Leftovers --- Radio Show 5/15/2010

We discussed the use of stop loss orders and stop loss limit orders.  In liquid markets, stop loss orders are usually sufficient, but on May 6th we saw how stop loss orders would have been more appropriate given high frequency and computer program trading gone awry.  A stop loss order is a market order after the stop loss is reached.  A normal stop loss is 8% from either the original basis or a higher gained level after purchase.  In a stop loss limit, you might have a stop of 4% with no execution below an 8% loss.  This would save you from a precipitous drop from which the market then recovers; if the market does not recover your loss is even greater, because there was no execution.  Those people, who followed my consistent advice, would have been completely out of stocks and stand alone ETF positions by May 5th, because the market went into correction on the 4th and they would have sold any positions in which there stop loss orders had not yet executed.  You do not stay in stocks and stand alone ETF positions in a correcting market.

The major securities exchanges agreed to create a uniform system of circuit breakers to slow trading during intense market volatility.  Part of the problem on the 6th of May was a slow down on the NYSE and trades routed to electronic exchanges.

U.S. Senate voted to force credit card companies to cut transaction fees to businesses that accept debit card transactions.  This will help businesses more than the public as the cost of the cuts is passed on by the credit card companies to the card holders.  The Senate also stripped the right of banks to directly engage ratings agencies to rate bonds.  The Senate wants the SEC to set up an independent board to decide which ratings agency provides ratings for a bond issue.  The New York Attorney General has subpoenaed eight banks for information on their dealings with ratings agencies: Goldman Sachs, Morgan Stanley, Deutsche Bank, Merrill Lynch, UBS, Citigroup, Credit Suisse, and Credit Agricole.  Moody's received a Wells notice from the SEC, because there is concern Moody's 2007 initial application to become a nationally Recognized Statistical Ratings Organization (NRSRO) was misleading.  Morgan Stanley is being investigated by the Justice Department to determine if they misled investors on mortgage derivatives it helped create, market, and sometimes bet against.  The New York Attorney General is suing a unit, Ivy Assets, of NY Mellon alleging they kept clients in the dark about problems with Bernie Madoff of which they had knowledge.

The U. S. Senate approved an audit of the Fed, but only of the emergency actions since December 2007.  It is not a full audit.

FHA commissioner David Stevens urges private mortgage insurers to not ease standards.  They have seen a massive drop in business, but prices are falling and the mortgage insurers want to do more business and the bailout of Fannie and Freddie, with their higher costs, is pushing private mortgage insurers out.  The FHA intends to maintain lending volume until capital comes back.

The ECB is committed to the survival of the euro and is buying sovereign bonds in the secondary market with a $1 trillion fund.  While this is portrayed as necessary steps to strengthen the eurozone, the bond purchases will primarily help European banks by taking the sovereign bonds off their balance sheets while increasing their liquidity.  The ECB pledged to keep the bonds for their full maturity.

There is a fake SEC being operated by con artists under the name of "U.S. Securities and Equities Administration", "U.S. Securities Administration", and the U.S. Securities Bureau enticing investors with offers to remove supposed restrictions on stocks they own or release funds being held by the government for a fee.  They had a global counterpart, an address shared with Deutsche Bank and Standard and Poor's in Boston.  They even set up a website with detailed investor alerts and warnings.

Parallel criminal and civil probes have been launched by DOJ and CFTC into whether JPMorgan through its trading activities actively suppressed the price of silver.  There has also been some speculation that big bullion dealers and ETFs do not have the physical bullion they claim to possess.

According to a study from the Center for Retirement Research at Boston College, if a couple turned 65 last year and at least one spouse suffered from a chronic disease, they would face lifetime health cost of $220,000.  A healthy couple without any chronic diseases would have lifetime health care costs of $260,000.  For 5% of the unhealthy couples, the cost can be as high as $465,000 compared to $570,000 for 5% of healthy couples, because a healthier couple will live significantly longer lives.

In the past we have said several times that a sustainable recovery is usually preceded by a strengthening dollar.  Since 2008, commentators have been extolling the export benefits of a weak dollar as the road to recovery.  The increase in exports and a significantly declining trade deficit has not been happening.  A strong dollar encourages foreign investors to invest in the U.S., bring money into the United States.  A stronger dollar makes imports cheaper and helps control inflation.  Services and production outsourced to other countries may find economic reason to return to the United States.  The strength or weakness of the dollar is always a double edged sword.

Lacker, Richmond Fed President, again said the Fed must not wait too long to raise rates given public inflation expectations despite low inflation.  Economy is slowly improving but it will take some time to make substantive progress in high unemployment, although he sees progress.

Kohn, Fed vice-chairman, said economic rebalancing prevents turmoil. in addressing the problem of global financial imbalances in the emergence of global financial crises.  In my opinion this is exactly the problem within the eurozone.  It is unfortunate that Germany and China are not interested in global rebalancing.

Hoenig, Kansas City Fed President, who also wants the Fed to raise interest rates and to move back to a more neutral policy, was profiled with a explanation of his monetary beliefs by The Wall Street Journal online.

Elizabeth Warren of the Congressional TARP Oversight Panel said she remains infuriated that TARP has failed to funnel some of the $700 billion to small businesses.  Big bank lending to small businesses actually dropped 9% from 2008 to 2009.  Small banks still remain constrained by exposure to commercial real estate.  In my opinion the banks which have profited the most from the government bailout are lending the least to promote economic recovery.  A study by the Panel found that several TARP initiatives were ineffective in getting money for small business.

The National Federation of Independent Business monthly economic trends survey showed more optimism but still weak economy with spending at record low levels.

FINRA is focusing its enforcement priorities on selling-away cases, municipal disclosures, structured products, and leveraged exchange-traded funds.

John Hussman in his weekly commentary is of the opinion that no repetition of game theory will produce a result that will keep Greece from needing to restructure its debt despite the EU/IMF bailout, which was designed to last three years.  In his opinion it might give Greece only 18 months relief from seeking capital in the open market.  Unfortunately, he appears to be to focused on deficits and not enough on the current account imbalances among the eurozone countries.

Rob Parenteau of the Levy Economics Institute, for whom I have been doing economic research on the eurozone crisis and European and U.S. bank exposure as well as hedge fund investment opportunities, wrote that the Greek bailout will fail for three reasons: 1) higher taxes and lower public worker wages create discontent, 2) Greeks have borrowed from French, German, and Swiss banks not just Greek banks compounding the problem, and 3) Greeks will have less money to spend and countries and businesses with business ties to Greece, like Germany and the Netherlands, will also suffer.  He also indicated the euro will fall at least 20-30% this year.


The IRS has issued average premiums by state for the new small group tax credit.
Chinese prices were up 2.8% for the year to April; industrial output was down 17.8% vs year ago; bank lending is still pumping despite monetary tightening at $113.4 billion in April.

French economy may see a .4% growth in Q1 and .5% in Q2 according to the Bank of France (the forecast is 1.4% and is now in doubt).

China April trade surplus is $1.7 billion after a March trade deficit of <$7.2 billion>.

Keeping children until age 26 on parent's insurance will raise employer premium costs by 1%.

UK production was up 2% in March; output was up 2% vs year ago.

US retail sales, ex autos, were down 2% in April with all sales up .4% in April; all sales were up 8.8% vs year ago.  March was revised up to 2.1% from 1.9%.  US trade deficit was up to 19% in March.  It grew by 2.5%, $40.4 billion, in March.  Imports were up 3.1% led by oil.

US industrial output was up .8% in April with capacity utilization up to 73.7%, which is still 6.9 below the average.

China April producer prices were up 6.8% and property prices were up 12.8%.

Hong Kong GDP Q1 was 8.2%.

U.S. Treasury auctions:

3 year Treasury, $38 billion, yield 1.414%, bid-to-cover 3.28, foreign 51%, direct 16.5%.

10 year Treasury, $24 billion, yield 3.548%, bid-to-cover 2.97, foreign 59.6%, direct 24.96.

30 year Treasury, $16 billion, yield 4.49% (higher than current market which means this yield is "tail"), bid-to-cover 2.60, foreign 32.5%, direct 17.5%.  This was a weak 30 year auction.


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