MarketWatch.com - Pre-Market Indications

Saturday, December 18, 2010

Bank Bailout A Boondoggle of Billions

Stock Assault 2.0 - Artificial Intelligence Stock Market Software

What the tax package proves conclusively is that the President, the House and the Senate have absolutely no intention of getting their fiscal house in order. We will address the lurid details later. There is no change in the policies of borrowing continuously in order to sustain current consumption and to keep the economy from collapsing. As far as we are concerned the hold up in the package was to load it up with pork and stimulus. Some call it bells and whistles â€" we call it irresponsible. The Fed and all the players are buying time and 70% of the public knows that and they are going along with it. Very few want to face the music.

The Fed, via the “President’s Working Group on Financial markets” is targeting asset prices, if possible, and the equities market. This is really the only bastion of wealth that the public recognizes. Wait until government and Wall Street go after their retirement plans, then they will get a wake-up call. Mr. Bernanke believes a strong stock market will spur spending, leading to higher income and profits. They had best have some heavy propaganda ready because 4th quarter GDP will probably come in around 2%. Inventories are building production is again stagnant, railroad traffic is off over 1% and the Baltic Index is down. Consumer credit has expanded more than $3 billion the first two-month rise in more than two years, although that number was aided by one off student loans, which accounted for all of October’s gains. In reality consumer credit fell more than $32 billion, the lowest level since late 2004. If you cut away the student loans consumer credit fell about $75 billion over the past three months.

What may seem odd to you is that a federal judge’s rejection of mandatory insurance, a keystone provision of the Obama Health Care Reform Package, is bullish for the stock market. The bill is enormously unpopular and the gutting of this part of the bill neuters it. It is on to the Supreme Court, where unfortunately it will be upheld, by our bought and paid for socialist activist judges. It reminds us in many ways of the Warren Court. The judges may take the case for decision by next June.

Irrespective, temporary fiscal stimulus has been just that, temporary. We ask, why would the result be any different this time? All the exercise, a very expensive exercise of $2.5 trillion annually, is doing is buying time. The result will be more inflation and unemployment and the beginning of demonstrations and violence as we have seen all over Europe for the past few years. Incidentally, both are worsening and next year will reach a level not seen since 1968 in Paris. Riots are on the way in America, just be patient, they will come in good time. This is the result of austerity from the bottom up and the rich getting richer. Washington and NYC had best re-read French history starting in 1788.

The last time we saw numbers that we see today was in mid-2007, when the stock market took a sharp plunge. A correction to 8,000 on the Dow would wring out present excess evaluation and perhaps then some. This market is way over valued.

In none of the news and research reports we read do we see any reference to the fact that insured unemployment jumped 523,000 to 4.2 million. Markets often ignore cold hard facts at their peril.

We wonder what Wall Street thought about the expose forced by court order of the distribution of bank bailouts? There was no discussion. They just ignored the preliminary report. There are different estimates, but we will stick with our original estimate of $13.8 trillion. There is no question the collateral was substandard and in defiance of Fed rules. It is understandable why the Fed wanted to hide what they had been up too. There were 4,200 different loans and securities purchases under 13 different bailout programs of $3.8 trillion, that is that we know of at this time. This was shared by a host of lenders to affect profits to lessen these lenders deplorable condition. It even included transnational conglomerates. Some $61 billion was loaned to hedge funds to assist their exit from ABS, Asset Backed Securities. Much of the money found its way to the Cayman Island accounts of these entities in order to cover up what has happening. These funds may have bailed out t hese hedge funds, but the funds were also used to attack the European bond market and the ECB and its policies. We still do not know how many trillions are still out there. Did they also use the IMF and World Bank to front secret transactions? None of this has been as yet disclosed. It is estimated that some 36% of collateral for the loans was stock, which is illegal, including junk bonds. This is only the beginning. When the full story is known the reign of the Fed will be history.

The final details of the tax package are not as yet available, but here are a few comments. The tax extension bill has become a boondoggle worth about $900 billion. Payroll tax cuts will work about as well as the Bush tax rebates â€" they didn’t work. Temporary measures never work, because they do not affect long-term behavior. Most of the money will be saved or used to reduce debt. Business needs accelerated depreciation allowances and research credits like they need a hole in the head. They are sitting on almost $2 trillion in cash, or 7.4% of assets, the highest in 52 years. This is just another payoff to business for their campaign contributions.

One of the things we would like to address is the “Shadow Lenders.” As you know the Fed gave support to hundreds of banks and other corporations and then would not divulge what they had done. One of the sneaky things they did was to use $140 billion, or 20% of the Fed’s Commercial Paper Funding Facility, $28 billion, to secretly fund domestic and foreign corporations. Banks around the world benefited. How they did it was via vehicles known as conduits. This contributed significantly to asset bubbles in residential and commercial real estate prior to the financial crisis, which began three years ago, by obscuring risks. Spokesmen for theses facilitators, banks, won’t say whether their firms borrowed money from conduits that tapped the commercial paper facility. These people are real beauties. Some transactions allowed companies to remove assets from their balance sheets and reduce capital requirements. These vehicles get quite large and were secretly hidden fr om regulators and Congress. This criminal enterprise functioned from September 2008 through January 2010.

The total loaned from this facility by the Fed was $738 billion. The Fed says they did not know what the conduits were doing with the money. If you believe that I have a bridge you might be interested in. These conduits were similar to SIVs, or Special Investment Vehicles, where assets, usually their losers, were held off balance sheets. In pulling this slight of hand they did not need to hold capital against these assets. Thus, Citigroup, Royal Bank of Scotland, etc. served as a vertical faucet for loans that very few knew about. As you can see, just about anyone who wanted or needed funds got them and the fed often didn’t even know where the funds went.

Both Europe, the UK and the US are on life support. Why else would they need such massive injections of money and credit? Now and during the coming year there will be about 2% growth, half of which will be supplied by quantitative easy of one form or another. These estimates come from official statistics, which unfortunately are incorrect: all three general economies in reality are in the minus column.

In order to maintain this level far more money and credit will be needed than has been admitted or anticipated. By June there is a good possibility that Greece, Ireland, Portugal and Spain will have defaulted. Already Moody’s has 10 Portuguese banks under review for possible downgrade.

Europe waited too long to pour money and credit into the system and as a result is showing distinct signs of deflation. Strains will be great during the first quarter of the year due to heavy refinancing demands. The euro zone has to refinance $750 billion. This event could push Spain and Portugal into the same position that Greece and Ireland are now in. This means for those who have to be in currencies the US dollar and the Swiss franc will be the obvious gainers. You might call them, for this period, the best of the worst. This is not as yet being reflected in the currencies or their bond markets. Higher US rates are the result presently of US fiscal fears that will abate as we cross into the first quarter of 2011.

It won’t take long for Rep. Ron Paul and Senator Bernard Sanders to go gunning after the Fed, which has to expose what they have been up too and what they have done, which has been illegal under their charter. That should calm dollar strength and add fuel to the fires that are driving gold, silver and commodity prices higher.

The “Build America Bond” program will be dead and the states will be strangled for lack of funds and as a result muni yields will have to climb further, which means lower muni prices and more layoffs in a sector that makes up 1/7th of the economy.

Housing will have another bad year that will stretch to 2013, and see 20% lower prices, many more foreclosures and a staggering inventory that could hit a 4 to 5 year supply, when normal is 4 to 5 months.

It looks like the administration and Congress with the assistance of the Fed will attempt to make $2.5 to $3 trillion in stimulus in a combination QE2-QE3, stretch out over two years. We are afraid they will find that is not going to work.

As we mentioned the first quarter should be good for the dollar, but as massive money has to be raised other borrowers will be crowded out of the market and yields will tend to rise again. The Fed could end up buying almost all the Treasury and Agency bonds, new and existing. This will continue to strangle credit to small and medium sized businesses that create 70% of new jobs. That means little improvement in employment. That also means the Chinese and Japanese could leave the Treasury-Agency markets and spend their dollars elsewhere, such as they have been in commodities, gold and silver. We have seen two years where loans to small and medium sized businesses have fallen by 25%. That is going to worsen.

Long-term debt will be overwhelming not only in the US and UK, but in Europe as well. If you can believe it banks have again been borrowing short, lending long a proven recipe for disaster. The 3% spread isn’t worth the effort.

On top of such a poor choice they have leveraged themselves as well. Many banks will bankrupt themselves in this process as they did in the early 1980s. The taxpayers simply cannot bail every bank out, especially if they get hit simultaneously. At the same time these banks have bad real estate loans on their books.

Unemployment should improve only slightly, up to June, due to adjustments and financial turmoil in the US, UK and Europe. The following year could improve by 1% to 2% on a U6 basis. That could take real unemployment over two years from 22 5/8% to close to 20%, which will neutralize recovery again.

We could see 0.4% ten-year T-notes and perhaps even higher over the next two years as deliberately created inflation takes its toll on purchasing power.

Most of you have observed rioting in London, Athens and Rome this past week, as Europeans become more militant in retaliating against austerity, higher taxes and growing unemployment. The bitterness, resignation and militancy is reminiscent of the late 1960’s demonstrations in Paris. Now we have seen this not only in Paris over the last three years, but now over Europe as well. The entire Continent is in contagion.

The established parties in every country represent the financial interests and on the edges we see the parties of protest. If an establishment politician steps out of line their money is cut off and they are isolated. No new direction is allowed. Wages must be lowered; the cost of business must fall, as well as corporate taxation. All the gains from higher productivity and lower wages must fatten the bottom line to increase salaries and options for the leadership. They cannot have constituents getting anything whether it is in Europe, the UK or the US. The elitists want all the wealth and world government to go along with it. The bureaucrats and the technocrats make the decisions and pass their orders on to the countries leadership.

In Europe the media is largely government controlled, which means it is controlled by the people behind the scenes that control government. It is more or less the same in the UK and US, but the elitists have direct control. That is why talk radio and the Internet, that emanates from the US, is so important. Their existence breaks the monopoly censorship. This process of sterilization then becomes broken and decent rises. The discontent you see in Europe is being fueled by the truth that is being dispersed by alternative media.

In Europe, education is in the hands of government, as well as research. As a result there is no cause and effect. This, of course, leads to mediocrity, an absence of original thinking and conformity, and a mold that youth is trying to break away from among other issues. Freedom in Europe has been extinguished by socialism. Socialism was the compromise lost in the 1930s between National Socialism and communism. It was a third way that began after World War II as a political and social solution. It avoided war but otherwise has been a failure. Unfortunately in every one of these isms, including what is called capitalism; freedom has been asphyxiated by the state. The question is do we opt for anarchy? What we did find out like others before us is that there is no ideal society. In the next issue we will cover more on the dilemma of civilization in Europe, the US and England, and where we believe the powers behind societies are leading us.

FedEx, which used to be seen as a proxy for the economy, reported misses on revenue and earnings. Revenue is $963B vs. $9.77 expectations. Earnings are $1.16; $1.32 was expected.

FedEx tried to excuse the earnings miss on higher employee benefit costs. But where is the justification for the miss in revenue?...FedEx boosted FY estimates to $5.00-$5.30 from $4.80-$5.25. So, FedEx, like most everyone, is betting on a better economy in the future.

As the incoming chairman of the House monetary policy subcommittee, Rep. Ron Paul (R-TX) will hold the bully pulpit when it comes to the nation's money woes.

He's not wasting any time getting right to the heart of the matter.

The libertarian-leaning conservative has long been a critic of the US Federal Reserve and central banking as a whole, but this may be a new one: speaking with CNBC recently, Paul said he views the Fed as a "monopoly" that could benefit from the introduction of competition.

"We should start ending the Fed by allowing competition," he said. "I don't like the fact that they have monopoly control. It's a cartel: they print the money. The Constitution really doesn't give them that authority. The Constitution said that only gold and silver can be legal tender. I want to legalize competition and allow individual Americans to use gold and silver in competition, as money. Today if you do that, you can go to jail.

"I don't like the idea that the power gravitates to the Federal Reserve. They literally can have a yearly budget bigger than the whole Congress, then what they do is kept secret. We don't know where they spend the money. We're just starting to crack that nut in order to get some of this information and we should continue to do it."

An Indiana-based firm called Liberty Dollar -- which produced "Ron Paul dollar" coins during his campaign for the Republican presidential nomination -- was raided by federal authorities in 2007 and the company was shut down. The coins, sold for $25 apiece, were made of silver, and part of the proceeds from their sales were donated to Paul's campaign.

The use of gold as money is not the same as reimplementing the gold standard for dollar valuations, which Paul has supported in the past. The US dollar was once backed by the price of gold, but President Richard Nixon decoupled the dollar's value from gold markets in 1971. The move sparked a global financial panic until the rest of the industrialized world followed suit in implementing fiat currencies.

Gold is largely viewed as an archaic store of value, but Paul is not alone in seeing it as a potentially viable alternative to the dollar. World Bank President Robert Zoellick argued recently that in reforming the global financial markets, a debate should be held on returning to a gold standard.

Gold, he wrote in an editorial published by The Financial Times, could be "employed as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."

"My personal beliefs is, I'd like the market to determine [where to store value]," Paul told CNBC. "... Markets are pretty smart. Right now markets are getting smart because they're rejecting the idea of a fiat standard and they're starting to realize it's this fiat standard, manipulation of the money supply and interests rates by the Fed that gave us the bubbles and now has given us this financial crisis that we're in.

"I don't believe we're anywhere near the end of this. I believe we're about to see the collapse of the bond bubble and you're going to see skyrocketing interest rates and price inflation coming back and that will be a whole new ballgame for us to face."

In his push for greater transparency in the nation's central bank, Paul added that he wants a physical audit of America's gold reserves to ensure the Fed didn't "loan out" or "sell" it. The US Mint is regularly subjected to audits which includes the gold and silver at Fort Knox, but the most recent audit did not disclose how much was still there.

The Congressman's take on the Fed could cause serious divisions between Republicans, who've often defended the nation's central bank. "I think you’re going to see a significant dispute within the Republican Party," Rep. Barney Frank (D-MA) recently told Bloomberg. Frank is the senior Democrat on the House Financial Services Committee who allied with Paul to push an audit of the Fed.

"I do not believe that Ron Paul’s views on the Fed represent the views of most Republicans," he added.

House Resolution 1207, Paul's "Audit the Fed" bill, cleared the lower chamber of Congress but was side-tracked into committee and its language was stripped out of the Senate's financial reform legislation. The bill would have put the Fed's complete balance sheet under the US Comptroller General's microscope, but leading Senate Democrats bucked Paul's bipartisan alliance and effectively let the bank "keep its secrets," the Texas Rep. said.

Paul's son Rand was elected last November to become the next Republican US Senator from Kentucky.

 

ICI: Domestic equity funds had estimated outflows of $2.67 billion, while estimated inflows to foreign equity funds were $1.27 billion…Bond funds had estimated outflows of $1.66 billion…Taxable bond funds saw estimated outflows of $401 million, while municipal bond funds had estimated outflows of $1.26 billion.

John Williams: This morning's CPI came in below expectations, thanks partially to gasoline inflation that was reduced by seasonal adjustment. The issue here is that in November 2009, gasoline inflation was boosted by seasonal adjustments, but it was reduced in November 2010. Specifically, a not-seasonally- adjusted 4.1% monthly gain in November 2009 gasoline prices ended up as a seasonally-adjusted gain of

6.4%. In contrast, a not-seasonally-adjusted 2.0% monthly gain in November 2010 gasoline prices ended as a seasonally-adjusted gain of 0.7%. There is no consistency or stability suggested in those patterns…

Adjusted to pre-Clinton (1990) methodology, annual CPI inflation was roughly 4.4% in November 2010…while the SGS-Alternate Consumer Inflation Measure…CPI reporting methodologies back to 1980, continued to hold at about 8.5% in November.

 

Yahoo Inc. is reducing its workforce by 4 percent as it hands out 600 layoff notices for the holidays.

The job cuts announced yesterday follow weeks of speculation about whether a long-running financial funk would spur Yahoo to trim its payroll before the new year.

Reports of Yahoo’s layoff plans surfaced a month ago on two popular technology blogs, TechCrunch and All Things Digital.

This marks the fourth time in three years that Yahoo has resorted to mass firings to boost its earnings.

The company is under pressure to cut costs because its revenue has risen by less than 2 percent so far this year and chief executive Carol Bartz has promised to widen Yahoo’s operating profit margins to as much as 24 percent by 2013.

The margin stood at about 12 percent through the first nine months of this year. [This doesn’t look like recovery to us. Bob]

The cost of living in the U.S. rose less than forecast in November, indicating higher prices for commodities such as fuel aren’t filtering through into other goods and services.

The consumer-price index increased 0.1 percent after a 0.2 percent rise the prior month, the Labor Department said today in Washington. The median estimate of economists in a Bloomberg News survey called for a gain of 0.2 percent. The so-called core measure, which excludes more volatile food and energy costs, also rose 0.1 percent, matching the median forecast.

 

Manufacturing in the New York region rebounded more than forecast in December after contracting for the first time in more than a year, a sign the industry that led the economy out of the recession continues to grow.

The Federal Reserve Bank of New York’s general economic index climbed to 10.6, exceeding the median forecast of economists surveyed by Bloomberg News, from minus 11.1 in November. Readings greater than zero signal expansion in the so- called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

 

Theo Lubke, who headed the Federal Reserve Bank of New York’s efforts to reform the private derivatives market, joined Goldman Sachs Group Inc. to help Wall Street’s most profitable firm navigate the looming overhaul of financial regulations. [The game of musical chairs continues.]

 

The Business Roundtable’s economic outlook index climbed to 101 after falling in the previous quarter for the first time since the beginning of 2009, the Washington-based group said today. Readings higher than 50 coincide with an economic expansion. The gauge, which increased from a third-quarter reading of 86, rose to 102 in the first quarter of 2006.

Forty-five percent of respondents said they will add to payrolls, an increase of 14 percentage points, while 80 percent said they expect sales will grow in the next six months, up from 66 percent in the third quarter. Businesses need to pick up hiring to lower an unemployment rate that’s been at 9.5 percent or higher for 16 straight months, the longest such stretch since record-keeping began in 1948.

“Demand is returning as evidenced by anticipated sales increases, and that is good news. When demand increases, capital expenditures and employment follow, which is what we expect to see in the next six months,” Ivan G. Seidenberg, chairman of the Business Roundtable and chief executive officer of New York- based Verizon Communications Inc., said in a statement.

Fifty-nine percent of executives said they plan to spend more on equipment, up from 49 percent, the survey showed.

The executives forecast U.S. economic growth of 2.5 percent in 2011 after projecting 1.9 percent growth for 2010 in the previous survey. That compares with the 2.6 percent median estimate of economists for 2011 surveyed by Bloomberg News from Dec. 2-8.

 

Industrial production in the U.S. increased more than forecast in November and consumer prices slowed, indicating the recovery is gaining momentum without generating inflation.

Output at factories, mines and utilities rose 0.4 percent, the biggest gain since July, after a revised 0.2 percent drop in October, a Federal Reserve report showed today in Washington. The consumer-price index climbed 0.1 percent in November after a 0.2 percent gain the prior month, the Labor Department said.

Assembly lines are speeding up as business investment and exports grow and consumer spending accelerates, helping to buoy an expansion that Fed policy makers said yesterday isn’t strong enough to reduce a jobless rate hovering near 10 percent. Price increases that are below central bankers’ goal will boost the case to maintain the Fed’s purchases of $600 billion in securities through June to spur growth.

 

Confidence among U.S. homebuilders was unchanged in December from a month earlier, indicating residential construction will stay near depressed levels.

The National Association of Home Builders/Wells Fargo index of builder confidence held at 16, matching the median forecast of economists surveyed by Bloomberg News, data from the Washington-based group showed today. Readings below 50 mean more respondents said conditions were poor.

Builders from Beazer Homes USA Inc. to D.R. Horton Inc. face a market struggling to heal after the end of a homebuyers’ tax credit of as much as $8,000 and, more recently, a rise in mortgage rates. Unemployment near 10 percent threatens to fuel foreclosures that may depress prices and impede recovery in the industry that precipitated the worst recession since the 1930s.

 

Applications for home mortgages declined last week as home loan interest rates rose for a fifth consecutive week, to seven month highs, an industry group said on Wednesday. The Mortgage Bankers Association said its seasonally adjusted composite index of mortgage application activity declined 2.3 percent to 589.7 in the week ended December 10. Application activity slumped as fixed 30-year mortgage contract rates rose to 4.84 percent in the week, the highest level since early May, from 4.66 percent in the prior week, according to the MBA data. Rising U.S. Treasury yields, on expectations that consumer spending and tax policy would boost growth, have helped push mortgage rates higher.

The jump in rates is effectively reducing credit for the U.S. housing market that has remained in a fragile state despite two years of government efforts to curb foreclosures and stabilize home prices. Most analysts expect home prices to resume their fall in 2011, creating a drag on the economy.

The MBA's seasonally adjusted index of refinancing applications fell 0.7 percent to 2,910.9 last week, the lowest since June 4. The gauge of loan requests for home purchases declined 5 percent to 200.3.

 

Global demand for U.S. stocks, bonds and other financial assets slowed in October from a month earlier, the Treasury Department reported, as the pace of economic recovery weighed on demand.

Net buying of long-term equities, notes and bonds totaled $27.6 billion during the month compared with net buying of $77.2 billion in September, according to statistics issued today in Washington. Including short-term securities such as stock swaps, foreigners purchased a net $7.5 billion compared with net buying of $80.1 billion the previous month.

The U.S. economic recovery from the deepest recession since the 1930s has lagged behind growth in emerging markets, weighed down by an unemployment rate close to 10 percent and record home foreclosures.

“There’s some question about the pace of our recovery and the size of our deficit and that may be damping demand for U.S. assets,” Gary Thayer, chief macro strategist at Wells Fargo Advisors LLC in St. Louis said by telephone after the data were released. “I also think there may be better opportunities elsewhere that are attracting people.”

Total net foreign purchases of Treasury notes and bonds slowed to $23.5 billion in October from $78.9 billion of purchases in September, according to the data released today.

Treasury’s Reporting

The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy home mortgages.

China remained the biggest foreign holder of U.S. Treasuries, after its holdings rose by $23.3 billion to $906.8 billion in October, according to the Treasury’s statistics.

The Chinese currency, the yuan, has strengthened since a two-year dollar peg was scrapped on June 19. The government will push forward the reform on the yuan’s exchange rate next year, according to a statement on the State Council’s website Dec. 12 following the Central Economic Work Conference.

The Treasury’s statistics on other countries showed Japan, the second-largest holder, increased its holdings by $12.8 billion to $877.4 billion in October. Hong Kong, counted separately from China, increased its holdings by $3.3 billion to $139.2 billion.

Bernanke Policy Options May Be Limited Amid Republican Scrutiny Representative Ron Paul of Texas, who has advocated abolishing the Fed, will head the committee that oversees it. Representative Darrell Issa...who will chair the House Oversight and Government Reform Committee, has said he wants the central bank to be more accountable to the public.

By March or April, central bankers will be moving toward a conclusion about how effective their policy has been and will consider whether to expand their stimulus.

Criticism from Congress strengthens the hand of internal skeptics, including Dallas Fed President Richard Fisher and Charles Plosser of Philadelphia, who next month will gain votes on the policy making Federal Open Market Committee, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington.

“Politics matter,” Reinhart, who directed the Fed’s Monetary Affairs Division from 2001 to 2007, said in a telephone interview. “There’s external criticism and that does empower the internal opposition.”

For the past two years, investors have sold stocks and fled to mostly bonds and some commodities.

Banana Ben, like his equally pernicious predecessor, Easy Al, is trying to paper over declining US living standards by orchestrating asset bubbles. Ironically, Ben has driven the public into bonds and his QE 2.0 is now bursting the mother of all bubbles, the bond market.

Soon Ben will be at his Rubicon. He must then either monetize everything or allow short rates to explode higher. This of course would precipitate the dreaded debt deflation that solons have tried to avert.

The lame-duck Congress’s last supper splurge, a proposed budget with a $1.1 trillion deficit that is 1900 pages long, contains 20,000+ earmarks and has been concealed from most legislators, helped kill bonds.

Muni bonds have been hit especially hard. Escalating interest rates will increase government deficits due to higher borrowing costs. And a negative feedback loop will develop. Can you say ‘default’?

Several purported investment experts on CNBC asserted that QE 2.0 is working. This is an ambiguous assertion because the primary Ben and B-Dud excuses for QE 2.0 are to lower long rates and unemployment. On long rates, QE 2.0 has been a disaster. QE has not helped employment to date.

It looks like the Fed’s QE continues to exacerbate US unemployment by driving foreign direct investment to emerging, low wage nations.

 

Former Reagan OMB Director David Stockman: We have had a Fed engineered serial bubble, that has created the appearance of wealth, that has caused people to consume beyond their means through borrowing, and that has flushed the income and wealth of our society up to the top, as a result of the Fed turning the financial markets into a casino. These are pure casinos, they are not capital markets, they are not adding to the productive capacity of our economy, they simply are a bunch of robots trading with each other by the millisecond as a result of the Fed giving them zero cost overnight money, and giving them all kinds of hand signals on what to front-run.

The Fed is destroying prosperity by funding demand that we can't support with earnings and productions, causing massive current accounts deficits and the flow of funds overseas and the build up in China, OPEC and Korea of massive dollar reserves which is a totally unsustainable, unsupportable system, and we are coming near the edge of where that can continue to remain stable

Will the Fed be able to survive Ron Paul? [Fortune interview with Ron Paul]

What are the Federal Reserve's shortcomings?

They're doing a job that's impossible to do. So it's not a single person's fault. It's not just former Chairman Alan Greenspan or current Chairman Ben Bernanke. It's the assumption that anybody knows what interest rates should be, or the assumption that they know what money supply should be, or the assumption that they can have stable prices or the assumption that they could deal with unemployment.

But then some would argue that investment in gold is also a bubble. What would you say…?

They can believe it, but I think it's the bonds that are at a bubble and the dollar is at a bubble. But no, I don't consider that a bubble at all. There will be corrections â€" you can have gold go down $200 or $300 and it wouldn't prove a thing.

Although I wrote the book End the Fed, I don't say that you should end the Fed in one day. All I say is allow the constitution to be used you can use gold and silver as legal tender, that's what the law still says.

Do you want to end the Fed?

Well, I don't expect to. The Fed's going to end itself when they destroy the system. So yes I would end the Fed but I would do it gradually and have a transition. I would let people voluntarily opt out and not be forced to use depreciating money.

‘Core’ retail sales increased 0.9%; but this ‘Core’ does not include food...Gasoline retail sales surged 4% in November. Clothing increased 2.7% (surging cotton or unit growth?)…The key electronic component declined 0.6%. Grocery stores increased 0.9%.

Excluding autos, gasoline and building materials, which are the figures used to calculate gross domestic product, sales climbed 0.9 percent, the most since August.

PPI increased more than expected. Few address this problem because it will diminish the supposed economic growth/retail sales. And as we noted a few weeks ago, during the holiday season, the Street, media and retail sales-depended association hype and spin bullishly like their lives depended on it.

The current-account deficit in the U.S. widened to $127.2 billion in the third quarter, reflecting an increase in imports.

The gap, the broadest measure of international trade because it includes income payments and government transfers, was the biggest in almost two years, figures from the Commerce Department showed today in Washington. Economists forecast the shortfall would widen to $126 billion, according to the median estimate in a Bloomberg News survey.

 

Foreclosure filings in the U.S. plunged to a two-year low last month as lenders and loan servicers reviewed practices under legal scrutiny around the country, according to RealtyTrac Inc.

A total of 262,339 U.S. properties received default or auction notices or were seized in November, down 21 percent from October and 14 percent from a year earlier, RealtyTrac said in a report today. Those were the biggest monthly and annual declines since the Irvine, California-based data company began reports in January 2005. One in every 492 households got a filing.

All 50 states are investigating whether faulty documents and signatures were used by lenders on hundreds of thousands of foreclosure papers in a process that has come to be known as “robo-signing.” The coordinated probe began in October after the biggest U.S. banks suspended some home repossessions to review their procedures. A seasonal drop in filings of 7 percent to 10 percent is typical for November, according to RealtyTrac.

“Fallout from the foreclosure robo-signing controversy forced lenders and servicers to hit the pause button on many foreclosures while they scrambled to revamp their internal procedures and revise or resubmit questionable paperwork,” James J. Saccacio, the firm’s chief executive officer, said in the report.

A U.S. District Court judge in Maine last week allowed GMAC Mortgage LLC to continue selling foreclosed homes in the state, ruling that federal courts have limited authority on the issue. GMAC, owned by Detroit-based Ally Financial Inc., has also been sued by the state of Ohio in a foreclosure complaint. The multistate probe may end in multiple settlements, Iowa Attorney General Tom Miller, the investigation’s leader, said last month.

Mortgage firms are pressing the Federal Reserve to curb homeowners’ right to invalidate loans based on flawed documents -- a right consumer groups say is one of the few weapons borrowers have to battle unfair lending.

Consumer groups and industry lawyers say a rule under consideration by the central bank would make it harder for borrowers to exercise their right of “rescission,” which forces a lender to relinquish a lien on a mortgaged property. They said the number of rescissions has grown in recent years as a result of the foreclosure crisis and allegations that mortgage documents were fabricated or processed improperly.

Ken Markison, regulatory counsel at the Mortgage Bankers Association, said the change would save lenders money. “Greater clarity will help avoid unnecessary litigation and reduce costs,” Markison said.

The number of U.S. workers filing first-time claims for unemployment benefits unexpectedly declined last week, pointing to a labor market that is on the mend.

Applications for jobless insurance payments decreased by 3,000 to 420,000, the lowest in three weeks, Labor Department figures showed today. Economists surveyed by Bloomberg News projected an increased in claims to 425,000, according to the median forecast. The total number of people receiving unemployment insurance and those getting extended payments rose.

The Federal Reserve gave more support to the world’s biggest financial companies, including Barclays Plc, Citigroup Inc. and Royal Bank of Scotland Plc, than the direct loans it disclosed this month in response to congressional mandates.

That’s because about $140 billion, or 20 percent of the Fed’s Commercial Paper Funding Facility, went to affiliates of four firms that provided financing to banks and other companies: Hudson Castle, BSN Holdings, Liberty Hampshire Co. and Northcross, central bank data show.

Banks around the world benefited. The affiliates were vehicles known as conduits -- part of what a Fed report in July called the “shadow banking” system that removed assets from companies’ balance sheets and turned toxic debt into top-rated securities. At least a dozen banks had promised to provide conduits financing or other support in an emergency, reports by Standard & Poor’s show. Some also tapped the conduits for loans, according to people with direct knowledge of the firms’ dealings.

The shadow banking system “contributed significantly to asset bubbles in residential and commercial real-estate markets prior to the financial crisis” by obscuring risks, the Fed itself said in the study. The Fed’s disclosures on Dec. 1 didn’t identify borrowers from the four conduits. The funds were repaid.

Spokesmen for New York-based Citigroup, London’s Barclays and Royal Bank of Scotland, based in Edinburgh, wouldn’t say whether their firms borrowed money from conduits that tapped the commercial paper facility. Representatives of the conduits either declined to comment or didn’t respond to messages.

* Overstock says RICO charges apply in case

* Original lawsuit from 2007 alleges naked short selling (Adds Goldman, Bank of America comment)

SAN FRANCISCO Dec 16 (Reuters) - Overstock.com Inc (OSTK.O) plans to amend a lawsuit it filed in early 2007 to include racketeering claims against Goldman Sachs and Merrill Lynch, the online retailer said on Thursday.

The original lawsuit, filed in the California superior court in San Francisco, alleged that Goldman Sachs Group Inc (GS.N) and Bank of America's Merrill Lynch unit (BAC.N) engaged in a "massive, illegal stock market manipulation scheme" that involved so-called naked short-selling.

In naked short selling, short sales are executed but never delivered, thereby causing the company's share price to fall.

"Merrill, Goldman and certain of their market maker clients agreed to and created a scheme to effect the naked short selling in Overstock securities that is the subject of this action, in order to perpetuate short selling and drive down the price of Overstock, to their mutual profit," alleges the motion, which was filed on Wednesday.

A Goldman Sachs spokesman said the bank opposes the motion, but did not elaborate. Bank of America declined comment.

Overstock claims the brokerages' actions are illegal under New Jersey's Racketeer Influenced and Corrupt Organizations Act (RICO) and such claims can be decided by non-New Jersey courts.

Overstock also said in a filing that it had settled with some unnamed defendants for $4.44 million in the case. (Reporting by Alexandria Sage. Additional reporting by Joe Rauch in Charlotte, N.C. Editing by Robert MacMillan)

 

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