FusionIQ’s Kevin Lane notes: Copper as seen on this weekly chart through last tick has broken two supports first near $ 50.00 (red line) and second (green line) near $ 46.00 – this free fall on volume is more indication that the market believes we are in a recession given copper’s ties as an economic metal.
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Source: FusionIQ
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Following yesterday’s ugly intra-day reversal, the futures are looking strong, with the fair value on the Dow at ~200 in the green.
This is an oversold bear market bounce, and the odds favor its eventual exhaustion and reversal (there are internal metrics we can track which will help us identify if this run is the start of something more significant and lasting).
The usual rationales from pundits hold little water. Consider the explanatories we have heard this morning:
• Unemployment claims were not as bad as forecast — but do you expect any significant improvement in the employment picture over the next 3- 6 months?
• Bernanke’s Speech did not rule out further Fed action — despite his plea its up to Congress, the political pressure against him, and the ongoing attenuation of Fed action.
• European Greek Bailout is coming closer to fruition. Merkel got her votes, and it looks like some form of rescue / kick the can down the road / don’t Take the Loss is coming mid-October
• End of the Quarter is upon us, with all the attendant window dressing.
My keys for today — aside from atoning for my many sins — is to watch the breadth, the volume, and of course, be wary for any late day reversals. Watch the markets when Europe closes. Perhaps most of all, keep an eye on the news. Not the news itself, but see how markets react to new news — that is far more important.
This phase of the cycle is a trader’s market — not a buy & hold investor’s environment.
To the nimble go the spoils.
The Solyndra Loans as Liar’s Loans
William K. Black
September 27, 2011
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This column comments on Joe Nocera’s September 23, 2011 column entitled: The Phony Solyndra Scandal
Nocera’s column compares the statements of Solyndra’s controlling managers to Dick Fuld’s statements to the public about Lehman’s conditions and asserts with minimal explanation that neither could have been criminal. I have testified before the House Financial Services Committee at some length as to why Lehman was a “control fraud” so I disagree with Nocera. Lehman engaged in extensive accounting and securities fraud and caused massive losses by selling endemically fraudulent liar’s loans to the secondary market. It Soyndra’s controlling managers made false disclosures analogous to those made or permitted to go uncorrected by Fuld, then they too face a serious risk of criminal prosecution – it we ever replace Attorney General Holder with a prosecutor.
I also write to explain why Nocera is wrong to absolve the White House from scandal in the Solyndra matter. Nocera argues that it is inherently highly risky for the government to lend to companies the market will not loan to because their “green” projects are extremely risky commercial projects. He concludes that it is inevitable that many such loans will fail and that such failures do not demonstrate that the federally subsidized loan program for green energy companies is flawed. He concludes by warning that China dominates solar panel manufacture and that China will be the winner if the Republicans cut funding for the green energy programs.
Nocera is correct that the subsidized program is extremely risky. He identifies two of the risks. First, the technology developed may prove unmarketable. Second, entry by competitors may be so robust that the price of the relevant products (e.g., solar panels) suffer a “stunning collapse” and cause the U.S. Treasury-financed firm to fail even if the development of improved technology is modestly successful.
There are obvious economic arguments against Nocera’s play of the Red Menace card. China heavily subsidizes solar panel manufacturing. Other nations (including the U.S.) subsidize solar panel manufacturing. Solar panels are still a specialty application that is not cost-effective in general usage absent public subsidies. The subsidies to the purchasers are not large enough to develop a market that has kept pace with the tremendous growth of solar panel production. The result has been a glut of solar panel production and a sharp drop in solar panel prices. In sum, the Chinese government is taking the very large financial risks of developing a new technology and the financial losses that come from selling us the solar panels at a low and sharply falling price that is inadequate to defray the costs of production and the risks of new product development. Nocera states that China has provide a $30 billion subsidy to solar panel producers purchasers, which has helped produce a glut of solar panels and caused a “stunning collapse” in their “market” price. That means that the great bulk of the Chinese subsidy has flowed to purchasers of solar panels, including Americans. Even if the Chinese develop a solar panel technology that is cost effective in general residential and commercial real estate usage there is no assurance that the Chinese government or public will find the production subsidies desirable. China may lose its solar panel production lead to a lower-cost producer or a higher quality producer. Other nations’ producers may be less than vigorous in enforcing the intellectual property rights of the Chinese producers, allowing domestic competitors to skip the large risks and costs of the research and development stage.
This column, however, generally emphasizes financial regulation, and there are reasons to use the word “scandal” to describe the administration’s treatment of its regulators in the Solyndra loan. Here is Nocera’s defense of the administration’s behavior:
“Undoubtedly, the Solyndra “scandal” will draw a little blood: there are some embarrassing e-mails showing the White House pushing to get the deal done quickly so it could tout Solyndra’s green jobs as part of the stimulus package.
But if we could just stop playing gotcha for a second, we might realize that federal loan programs — especially loans for innovative energy technologies — virtually require the government to take risks the private sector won’t take. Indeed, risk-taking is what these programs are all about. Sometimes, the risks pay off. Other times, they don’t. It’s not a taxpayer ripoff if you don’t bat 1.000; on the contrary, a zero failure rate likely means that the program is too risk-averse. Thus, the real question the Solyndra case poses is this: Are the potential successes significant enough to negate the inevitable failures?”
Nocera’s effort to minimize the administration’s misconduct and his misstatements about risk are interrelated and they reprise the mistakes that the Bush administration made in its assault on financial regulation that led to the ongoing financial crisis. Life does not reward all risks. The quintessential risk that it does not reward in lending is failing to underwrite. A lender that fails to underwrite prudently is taking a severe risk, for the failure causes “adverse selection.” Lenders that make large loans (e.g., mortgages or loans to solar panel manufacturers) under conditions of adverse selection have a “negative expected value” – they are gambling against the house. Lenders that make loans with a negative expected value will suffer severe losses.
We are still suffering from a crisis driven by CEOs of lenders who deliberately destroyed essential underwriting in order to maximize the accounting control fraud “recipe” that I have explained many times. The result was “liar’s” loans. By 2006, roughly half of loans called “subprime” were also liar’s loans. Approximately one-third of U.S. mortgage loans made in 2006 were liar’s loans and the fraud incidence in studies of liar’s loans is 90 percent. Liar’s loans caused staggering direct losses and hyper-inflated and extended the residential real estate bubble, driving the Great Recession.
So the “real question” is not the one Nocera framed. The real question is why a lender (the U.S. government in this case) would gratuitously fail to underwrite a loan properly. The fact that the type of loan was inherently extremely risky makes it imperative that the lender engage is superb underwriting. The Obama administration, and Nocera, have failed to learn the most obvious and costly lesson of the ongoing U.S. crisis – liar’s loans cause catastrophic losses and failures and are “an open invitation to fraudsters” (quoting MIRA’s 2006 report to the members of the Mortgage Bankers Association).
Nocera does not explain what is embarrassing about the Obama emails. The government’s professional loan underwriters were worried about lending to Solyndra. They were warning the administration that they had not been able to complete the professional underwriting essential to making loans prudently. The Obama administration officials did not respond by backing their professional regulators. The administration did not stress that it was essential that the loan be approved only after it passed a rigorous underwriting process. The administration responded to the efforts of its professionals to protect the government from loss by abusing the regulators and pressuring them to approve the loans without completing the underwriting. The administration thought it was fine to make a liar’s loan to Solyndra.
The administration exposed the government to a gratuitous risk of loss of hundreds of millions of dollars in order to achieve an overarching priority – they wanted a presidential photo op. If that isn’t a scandal, if Nocera thinks it is merely business as usual, then our failure to hold Dick Fuld, President Obama, and a host of other elites to a higher standard of accountability is the scandal that will generate repeated scandal.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
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Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Initial Jobless Claims totaled 391k, 30k below estimates and down from 428k last week. It’s the lowest level since April but the Labor Department said, according to DJ, the sharp fall was due to “technical issues and seasonal adjustment volatility, rather than economic factors.” Since there weren’t any holidays over the past few weeks I’m not sure what issues the Labor Dept could have had but I guess we’ll have to wait until next week to get a better feel. Continuing Claims were in line but Extended Benefits rose a net 75k. Bottom line, while the market responded well to the Initial Claims print, the Labor Dept caveat shouldn’t be ignored. Unfortunately though we’ll have to wait until next Thursday to see whether a new positive trend is being established or today was a technical anomaly.
Source:
Gary Shilling Says U.S. Faces Deflation
Bloomberg, September 28, 2011
Art Cashin of UBS looks at the Q&A portion following Fed Chairman Bernard Bernanke’s Cleveland speech last night.
Regardless of what you thought of the speech (Lessons from Emerging Market Economies on the Sources of Sustained Growth) it was the Q&A that produced the stir.
Via the Associated Press, here is a brief report on the event:
“Federal Reserve Chairman Ben Bernanke said Wednesday that long-term unemployment is an American “national crisis” and suggested that Congress should take further action to combat it. He also said lawmakers should provide more help to the battered housing industry. Bernanke noted that about 45 percent of the unemployed have been out of work for at least six months.
“This is unheard of,” he said in a question-and-answer session after a speech in Cleveland. “This has never happened in the post-war period in the United States. They are losing the skills they had, they are losing their connections, their attachment to the labor force.” He added: “The unemployment situation we have, the job situation, is really a national crisis.”
Bernanke said the government needs to provide support to help the long-term unemployed retrain for jobs and find work. And he suggested that Congress should take more responsibility.
Art notes that “there was even a line that might be seen as a cross between ‘I’ve done my job’ and ‘we’re plumb out of bullets’ “:
“Monetary policy can do a lot, but monetary policy is not a panacea,” Bernanke said.
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Sources:
Bernanke: U.S. Unemployment a ‘National Crisis’
Joshua Zumbrun and Vivien Lou Chen
Bloomberg, Sep 29, 2011 12:00 AM ET
http://www.bloomberg.com/news/2011-09-29/bernanke-says-u-s-facing-national-crisis-as-high-unemployment-persists.html
Bernanke: Long-term unemployment a national crisis
MARTIN CRUTSINGER
AP Economics, September 28, 2011
http://www.kansascity.com/2011/09/28/3173244/bernanke-urges-us-to-learn-from.html
Yahoo Finance version
The Euro zone took one step closer in deciding what it wants to be when it grows up as the German Parliament expectedly passed their vote on the expanded EFSF. We still await a few more country votes in the next few weeks but the moment of truth is quickly arriving on what the EU/IMF plan is for Greece past the next Bailout 1 payment to them. As Eminem wrote, “Look, if you had one shot, or one opportunity to seize everything you ever wanted in one moment, would you capture it or just let it slip?” If the EU lets Greece default and write off a substantial amount of their debt, they would have seized the moment and forcibly dealt with the problem of too much debt. If the EU continues on the fantasy track of thinking Greece can get by with the buying of more time, the Euro zone experiment will ultimately fail. Economic confidence in the Euro region fell to the weakest since Dec ’09 in Sept at 95 vs expectations of 96. Italy sold a total of 7.9b euros of debt at various maturities reaching out 10 1/2 yrs, below the 9b they desired but Italian bonds are little changed today. US$ 3 month LIBOR rose for a 47th straight day and the euro basis swap remained above 100 bps for a 6th straight day. The Shanghai index fell to the lowest since July ’10 and is just 2 pts from the lowest since Apr ’09 on continued growth concerns.
Preface: This essay is not intended as an endorsement of Ron Paul. Instead, it is intended to demonstrate why Ron Paul is becoming so popular, despite being virtually ignored by the mainstream media.
CNN notes:
“We are seeing a level of enthusiasm for Ron Paul that can be compared with President Obama in 2008″, said Eric Brakey, Media Coordinator for NYC Liberty HQ, the grassroots organization hosting the rally for the candidate. “Congressman Paul’s youth support is different now than it was during his last presidential campaign. It’s more organized and it’s picking up steam and continues to grow”.
As the longtime congressman from Texas stepped onto the stage, the crowd screamed with enthusiasm. The audience’s biggest reaction came when he spoke about ending the Federal Reserve. “The country has changed in the last four years, but my message hasn’t changed” Paul said. “The country is ripe for a true revolution”.
At least 75% of the American people want a full audit of the Fed, and most were against reconfirming Bernanke.
Indeed, as Bloomberg noted last December:
A majority of Americans are dissatisfied with the nation’s independent central bank, saying the U.S. Federal Reserve should either be brought under tighter political control or abolished outright, a poll shows.
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Americans across the political spectrum say the Fed shouldn’t retain its current structure of independence. Asked if the central bank should be more accountable to Congress, left independent or abolished entirely, 39 percent said it should be held more accountable and 16 percent that it should be abolished. Only 37 percent favor the status quo.
As I have extensively documented, the Fed is largely responsible for the economic crisis, and has failed to meet a single one of its stated mandates (let alone its implied ones).
Ron Paul is also gaining popularity because he is against the never-ending War On Terror, and wants to bring the troops home. Americans are sick of the never-ending, ever-creeping war. See this, this and this.
As Talking Points Memo reported earlier this month:
“…Only about a quarter say the wars in Iraq (26%) and Afghanistan (25%) have lessened the chances of terrorist attacks in the United States,” the Pew report reads. “In both cases majorities say the wars either have increased the risk of terrorism in this country or made no difference.”
Top American military leaders agree, saying that the war on terror has weakened our national security.
Here is my Happy New Year train reading:
• Amazon Challenges iPad With Kindle Fire (WSJ) see also Playing With Fire: Amazon Launches $200 Tablet, Slashes Kindle Prices (Wired) and Amazon Tablet: Apple Will Be Fine, But Netflix Is Another Story (Forbes)
• A crash isn’t inevitable, but worries aplenty (Sydney Morning Herald)
• Hoenig critiques Fed in parting shot (Portfolio)
• The Value of College Is: (a) Growing (b) Flat (c) Falling (d) All of the Above (The Atlantic) see also Education: A Bright Line through Google Zeitgeist (Scientific American)
• Spending Less on Entertainment and Charity (Economix)
• Seth MacFarlane’s Music Is Better Than Words (TBP/Amazon)
• How Alcohol Affects Your Decision-Making Process (Lifehacker)
• A Long Day at ‘The Office’ With Mindy Kaling (NYT)
• NYAG: America’s most powerful liberal? (Politico)
• Is New York’s Tech Boom Sustainable? (NYT)
What are you reading?
"Markets can remain irrational longer than you can remain solvent." —John Maynard Keynes
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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