Tuesday Tune-up

Il Divo, "Hallelujah"

Wake-up Call

Purr softly, carry a big stick.

Quote for the Week, October 28-November 3, 2012

While there is a lower class, I am in it, and while there is a criminal element, I am of it, and while there is a soul in prison, I am not free.
--Eugene V. Debs

 

Beyond Ripe

AAPL: down 13.5% from its mid-September high

Go to the MainePERS website, and you will see that the largest holding of the pension fund's stock portfolio is Apple, maker of iEverything.  No surprise there.  With a market capitalization of over half a trillion dollars, Apple is the most highly valued company EVER.  Indeed, its market cap exceeds the GDP of all but 23 countries.  Still not sure what that means?  Here is a gallery of comparisons.

Caveat emptor.  Such a momentum stock invariably performs as does a Six Flags roller coaster:  it goes down faster than it goes up.  And Apple's share price may now be succumbing to gravity.  Just three weeks ago a single share of Apple's common stock was worth two iPad minis.  No longer.  Trading at over $700 a share in mid-September, AAPL was fetching a tad over $600 at one point in yesterday's after-hours market.

The reason?  Apple's Q3 earnings, announced at 4:30 p.m., fell short of expectations.  Worse, the company's forward guidance called for reduced profit margins in Q4.  When hedge funds (who are crowded into AAPL big time) hear "lower margins," they sell first, then ask questions later.  Supply constraints, stiffer competition, customer fatigue--doesn't matter.  With the hedgies evacuating, MainePERS has seen its position in AAPL decline in value by almost $22 million.

It is the Law of Large Numbers.  Companies like Apple (even Apple) cannot grow by double-digit percentages forever.  And especially in a contracting economy.  When the stock sprinted ahead by 50% in the first quarter of 2012, maybe portfolio managers at MainePERS should have taken some off the table.  But that's not how the fund's "passive" investment strategy works.  Now the portfolio will be rebalanced the old-fashioned way--by reversion to the mean.

All of which may leave state retirees waiting in line for their bennies:

[update, 10-29-12--]

News today of some upper-echelon house-cleaning at Apple, an admission that the company has disappointed investors.

Under 55? Uncle Sam Does Not Need You

[click here to enlarge]

from ZeroHedge:

In the last three years, the U.S. economy has added back about half the jobs lost in the Great Recession that began in January 2008.  However, for those between the ages of 25 and 55, there has been no recovery.  None.

Wonder if the President will get their votes on November 6.

Wall Street Gets Its Protection

"[President Obama] had the same ideology as Secretary Geithner and frankly the same ideology as a lot of those other people who came from Wall Street:  protect the banks."

"We still have a Too Big To Fail problem."

--Neil Barofsky, former SIGTARP and author of Bailout,
to Bill Moyers

Where Have All...the Dollars Gone?

Matt Stoller,

"Modern American Economic History in a Few Charts"

NakedCapitalism.com

Tuesday Tune-up

The Corrs, "Runaway"

Former VP Rips Squid

"The quickest way to make money on Wall Street is to take THE most sophisticated product and try to sell it to the least sophisticated client."

--Greg Smith, author of Why I left Goldman Sachs,

to 60 Minutes

Quote for the Week, October 21-27, 2012

I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn't.
--Jim Rogers

Tuesday Tune-up

Tift Merritt, "Broken"

Quote for the Week, October 14-20, 2012

Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.
--Groucho Marx

Watch, Then Vote

Homework for November 6:

Inside Job, narrated by Matt Damon.

This movie gets taken down from time to time by The Powers That Be, but now it's back (with Spanish subtitles).  Catch this before it gets away.

JPM Underwhelms with Q3 Earnings

CEO Dimon:  feeling the heat?

This morning's headlines say it's a beat.  But the third-quarter earnings report from JP Morgan Chase leaves a lot more to be desired than just transparency.  The capsule summary from ZeroHedge:

"[T]he bottom line is this: revenues from trading dropped both sequentially and Q/Q while banking expenses rose, Net Interest Margin dropped to a new record low, even as the firm took a major $967 million loan loss reserve release on its loans to $22.8 billion, even as its total Non-Performing Loans rose by a whopping $1.3 billion to $11.370 billion, the largest quarterly jump in years!"

In other words, business is not exactly booming at this top-tier investment bank.  We might have guessed that a lackluster report was coming simply by listening to CEO Jamie Dimon's sour-grapes speech two days ago, when he insisted (regarding his firm's takeover of Bear Stearns in 2008) that the devil made him do it.  Make that devils, plural.  You know, Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, the usual suspects.  "We did them a favor," Dimon said in D.C. on Wednesday.  "We were asked to do it and we did it at great risk to ourselves."

But that's not what Dimon was saying in March 2008, when he described the takeover as "good long-term value for J.P. Morgan Chase shareholders."  He then went on to say, "This acquisition meets our key criteria:  we are taking reasonable risk, we have built in an appropriate margin for error [i.e. we underpaid, heh-heh], it strengthens our business, and we have a clear ability to execute."

Yeah, clearly.  Dimon now claims that losses from the acquisition have run in the billions--and counting, what with state attorneys general launching litigation left and right.  Diamond Jim is being disingenuous, moreover, with the later assertion that risk came looking for him, and not vice versa.  Billions more have been lost as JPM unwinds the infamous London Whale trade.  And now we learn from this morning's report that the company in one quarter almost doubled its exposure (now close to $12 billion) to the sovereign debt of the stressed peripheral nations of Europe--a dice roll if there ever was one.  Whales, PIIGS, you name it, Dimon is rooting for profits in all the wrong places.

Bank analyst Christopher Whalen suggests here that Jamie needs a little adult supervision.  Either that or a freshly minted stack of resumés for his next job search.  Bank compliance expert Michael Crimmins is of the opinion that Dimon deserves not just a pink slip, but an orange jumpsuit.  The Whale Tale, in his view, reveals "glaring deficiencies in internal controls [at JPM] that warrant prosecution of Jamie Dimon under Sarbanes Oxley."  Remember that, in case Obama/Biden need to shag a few more votes going into the November election.

As for JPM's failed business model, Reggie Middleton and Max Keiser share some thoughts here:

[update, 10-15-12--]

Next up, Citigroup, whose Q3 report this morning used many of the same accounting gimmicks as JPM to make lemonade out of lemons.  ZeroHedge scrubs C's financials here.

[update, next day--]

Citi's Chief Executive Officer and Chief Operating Officer are given the heave-ho.  Some quarter.  Some company.

Push-Button Slaughter

It takes a single drone to raze a village.

The Case of the Missing Jobless

On Friday the Bureau of Labor Statistics reported that the nation's unemployment rate dropped below 8% in September.  This would appear to be, if not the best of news, at least not so bad--and a tonic for President Obama's campaign for re-election.  At last, progress!  Naturally, skeptics immediately claimed that government bureaucrats had cooked the books to make the Prez look good.  Nonsense, say the Big O's apologists, who insist that the statistical downtick, coming just one month before Election Day, was but a coinky-dink.

Yes or no?  Were the data manipulated?  On that topic John Mauldin's discussion is as careful and nuanced as any.  But whichever numbers you use, three things are clear:

1.  Fewer than half the jobs lost since December 2007 have been recovered.

2.  The new jobs do not pay as much.

3.  Earners are down, dependents are up.

All of which mean that government revenues will not be catching up to expenditures anytime soon.

Tuesday Tune-up

Thalía (w/ Joan Sebastian),
"Con La Duda"

Holiday Hike

Webb Lake from the summit of

Blueberry Mtn., Weld

October 8, 2012
[photo: Cathy Hazelton]

The Fed Pushes on a String...

...but who's pulling it?

"Watergate was actually not a Nixon operation at all, but a deep, deep covert operation against Nixon--seeking to protect the prerogatives and secrets of a group accountable to no one...Nixon was 'paranoid' about the CIA.  He imagined that agency operatives were everywhere, working to undermine him.  Was he crazy, or was he right?

"...a perceptual gap is the essence of the Bush enterprise.  The actuality has tended toward wars for resources and the preservation of class prerogative, all abetted by secrecy, intimidation, and the dark arts of both psychological and covert ops."

--Russ Baker, Family of Secrets

Quote for the Week, October 7-13, 2012

I am a man of fixed and unbending principles, the first of which is to be flexible at all times.
--Everett M. Dirkson (and later echoed by Mitt Romney)

Etchings

mill pond on Spears Stream

West Peru

[photo: Erin Cox]

Check out Erin's FaceBook gallery.

"It Takes Time"

Listen to Kyle Bass, and you will realize that those clouds on the economic horizon have a lining of lead, not silver.  His goal as fiduciary:  not to lose money.

Deja Vu All Over Again

Banksters may want to put that cigar away.

News that rocked the financial world four years ago is about to be recycled.  Last night came word that New York Attorney General Eric Schneiderman has filed a civil suit against one of Wall Street's biggest banks, JP Morgan Chase & Co., for "multiple fraudulent and deceptive acts" in peddling residential mortgage-backed securities (RMBS) to investors from 2005 to 2007.  The fraud was actually perpetrated by Bear Stearns, which was close to bankruptcy when JP Morgan Chase took it over in May 2008, thereby inheriting the legacy liability.

The takeover had started with a low-ball bid from Morgan of a scant $2 a share.  Once the U.S. Federal Reserve agreed to offload $29 billion in toxic assets from Bear's balance sheet, the deal got done at $10 a share.  As Bear was going under, I was following the action here and asking whether two other investment banks, Lehman Brothers and Merrill Lynch, might be next.  Their turn came several months later ("Merrill, Lehman Are Goners").  Lehman was simply allowed to fail.  Merrill Lynch was "saved" by a shotgun wedding with Bank of America.

In taking on Merrill Lynch, BofA overpaid.  Taxpayers took some of the sting away (you remember agreeing to this, right?) by offering two tranches of TARP money adding up to $45 billion.  But even those sweeteners could not offset the deficiencies on Merrill's balance sheet, which were hidden from BofA shareholders until after they were coaxed by management to approve the merger ("Good Money After Bad").  BofA was eventually sued for the lack of disclosure, and in February 2010 the Securities and Exchange Commission settled with the company for $150 million.

Peanuts, said federal district judge Jed S. Rakoff, who, even as he approved the settlement, chastened the SEC for not extracting more.  Well, BofA shareholders have picked up where the regulators left off.  Last Friday the company settled a class-action suit over the Merrill Lynch acquisition for $2.43 billion (the N.Y. Times has the lowdown and a look-back here).  Upon the announcement, a loud "That's what I'm talking about!" echoed through the canyons of Lower Manhattan, originating apparently from the Pearl Street address where Judge Jed holds court.

But that will not be the end of the litigation for BofA.  The NY AG warns [see Schneiderman's interview with Bloomberg TV here] that the new charges against Morgan will be replicated against those of Morgan's peers who were also playing fast and loose with RMBS in the go-go aughts.  If the charges stick, settlements could run in the tens of billions to cover investors' losses.  Either that, or, as Christopher Whalen suggests, the banks will have to buy back the tainted securities:

"So what happens with JPM and Bear?  One word: rescission.  My guess is that the fraud perpetrated by Bear Stearns in creating these rancid securities will eventually force JPM to repurchase some of the bonds from investors.  That is tens or even hundreds of billions of dollars of face amount of bad securities." 

[update 10-10-12--]

A U.S. district attorney in New York has just sued Wells Fargo for mortgage fraud, issuing a statement that "yet another bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance."  Earlier this year the same office settled three similar suits against other banks for a total of almost a half-billion dollars.  [Story here.]