a true collapse would be so deep and widespread that they’re too hard for anyone to oversee. But having said that, truth finding and price discovery are crucial for a functioning economy, and there is not a shred of truth left in the markets nor is it possible to discover anything about any price as a free market would have set it. And that means there’s no trust or confidence left in markets, there’s only a shaky trust in authorities propping them up. Neither of which can last forever.

What are stocks truly worth, what is a fair prices for a home, or a plot of land, an hour’s work, or a year’s crop? Is it what they were valued at in 2006, pre-crash, or in 2010, post-crash, or today in 2014? We can’t really answer that question (which is bad enough), but we can surmise that valuations have been distorted to an extensive degree by all sorts of government measures to stimulate economies and by central banks inserting freshly not-even-minted amounts of what some insist is money and others insist absolutely isn’t, into essentially broke banks, pretending they expect it to trickle down.

And that’s not all. The biggest banks in Japan, the US and Europe (and don’t get me started on China) have been declared “systemic” or too-big-to-fail, a status which absolves them from having to expose their debts to daylight. That means the shares in these banks are of necessity overvalued, and potentially by a lot, because if there were no such losses fermenting away in their vaults, they would be very eager to prove they have no foul smelling debt, since that would greatly boost their – perceived – trustworthiness. We know, therefore, that those bad debts, gambling losses, still exist, in all likelihood a lot of them, and all over the place. We’re talking many trillions of dollars.

And that’s not all either. Since stimulus measures on the one side and the refusal to uncover debts on the other have propped up asset prices to the extent they have, it’s not just the banks’ assets, but everybody else’s assets that are overvalued too. Yes, that includes yours. Not only the shares you may own in a bank or some other company, but also your home, and potentially even your job, it’s all overvalued. In other words, the perceived value of your assets is as distorted by government interference, executed with credit that uses your children’s labor as collateral, as a too-big-to-fail bank’s assets are.

The obvious reaction to realizing that your assets are overvalued, and possibly by a lot, is to think: let them keep going as they are, or I would risk losing my investments, the home my kids grow up in, and maybe my job. However, while running an economy on credit can be useful up to a point, when that credit becomes really zombie money, everyone starts paying a price, and the more there is of it, the higher that price becomes. The difference between credit and zombie money, as thin as the line between them may seem at times, is actually quite easy to discern: the former, if limited to productive purposes, allows for price discovery, while the latter makes it impossible.

Perverted markets give birth to perverted asset valuations. So who wants perversion? Well, the people who own the assets. People like Jamie Dimon, and you. Those who don’t like them – or shouldn’t if they were aware of what’s going on – are the young who can’t get a decent paying job, who can’t find a home to buy or even rent, who have a fortune in student debt hanging around their necks, and who therefore can’t start a family. Plus of course the weak, the needy and the old who rely on fixed income.

Governments and central banks shouldn’t interfere in markets in ways that make it impossible to know what anything is really worth. They should let banks that have too many debts go bankrupt and be restructured; that’s actually a very fine task for a government: to make sure that things are handled fairly, and with no negative impact on their people. But what we see is that this picture has been put upside down: governments seek to make sure that there’s no negative impact on their banks, and use their people’s present and future wealth to achieve that.

But why protect banks? What’s so important about them? Is it that they hold people’s money? That’s easy to get out first in case of a default, before anything else, and to guarantee. Granted, that might also lead to some price distortion, but not anywhere near what we see now. The secret ingredient here is of course that banks create credit/money every time they write a loan, but there’s no real reason why banks should do that, not governments, that set-up has no benefits for society, only for bankers and their shareholders.

I can write and think and philosophize about this for a very long time, and I do find it interesting, but eventually I always wind up at the same point, and that does sort of take the fun out. That is, the road we’re on now is not infinite, and there’s a cliff at the end of it. It always leads back to the value of real things that real people have produced with real work, and the fact that in today’s economy, that sounds almost like a – perhaps cruel – joke. The value of what you and I can produce with our own hands, guided by our own brains, is diminished to a huge extent by the zombie money that can place higher values on things that are achieved by flicking a switch, stroking a keyboard, or just let machines to the whole thing.

It’s one thing to make our work lighter, easier, or enhance our productivity. It’s another to replace it with something else altogether. And then pump central bank zombie money into raising the value of what has just replaced us. Even if we would all have access to all new technologies, you would have to seriously question their value, but once there’s only a select group that has that access, and on top of that it’s got access to public coffers, the only way for society itself is down. And the only way to restore a society’s core values, not as they are perceived today but as they truly are, is to cleanse the economy and the financial system of what distorts and perverts the ability to assess asset values. Which happens to be our own government and central bank’s interference in the financial system.

A collapse of the markets is going to come no matter what. They won’t be able to live forever on a diet of bad debt propped up by central bank zombie money, laid out on a bed of bad faith. And when it happens, sure, it’s going to hurt you, and probably a lot. But then, the sooner it happens, the less it will hurt your children. Isn’t that worth trying to understand why a market collape would be a good thing?

Coffee just got too expensive for Starbucks

 

Coffee just got too expensive for Starbucks

By Matt Phillips

It’s true. Coffee giant Starbucks has been taking a break from buying beans over the last month, as coffee prices continue to log ridiculous gains.

The Wall Street Journal reports (paywall) that the coffee giant has already locked in prices for all of this fiscal year and some of next fiscal year. But prices are up roughly 90% for Arabica beans this year, thanks to a drought in the world’s biggest supplier country, Brazil. Starbucks thinks it might be wise to stop buying (beyond the deals it already has locked) and wait to see if the market has gotten too panicked about damage to the crop. (The harvest is only just underway.)

“Our strategy is stability,” Starbucks’ head of coffee, Craig Russell, told the Journal. “To have stability, you don’t chase the market.”

Keep reading Coffee just got too expensive for Starbucks – Quartz.

A Critique Of Piketty’s Solution To Widening Wealth Inequality

Courtesy of Charles Hugh-Smith of OfTwoMinds

The real problem with Piketty's taxation/social welfare solution to wealth inequality is that it does nothing to change the source of systemic inequality, debt-based neofeudalism and neocolonialism.

Those of us concerned by widening wealth/income inequality have been following the work of Thomas Piketty and Emmanuel Saez for many years. I've cited their analysis many times; for example: Two Americas: The Gap Between the Top 5% and the Bottom 95% Widens (August 18, 2010).

Thomas Piketty has taken his meticulous research and turned it into a book, Capital in the Twenty-First Century, that has catalyzed the discussion of widening inequality by essentially proving that capital expands at rates far above the overall economy and wages. Since capital grows much faster than wages or the underlying economy, the gap between earned income and unearned income (rents) widens, along with the net worth of those who own capital and those who own little to no capital.

Here is a chart from his work with Saez, showing how the top 10% has pulled away from the bottom 90%:

This chart shows how the income of the bottom 90% has been stagnant for 40 years:

This chart shows how capital's growth rate causes the very top layer of owners of capital to outpace their less-wealthy peers: the top 10% have outpaced the bottom 90%, the top 1% has outpaced the top 10%, the top .1% has outpaced the 1%, and the top .01% has outpaced the .1%.

As other reviewers have noted, Piketty's book is not a theoretical critique of capitalism, it is a data-driven exploration of how present-day capitalism drives wealth inequality. Piketty's solution to widening inequality is a global wealth tax, a solution he characterizes as utopian, for getting the world's nations to eradicate tax havens is close to impossible.

I would go further and say it is impossible within the U.S., never mind the world, as the top .1% own the political machinery. Why would anyone who owns the political process agree to tax themselves?

As a result, any wealth tax will fall not on the super-wealthy with billions of dollars of unearned rentier income but on the upper-middle class who worked, saved and invested to build a nestegg. In other words, a wealth tax will fall on the same tax donkeys who are already paying the majority of income taxes.

If I have contributed anything to the wealth inequality issue, it is the proposition that we live in a neofeudal, neocolonial economy (the New Feudalism), ruled by a New Nobility. In my analysis, neofeudalism arises from these characteristics:

1. Debt is the enforcement mechanism of feudal fealty. Debtors–those with mortgages, student loans, vehicle loans, credit card balances, etc.–are obligated to fund the rentier income of their financial masters, the New Nobility. This is the essence of a feudal arrangement.

Others have different definitions of neofeudalism.

In my analysis, the rise of neofeudalism is a direct consequence of the financialization of the economy, in which essential assets (homes, for example) and processes are commoditized into financial instruments that can be sold, leveraged, pyramided and traded globally. Once an asset or process has been commoditized, it loses all connection to individuals, communities, companies or nations: it is the perfection of rootless capital, free to be bought and sold anywhere, any time, with no connection to the real world other than a chain of claims.

2. Society and the economy are organized so only the wealthy do not need to go into debt, which is serfdom in a neofeudal arrangement. The illusion of choice is thus maintained, a sibling of the illusion of democracy in which both party candidates are in thrall to the New Nobility.

The fiendishly Orwellian brilliance of neofedualism is this: present-day serfs opt into serfdom, just as free citizens opted into the protection of feudal lords' estates as the Roman Empire crumbled around them. It was a false choice; remain free and face ruinous taxes, or choose serfdom on a lord's estate. The present economy offers an equivalent false choice for all but the most dedicated, disciplined few who reject debt by rejecting consumerism, "growth" and the endless spew of neofeudal propaganda.

Want a college education? You freely choose the servitude of debt.

Want a house? You freely choose the servitude of debt.

Want a new vehicle? You freely choose the servitude of debt.

Neocolonialism is tightly bound to neofeudalism in my model.

3. The essence of neocolonialism is the "company store," which extends credit that can never be paid off as wages are stagnant. In a neocolonial economy in which only the top Caste of Managers, Technocrats and Professionals (the top 10%) can expand their income and wealth, debt-serfs are impoverished by servicing debt. As the real (inflation-adjusted) incomes of the bottom 90% decline or stagnate, debt service consumes an increasing amount of disposable earned income.

Debt service is guaranteed in the neocolonial model. In the old colonial model, marginalized populations were recruited to work on plantations with the false promise of wages, which never quite exceed the cost of servicing debt.

This arrangement was much neater than slavery, as the marginalized need not be bought: they freely choose their servitude. Beneath this supposed free will is of course a false choice: there is no other way to earn cash income other than working on the debt-plantation.

In the old colonial model, only those ethnicities with an iron passion for saving regardless of income (for example, the Chinese, among others), were able to accumulate enough capital to escape the debt-bondage and establish small businesses.

I explain the basic structure of neofeudalism and the neocolonialism in The E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)

The problem with Piketty's solution to the intrinsic inequalities created by financialization, neofeudalism and neocolonialism is the super-wealthy might well agree to tax those beneath them, just to prop up the arrangement that benefits them so mightily. I can easily foresee a political movement, secretly funded by the New Nobility, that taxes all wealth above $1 million, but which magically excludes wealth-holders that just happen to be the top .1%.

The New Nobility might even agree to pay a modest wealth tax, which would fund millions more recipients of food stamps, Section 8 housing and other social welfare, in effect institutionalizing neofeudalism and neocolonialism by rendering the unemployed complicit in the arrangement.

If you owned $100 million, and were earning $5 million in rentier income annually, wouldn't you agree to a $1 million tax to fund social welfare programs that kept the rabble sedated with bread and circuses? It's a no-brainer.

The real problem with Piketty's taxation/social welfare solution to wealth inequality is that it does nothing to change the source of systemic inequality, debt-based neofeudalism and neocolonialism. Simply raising more taxes to fund more social welfare programs leaves the unjust, rapacious, and ultimately destabilizing Status Quo entirely intact.

I have laid out another path in my books: refuse serfdom, abandon participation in neofeudalism and neocolonialism, and build parallel systems of cooperation and wealth-building that are not debt-dependent.

Let’s Be Frank

A share price decline after its earnings report made for a great chance to add another strike price to our Franklin Resources put position.

Market Shadows’ Virtual Put Writing Portfolio sold 2 contracts of the BEN Jan. 2016, $50 puts @ $6.00 per share today.

BEN  Leap Put with 1-year chart

Our worst case scenario on this trade would force us to buy 200 shares of BEN at a net cost of $44 ($50 strike – $6 put premium).

The best case result will be keeping the $1,200 paid to us in put premium without needing to buy any more shares.

A full article detailing why I like Franklin Resources so much at that net price is in the works but I wanted to post this trade before closing time.

You Can’t Kiss Every Pretty Girl (…or Handsome Boy)

You Can’t Kiss Every Pretty Girl (…or Handsome Boy)

By Wade of Investing Caffeine

Kissing

There are a lot of pretty girls in the world, and there are a lot of sexy stocks in the stock market, but not even the most eligible bachelor (or bachelorettes) are able to kiss all the beautiful people in the world. The same principle applies to the stock market. The most successful investors have a disciplined process of waiting for the perfect mate to cross their path, rather than chasing every tempting mistress.

Happily married to my current portfolio, I continually bump into attractive candidates that try to seduce me into buying. For me, these sexy equities typically come in the shape of high P/E ratios (Price/Earnings) and rapid sales growth rates. It’s fun to date (or rent) these sexy stocks, but the novelty often wears off quickly and the euphoric sensation can disappear rapidly – just like real-world dating. Case in point is the reality dating shows, the Bachelor and Bachelorette. Over 27 combined seasons, of which I sheepishly admit seeing a few, only five of the couples remain together today.  While it may be enjoyable to vicariously watch bevies of beautiful people hook-up, the harsh reality is that the success rate is abysmal, similar to the results in chasing darling stocks (see also Riding the Wave).

Well-known strategist and investor Barton Biggs once said, “A bull market is like sex. It feels best just before it ends.” The same goes with chasing pricey momentum stocks – what looks pretty in the short-run can turn ugly in a blink of the eye. For example, if you purchased the following basket of top 10 performing stocks of 2012 (+118% average return excluding dividends), you would have underperformed the market by -16% if you owned until today.

Top 2012 Performers

Warren Buffett understands hunting for short-term relationships may be thrilling, but this strategy often leads to tears and heartbreak. Buffett summarized the importance of selectivity here:

“I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

 

Rather than hungering for the spiciest stocks, it’s best to find a beauty before she becomes Miss America, because at that point, everybody wants to date her and the price is usually way too expensive. If you stay selective and patient while realizing you can’t kiss every pretty girl, then you can prevent the stock market from breaking your heart.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in PHM, MHO, CVI, EXPE, HFS, DDS, LEN, MPC. TSO, GPS, BRKA/B, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Pending Home Sales Rise First Time in 9 Months, Down 7.9% From Year Ago

Courtesy of Mish.

The Wall Street Journal reports Pending Home Sales Up 3.4% in March, the first rise in nine months.

Facts and Figures

  • Pending sales up 3.4% from February
  • Pending sales down 7.9% from year ago
  • Index 2.6% Below 2001 Level
  • Actual new home sales down 14.5%

Wishful Thinking

In the wishful thinking department, Gennadiy Goldberg, U.S. strategist at TD Securities stated “The stronger pending home-sales report hints at resurgence in housing-market momentum during the typically busier spring buying season.”

Don’t count on it. Home prices are up, and so are mortgage rates. Thirty year mortgages are about a full point higher from a year ago. The recovery, if that’s what wants to call it, was driven by all-cash sales.

Investor demand has waned at these prices. There is just not much left of the recovery, if anything at all.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Continue Here

Donetsk Riots Break Out In “Scenes Of Absolute Brutality”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It seems the US and EU sanctions escalation has done nothing to calm the tensions between Ukrainians and pro-Russian forces in Donetsk, where according to report ultranationalists from Kiev are involved in a skirmish with local riot police. As the following clip suggests… "rocks and missiles are being thrown from both sides – there are injuries and scenes of absolute brutality as both sides clash."

 

Minutes before the violence erupted…

 

and then as violence erupted…

 

It got serious..

One Sentiment Gauge in Europe Reaches Epic Proportion

One Sentiment Gauge in Europe Reaches Epic Proportion

A visual history of complacency and fear as seen by the 10-year spread over German Bunds

By Elliott Wave International

The one-two punch 2014 winter storms that battered the southeastern United States left $13.5 million in damages in Georgia alone and thousands of residents displaced due to burst pipes and power outages. I am one of the displaced. Three months after the flood, I'm still living out of suitcases in a hotel while my apartment gets rebuilt.

I'm ashamed to admit before Icepocalypse, I had the least comprehensive homeowner's insurance. Why bother, I thought. This is Atlanta. The only blizzard this city's seen in the last decade is on the dessert menu at Dairy Queen.

But now, you better believe the first thing I'm going to do when I move back in is upgrade my policy to cover all and any acts of man and God — fire, tornado, sharknado, alien invasion, you name it.

It's human nature. You can never truly prepare for the worst until you experience it first-hand. Then, and only then, do you go above and beyond to protect your health and welfare.

Nowhere is this more apparent than in the world of finance. The tendency for investors to be blindly optimistic in the run-up to disaster, and then stringently fearful after is undeniable. You can actually see it with your own eyes in the yield spread between low-grade bonds and long-term securities.

In a nutshell: A falling yield spread signals a growing appetite for risk among investors, while a rising yield spread signals an aversion to risk.

As for a real-world example, the April 2014 Elliott Wave European Financial Forecast opens with a special section on one of the most accurate gauges of eurozone sentiment since the start of the financial crisis: the 10-year spread over German Bunds.

Before we delve into our analysis, let's set the pre-crisis scene to 2006 early 2007. Europhoria is off the charts as seen in these headlines from the time:

"Euro Bull is Far From Over! Not only has the bear market been consigned to memory, it has been replaced by a rampaging bull market in equities. It's Goldilocks all over again!" — April 20, 2006 National Post

– And — "Lehman Brothers strategy boffin says buy, buy, buy Europe." — January 16, 2007 Daily Mail

So, did the yield spread mirror the blind optimism among investors?

You betcha! Here, the April 2014 European Financial Forecast confirms: "By mid-year 2007, bond investors lent money to treasuries in Greece, Ireland, Italy, Portugal and Spain at more or less the same rate as they lent money to Germany." The first half of our chart of the 10-year spread over German bunds captures this historic complacency:

The move in the other direction was far from swift, as ingrained optimism persisted amidst the 2007 U.S subprime implosion, and 2008 Lehman Brothers bankruptcy. The next series of charts show how investors didn't fully "snap awake" until late 2008-9.

From there, the needle of sentiment swung firmly into risk-aversion territory:

The spread between 10-year yields in Germany versus peripheral Europe rose by a factor of 43 — from around 23 basis points in January 2008 to almost 1,000 basis points in January 2012.

Now is the time for reckoning. Historic complacency coincides with peaks, while historic fear with bottoms. So there is only question before you: Where does the 10-year spread over German Bunds stand now?

The April 2014 European Financial Forecast zooms in on the yield spread's performance since 2012 and has this answer:

Only a trend of "epic proportion can explain" today's reading; and when this phase gets underway, equities along with debt instruments "of all stripes" will follow.

Don't wait until after the tide has already turned. Prepare for the long-term changes ahead in Europe's leading economies with EWI's European Financial Forecast Service.

Start your 2-week free trial to the European Financial Forecast Service today. You'll get:

  • The monthly European Financial Forecast, with intermediate-term analysis of European markets: DAX, FTSE, CAC, SMI and Euro Stoxx 50
  • The European Short Term Update (delivered online 3 times a week)
  • Elliott Wave Theorist (delivered online at least twelve times a year), with Robert Prechter's latest Elliott wave research focusing on the long-term direction of the markets and the manifestations of waves in society

This article was syndicated by Elliott Wave International and was originally published under the headline One Sentiment Gauge in Europe Reaches Epic Proportion

As Its Domestic Cash Plunges By Record To Early 2010 Levels, Apple Prepares Massive $17 Billion Bond Offering

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While Apple's earnings report last week left little to be desired, one of the more notable observations was that the company's cash hoard, relentlessly rising until now, had seen its first quarterly dip since Lehman, declining by $8 billion from $158.8 billion to $150.6 billion. Which was to be expected: since the technological company has not had much success with "growthy" innovation since the arrival of Tim Cook, it has been forced to become an activist investor's favorite piggybank, buying back and dividending record amounts of cash. In fact, perhaps the most notable feature of its earnings release was that AAPL would boost its buyback plan by 50% to $90 billion.

One small problem: as everyone knows, when it comes to shareholder friendly actions, Apple can only rely on its domestic cash hoard. The foreign cash, unless it is repatriated and subject to substantial tax withholding, is for all buyback and dividend purposes, meaningless. Also, as most know, starting in 2010, there was a dramatic divergence between the amount of cash AAPL generates domestically versus how much it has in offshore bank accounts.

Which brings us to AAPL's most recent cash update between domestic and foreign holdings. Because while total cash may have dipped by $8 billion, foreign-held cash actually rose by $7.8 billion. Which means that Apple's domestic cash tumbled. By how much? The chart below has the answer.

As that highlighted yellow bar shows, AAPL domestic cash tumbled by a record amount, plunging by nearly half, or $16 billion to be specific, from $34 billion to $18 billion.

What this simply means is that after making the history books with the biggest ever, $17 billion bond offering 12 months ago, Apple is about to issue a whole lot more of debt. Sure enough, as FT reported moments ago, AAPL is preparing another $17 billion in debt, to follow the $17 billion it issued last year, which would make it the joint largest bond offering in history. Again. From the FT:

Apple is preparing the groundwork for another blockbuster debt sale in the region of $17bn that could rank as the second-largest corporate bond sale of all time.

Apple plans to use proceeds from the debt sale to fund the buyback rather than tap its $150bn cash pile. About $130bn of that cash is held overseas, 88 per cent of the total, and returning it to the US would lead to a tax charge of up to 35 per cent.

A foreign debt sale would probably target the eurozone, where interest rates are lower than in the US, and diversify Apple’s debt investor base.

During Apple’s quarterly results call last week, Luca Maestri, Apple’s incoming finance chief, warned that repatriating offshore cash would incur “significant” tax consequences.

Apple was likely to raise “an amount of term debt financing similar to what we issued in 2013”, he said, adding that preparations had also been made to tap the commercial paper market for short-term liquidity.

However, considering the less than smashing success of its first record bond offering (the 2043s are trading at 90, the 2023 at 93), this one may be a little more problematic to pull off, and AAPL may have no choice but to boost the cash coupon to find enough buyers who will likely be unable to flip the bonds on the next day.

The goods news for Apple is that unlike IBM, whose debt/capital ratio soared to the highest ever following its surge in debt-funded buybacks, it still has a lot of balance sheet capacity before it has to be worried about a debt downgrade to fund its returns to shareholders. The bad news, is that unless the company finds a way to boost domestic cashflow, or somehow put the offshore cash to good use, it won't be too long before Apple too, has no choice but to do what every other company is doing in the absence of top-line growth: issue record amounts of debt just to keep shareholders happy. 

Needless to say, this strategy works as long as rates are low, but once rates start rising, it stops working.

Suspicious Deaths of Bankers Are Now Classified as “Trade Secrets” by Federal Regulator

Courtesy of Pam Martens.

(Left) JPMorgan's European Headquarters at 25 Bank Street, London Where Gabriel Magee Died on January 27 or January 28, 2014

It doesn’t get any more Orwellian than this: Wall Street mega banks crash the U.S. financial system in 2008. Hundreds of thousands of financial industry workers lose their jobs. Then, beginning late last year, a rash of suspicious deaths start to occur among current and former bank employees.  Next we learn that four of the Wall Street mega banks likely hold over $680 billion face amount of life insurance on their workers, payable to the banks, not the families. We ask their Federal regulator for the details of this life insurance under a Freedom of Information Act request and we’re told the information constitutes “trade secrets.”

According to the Centers for Disease Control and Prevention, the life expectancy of a 25 year old male with a Bachelor’s degree or higher as of 2006 was 81 years of age. But in the past five months, five highly educated JPMorgan male employees in their 30s and one former employee aged 28, have died under suspicious circumstances, including three of whom allegedly leaped off buildings – a statistical rarity even during the height of the financial crisis in 2008.

There is one other major obstacle to brushing away these deaths as random occurrences – they are not happening at JPMorgan’s closest peer bank – Citigroup. Both JPMorgan and Citigroup are global financial institutions with both commercial banking and investment banking operations. Their employee counts are similar – 260,000 employees for JPMorgan versus 251,000 for Citigroup.

Both JPMorgan and Citigroup also own massive amounts of bank-owned life insurance (BOLI), a controversial practice that pays the corporation when a current or former employee dies. (In the case of former employees, the banks conduct regular “death sweeps” of public records using former employees’ Social Security numbers to learn if a former employee has died and then submits a request for payment of the death benefit to the insurance company.)

Wall Street On Parade carefully researched public death announcements over the past 12 months which named the decedent as a current or former employee of Citigroup or its commercial banking unit, Citibank. We found no data suggesting Citigroup was experiencing the same rash of deaths of young men in their 30s as JPMorgan Chase. Nor did we discover any press reports of leaps from buildings among Citigroup’s workers.

Continue Here

FINRA Enforcement Chief Brad Bennett on HFT, “Better To Be Silent and Thought a Fool . . .”

Courtesy of Larry Doyle.

In today’s version of “You Can’t Make This Stuff Up,” we hear from Brad Bennett, the Head of Enforcement at Wall Street’s self-regulatory organization FINRA. Bennett and others spoke on a panel this past Friday at a conference sponsored by the Practicing Law Institute.

On the hot button topic of high frequency trading, Bennett weighed in with a comparison that is so dismissive as to defy credulity. Let’s navigate as the folks at Wealth Management were there to cover and reported:

Benefiting from faster access to the markets is akin to buying a first-class plane ticket, and doesn’t sound unfair, said the top cop at Wall Street regulator FINRA. 

Bennett was on a panel with the enforcement heads of the SEC, the Consumer Financial Protection Bureau and the Dept. of Justice.

Bennett specifically had the following to say:

“The interesting thing of what Lewis writes about is his primary focus is on preferential access – the exchanges allowing people to locate closer to their trading engines such that their pipes are faster which (you know), that’s an interesting area of investigation because if fully disclosed, one could look at it like, well, can you buy first class ticket and get a first class seat on the airplane? Do you get off quicker if you buy first class and get drinks, well yes you do. Is there anything unfair about this if it’s fundamentally disclosed? I don’t know, doesn’t sound like it to me but those are the kinds of issues that have to be worked thru.”

Bennett is not some mid-level regulatory official. As the Head of Enforcement, he is charged with making sure Wall Street firms play by the rules to the absolute letter of the law and to mete out punishment when they do not. Given FINRA’s track record (which leads me to define this regulatory organization as little more than a pack of meter maids),  perhaps we should not be surprised by Bennett’s rather flippant remark. I guess some might call him the Head Meter Maid.

So, once again, I will pose the question to Mr. Bennett and his FINRA colleagues: are you upholding your mandate to fully protect investors and the public interest or are you protecting the industry that funds you? The comment equating co-location of computers on equity exchanges to a first class plane ticket so as to facilitate what appears to be massive front running puts that question front and center once again.

Bennett references that the practices involved might generate “an interesting area of investigation if fully disclosed.”

Well, Mr. Bennett, let’s do just that.

Will you and your colleagues at FINRA allow for an independent outside audit so that full disclosures on this front and others can bring meaningful transparency to these topics? Will you and your colleagues at FINRA agree to your organization being subject to the Freedom of Information Act?

I will be the first to sing your praises if you open the doors and windows into these areas of national concern.

If not, then I can only view your comparative statement as further evidence confirming that you would be “better to be silent and thought a fool than to speak up and remove all doubt.”

Navigate accordingly.

Gimme Some Credit

Gimme Some Credit

By Paul Price of Market Shadows

(Originally published on 4/28)

We Sold a Long-Term Put on Visa 

Market Shadows’ Virtual Put Writing Portfolio took advantage of last week’s sell-off in the high-quality shares of Visa (V).  We wrote (sold) one contract of the Jan. 2016, $200 strike price put for $24.42.

Visa Put for MS

Thus, we are now ready to buy 100 shares of Visa for a net price of $175.58 ($200 strike price – $24.42 put premium) if the put is exercised. Our maximum gain will be realized if Visa simply holds above $200 through expiration date.

If V stays above $200, we will keep the entire $2,442 premium and will not be forced to buy any Visa shares. That is our best case scenario.

For email alerts from Market Shadows, please provide your email address at the top left of a website page.

Market-Shadows-Sign-Up-Box1

 

Progressives Plan Huge Illinois Tax Hikes; Union Member on the “Fair Tax” Proposal

Courtesy of Mish.

Via email, Ben VanMetre at the Illinois Policy Institute mentions huge tax hikes that Progressives are angling for. The tax hikes are so steep and so universal that even thinking union members are against the hikes.

From VanMetre

State Sen. Don Harmon and advocates for his progressive tax proposal argue that the progressive income tax will provide tax relief for Illinois’ middle class.

Not only is the argument not true, but the progressive income tax was never about tax relief. The proof of that is in the numbers.

Under Illinois law, the individual income tax rate will be 3.75% in 2015. Under the progressive tax-hike plan introduced by Sen. Harmon — and endorsed by A Better Illinois — a higher 4.9% applies to income earned after $12,500.

Under Harmon’s proposal, anyone with a taxable income of more than $22,000 will see their overall state tax bill increase. That plan targets Illinois’ working- and middle-class residents.

So why didn’t Harmon use the sunset rate (3.75%) for $12,500 in his rate structure?
The answer: because part of the progressive tax hike scheme is about making as much of the temporary tax hike permanent as possible while still calling it “tax relief.”
And that’s true for all of the popular progressive tax plans instructed in Illinois recently:

• State Rep. Naomi Jakobsson’s plan makes permanent the 5% rate on income earned above $36,000.
• The Center for Tax and Budget Accountability’s plan makes permanent the 5% rate on income earned above $5,000.
• Sen. Harmon’s plan makes permanent nearly all of the 5% rate on income earned above $12,500.

It’s time for taxpayers in Illinois to know the truth about the progressive income tax. It’s not about tax relief — it’s about making the temporary tax hike permanent and further increasing taxes on the middle class.

Ben VanMetre
Senior Budget and Tax Policy Analyst

“Unfair” Tax details

Continue Here

How Technology Affects Sleep

How Technology Affects Sleep — An infographic by Big Brand Beds.

 how-technology-affects-sleep-164845 (1)

How Technology Affects Sleep

How Technology Affects Sleep — An infographic by Big Brand Beds

how-technology-affects-sleep-164845 (1)

Why Housing Has Stalled — And Why Everything Else Will Follow

Courtesy of John Rubino.

It’s not easy being a mainstream economist. You spend your life building models that become your professional identity. And when those models fail to describe and predict reality, you’re left wondering about the meaning of it all.

The latest case in point is US housing. Keynesian economic models say that if you lower mortgage rates you get more houses bought, sold and built. A nice, simple piece of cause and effect. But today’s mortgage rates are at levels that would have incited a buying frenzy a generation ago, employment is rising — and home sales, home building and mortgage originations are all flat-lining.

Zero Hedge and Automatic Earth recently posted good discussions of the current state of the housing market. See:

Economists Stunned By Housing Fade

US Housing is Down For the Count

Both articles conclude that housing is weak and getting weaker. But the real question is what this means for the rest of the economy. Is housing a discrete sector dealing with its own supply/demand issues, or is it a sign of things to come for consumer spending, government tax revenues, and business investment?

The argument for the latter scenario is based on the idea that newly-created currency pouring into the financial system pumps up asset prices, which convinces people that they’re rich enough to indulge in new cars, new clothes and nice vacations — and more stocks, bonds and houses.

But this “wealth effect” only works when the amount of debt in the system is low enough for new paper profits to change behavior. If people already carry too much debt, then they don’t feel comfortable borrowing even at historically low interest rates, and inflated asset prices become harder and harder to support. Either they stall or start moving lower, which shifts the wealth effect into reverse and sucks the air out of the economy.

The reason that so many economists didn’t see housing rolling over and don’t think it will affect the rest of the system in any event is that most Keynesian models don’t pay attention to society’s balance sheet. A given amount of new debt is supposed to increase “aggregate demand” by the same amount whether the government and consumers are debt-free or buried under a mountain of obligations taken on in years past. That’s a false assumption of course. Liabilities matter, and the fact that debt levels, especially student loans, are hitting records probably explains why housing isn’t behaving according to script.

The other fuel for a wealth effect-driven boom is the stock market. Here again, a nice pop has coincided with a big jump in debt, in this case margin debt, which investors incur when they borrow against stocks to buy more stocks. Late last year margin debt hit a new record and since then has gone even higher. Now it’s at levels that, based on history, imply less bang for each new borrowed dollar. Going forward it will be harder for investors to generate big returns by borrowing money and buying more equities. Taking profits will begin to seem more and more prudent, until sellers swamp buyers and the markets correct.

Margin debt 2014

Click here for a great explanation of why pretty much every stock market valuation measure is now flashing either yellow or red, from John Hussman.

Assuming that equities plateau or start falling, what does that do mean for government’s strategy of using asset bubbles to pump up the consumer economy? Probably it derails it. The question is when.

Hussman notes that periods of extreme overvaluation like today are good indicators of low average stock market returns over the next decade, but not necessarily great trading signals. Stocks might get more overvalued before they stop. But that would raise the risk of a crash, which would have an even more serious impact on investor psyches. So either way, this year or next, the wealth effect will become the poverty effect, and asset owners will become asset sellers.

Visit John’s Dollar Collapse blog here >

Why Housing Has Stalled – And Why Everything Else Will Follow

Courtesy of John Rubino.

It’s not easy being a mainstream economist. You spend your life building models that become your professional identity. And when those models fail to describe and predict reality, you’re left wondering about the meaning of it all.

The latest case in point is US housing. Keynesian economic models say that if you lower mortgage rates you get more houses bought, sold and built. A nice, simple piece of cause and effect. But today’s mortgage rates are at levels that would have incited a buying frenzy a generation ago, employment is rising — and home sales, home building and mortgage originations are all flat-lining.

Zero Hedge and Automatic Earth recently posted good discussions of the current state of the housing market. See:

Economists Stunned By Housing Fade

US Housing is Down For the Count

Both articles conclude that housing is weak and getting weaker. But the real question is what this means for the rest of the economy. Is housing a discrete sector dealing with its own supply/demand issues, or is it a sign of things to come for consumer spending, government tax revenues, and business investment?

The argument for the latter scenario is based on the idea that newly-created currency pouring into the financial system pumps up asset prices, which convinces people that they’re rich enough to indulge in new cars, new clothes and nice vacations — and more stocks, bonds and houses.

But this “wealth effect” only works when the amount of debt in the system is low enough for new paper profits to change behavior. If people already carry too much debt, then they don’t feel comfortable borrowing even at historically low interest rates, and inflated asset prices become harder and harder to support. Either they stall or start moving lower, which shifts the wealth effect into reverse and sucks the air out of the economy.

The reason that so many economists didn’t see housing rolling over and don’t think it will affect the rest of the system in any event is that most Keynesian models don’t pay attention to society’s balance sheet. A given amount of new debt is supposed to increase “aggregate demand” by the same amount whether the government and consumers are debt-free or buried under a mountain of obligations taken on in years past. That’s a false assumption of course. Liabilities matter, and the fact that debt levels, especially student loans, are hitting records probably explains why housing isn’t behaving according to script.

The other fuel for a wealth effect-driven boom is the stock market. Here again, a nice pop has coincided with a big jump in debt, in this case margin debt, which investors incur when they borrow against stocks to buy more stocks. Late last year margin debt hit a new record and since then has gone even higher. Now it’s at levels that, based on history, imply less bang for each new borrowed dollar. Going forward it will be harder for investors to generate big returns by borrowing money and buying more equities. Taking profits will begin to seem more and more prudent, until sellers swamp buyers and the markets correct.

Margin debt 2014

Click here for a great explanation of why pretty much every stock market valuation measure is now flashing either yellow or red, from John Hussman.

Assuming that equities plateau or start falling, what does that mean for government’s strategy of using asset bubbles to pump up the consumer economy? Probably it derails it. The question is when.

Hussman notes that periods of extreme overvaluation like today are good indicators of low average stock market returns over the next decade, but not necessarily great trading signals. Stocks might get more overvalued before they stop. But that would raise the risk of a crash, which would have an even more serious impact on investor psyches. So either way, this year or next, the wealth effect will become the poverty effect, and asset owners will become asset sellers.


Visit John's Dollar Collapse blog here >