Market Talk

Doesn’t look like I’m going to have a chance to dig into the FCIC’s report on the history of and causes of the housing bubble/financial crisis/Panic of 2008. From the bits and pieces I’ve seen, mainly taking Barry Ritholtz’s take on it, it’s a very comprehensive and insightful report, and for that we should all be thankful.

Look, it’s great that somebody in an official capacity has finally pinned the blame on Alan Greenspan. But, really, it’s too late, because Congress already passed all their laws.

My only comment, which I don’t even need to read the report to make, is this: why is this report, from this commission that Congress chartered, coming out now, months after Congress wrote up its “comprehensive,” and I use that word very lightly, financial-reform plan, voted on it, sent it to the President and watched him sign it into law?

Honestly, what was the point of even having this commission if nobody was going to wait around to see what it had to say before constructing an entirely new regulatory edifice?

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Spencer Bachus, the esteemed gentlemen from Alabama, either doesn’t understand what happened to this country the past three years, or is so busy counting his campaign contributions that he’s unable to properly discharge his duties. Either way, he’s already doing the nation a disservice, and the 112th Congress hasn’t even been sworn in yet.

From Deborah Solomon’s story at WSJ.com:

WASHINGTON-—Rep. Spencer Bachus, the Alabama Republican competing for the reins of the House Financial Services Committee, warned regulators not to “rigidly” implement a new rule aimed at curbing banks’ risk-taking ability, saying it will impose “substantial costs” on the economy.

Okay, first off, what the hell is a rule if it isn’t rigid? I mean, really. Think about that for a second. Do I need to quote the freaking dictionary? “An authoritative statement of what may or may not be done.” That is what a rule is. A rule should be hard and fast and inviolable, or it’s not a rule at all. It’s a suggestion. This was the real complaint about the FinReg bill, that it didn’t set down hard and fast rules that would be hard to evade.

The “rule” that’s got Rep. Bachus so confused about the meaning of the word rule is, of course, the so-called Volcker Rule, the one that would determine who can and who cannot dabble in proprietary trading. The point isn’t to limit proprietary trading per se, the point is to prevent the government from ever again finding itself in a position where it has to cover reckless bets made by reckless banks. That’s a point apparently too fine for Rep. Bachus to grasp.

If this is the way we’re going, it’s hide your money under the mattress time, kids.

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Christopher Whalen over at Institutional Risk Analytics is one of the sharpest banking critics out there. This is his succinct take on this weekend’s Basel III capital-ratio rules. Notice, too, he harps on a point some others have made as well: the changes to accounting rules in the wake of the credit crisis, and accounting rules in general, mean far more than capital ratios.

“Basel III is entirely irrelevant to the economic situation and even to the banks,” notes Christopher Whalen of Institutional Risk Analytics, which publishes stress ratings for all US banks.  “Through things like minimum capital levels, the Basel II rules provided the illusion of intelligent design in the regulation of banking and finance.  In fact, Basel II made the subprime crisis possible and the subsequent bailout inevitable.  Now Basel III is being criticized as hurting the economic recovery.  In fact, Basel III is a sideshow and is dwarfed in terms of its economic impact by changes in accounting rules and securities laws in the U.S. and EU.  The only people who care about Basel III are the economists and regulators who are employed to support this ridiculous process.”

Sit back and take a deep breath, there’s a ton of news to digest today.

US stocks stage a furious late-day rally and close mixed as Senate passes financial overhaul bill, but more importantly, speculation swirled late in the day that a settlement had been reached between the SEC and Goldman Sachs (GS) over the fraud lawsuit.

Headlines crossed after the closing bell confirming the rumor, saying Goldman agreed to pay $550 million to settle the charges. SEC’s planning to hold a news conference any minute.

Dow snaps its seven-day winning streak, closes down 7 at 10359, but was down as much as 126 earlier in the session before recovering. S&P 500 rises 1 to 1096 and Nasdaq Comp slightly drops 0.8 to 2249.

JPMorgan kicked off the day by generating strong 2Q profits, although revenue fell in four of its six lines of business. Additionally, there was a plethora of economic data this morning which can be described as suspect, at best. Producer prices fall for third straight month and manufacturing data was weak. Jobless claims dip to two-year low, but seasonal factors skewed the data.

But all the fireworks came after hours. In addition to Goldman, Google shares are sliding 4% in late trading after the Internet giant reported 2Q earnings that missed analysts expectations.

WSJ also reports latest developments surrounding the scandalous iPhone 4, saying Apple (AAPL) overruled internal concerns about antenna reception and denied carriers the proper time to test the device before selling it.

Hectic week ends with a busy day tomorrow as GE, BofA and Citi all report quarterly results. As Art Cashin always says, stay nimble, folks.

- “The key to a sustainable recovery and robust economic growth is to get companies to start investing in America,” a recent Washington Post op-ed says. But Big Picture blogger Barry Ritholtz disagrees with that premise. “Since we know that personal consumption expenditures comprise 70% of GDP, I’m not sure why ‘getting companies to start investing’ would be considered the key,” Ritholtz writes. “The demand problem we have on our hands is what is keeping companies’ spigots closed.”

- S&P 500′s 5% gain last week comes on the heels of a 5% drop the week before, highlighting “one more example of how sentiment in this market turns on a dime,” Bespoke Investment Group says. “Sentiment heading into the current earnings season is certainly a lot less positive than it was last quarter.”

- Google (GOOG) launches App Inventor for Android, a do-it-yourself tool that makes it easy for anyone – programmers and non-programmers — to create mobile applications for Android-powered smartphones. App Inventor should make Android more accessible — and useful — to more developers, a key constituency as Google vies with Apple (AAPL) for dominance in the emerging smartphone market.

- Deflation chatter seems to be ramping up of late, especially as worries over a double-dip gain steam. “If you have loads of cash and no debt, falling prices sound wonderful,” Tom Petruno writes at LA Times’ Money & Co blog. “But the danger is that a broad deflation could cause many people to stop spending and hoard cash, figuring that they could get whatever they wanted for less if they just waited.”

- Amid all the banter between bulls and bears, it seems like both parties have actually been right in 2010, Joshua Brown notes at The Reformed Broker. Bulls are right because stocks are still in the same bull market since March 2009, he says. But bears are also correct because everything’s down year-to-date except gold, silver, treasurys and the yen. Calls for more stimulus make sense, but concerns about deficit-spending are also justified. “Only the future can serve as judge.”

- Flight to safety and quality is the biggest reason foreigners, mutual funds, banks and households keep increasing their Treasury holdings. “But, unless financial conditions deteriorate further, I wonder why there would be a similar increase in demand for Treasury debt over the next two years,” James Hamilton writes at Econbrowser. “What I’m having more trouble seeing is who is going to buy the additional $8 trillion in net new debt that would be issued over the next decade under the CBO’s alternative fiscal scenario.”

- “There’s an old adage that tapes that are oversold are bought on bad (but not horrid) news while tapes that are overbought are sold on good (but not great) news,” Minyanville’s Todd Harrison says. “Through that lens, last week’s rally made the upcoming earnings entirely more difficult to game.”

- Google (GOOG) has secretly invested $100M-$200M in social gaming behemoth Zynga, TechCrunch reports, which will be the cornerstone of a new Google games service that will launch later this year. TechCrunch points out Google has posted a job opening for a product manager who will be responsible for developing Google’s games commerce product strategy. Both companies declined comment.

- “As we evaluate financial reform and political change, we should keep in mind that it is not 2008 that we must struggle to prevent,” Steve Randy Waldman writes at Interfluidity. “It’s 2006 that was the worst of times, the piranha were feeding while we splashed and giggled in our water wings.”

- “Many individual investors were tiptoeing back into stocks in the spring,” WSJ says. “Now, they’re running for cover again.”

- Consumer credit falls for fourth straight month. “There’s absolutely nothing encouraging about these numbers from a standpoint of ‘recovery,’” Karl Denninger writes. Perhaps more disturbing is the negative revisions. “They effectively erased the alleged ‘improvement’ in the rate of decline that was allegedly ‘reported’ last month.”

- Paul Krugman wants to know what went wrong as high unemployment continues to plague the economy. “It’s now obvious that the stimulus was much too small; yet there’s virtually no chance of getting additional measures out of Congress,” Krugman says. “From a strictly economic point of view, we could still fix this: a second big stimulus, plus much more aggressive Fed policy,” he adds. But politically, we’re stuck…I’d like to say something uplifting here; but right now I’m feeling pretty bleak.”

- Bank lobbyists successfully watered down financial reform, Simon Johnson writes, except for one key aspect: the Kanjorski Amendment. The amendment “gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a ‘grave risk’ to the financial system,” Johnson says. “The debate on big banks and the dangers they pose is far from over.”

- Apple’s (AAPL) next release of its Apple TV set-top box will let viewers watch individual TV episodes for 99c, according to the NewTeeVee blog. In a move reminiscent of how AAPL launched what became the world’s biggest music retailer, it’s apparently trying to get TV programmers to allow episode rentals for less than the current $1.99 or $2.99 fees.

- The housing bust, which first hit the working class, has made its way up the ranks and now is hitting the affluent pretty hard. About one in seven homeowners with loans of more than a million dollars are seriously delinquent, NYT reports, while only one in 12 mortgages under $1M are delinquent. The “message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously,” Yves Smith says.

- Adobe’s (ADBE) next version of Flash will support 3D graphics, if the session lineup for the company’s MAX 2010 conference is any indication. The session, flagged in a CNet post, promises “a deep dive into the next-generation 3D API coming in a future version of Flash Player.”

- Percentage of S&P 500 stocks trading above their 50-day moving averages has spiked up to 28% amid this week’s big rally, Bespoke Investment Group reports. “For bulls, this means there could be a long way to go before the rally runs out of steam. For bears, this shows that even after a pretty big rally, breadth remains rather weak.”

- Sure the New York Stock Exchange is flying both the Dutch and Spanish flags, but don’t be fooled by the alleged display of World Cup nonpartisanship. NYSE CEO Duncan Niederauer asked exchange employees to wear orange in support of colleagues in The Netherlands (where NYSE operates an exchange) before Sunday’s final with Spain, says spokesman Ray Pellecchia, emphasizing in a blog post that his own blue-and-orange tie is “NOT a Mets tie.”

- Deflation worries are still prevalent. “Debate rages about whether the trend is a warning sign for the economy or merely statistical noise,” James Picerno notes at The Capital Spectator. “To be fair, outright deflation isn’t here yet, nor is it certain (or even likely) that it’ll turn up.” But the risk remains. “And with the outlook for a jobless recovery looming, this is no time to soft pedal the D risk.”

- Reuters blogger Felix Salmon is pessimistic that there’s an easy solution to the long-term unemployment issue plaguing the US. “Maybe unemployment is simply a problem to which there is no good medium-term solution, let alone any short-term fix,” he says. “Certainly the government can’t directly employ the unemployed, and although I’m a big fan of arts subsidies as a way of creating jobs, that kind of thing is only ever going to have a marginal effect.”

OK boys, let's mix it up!

Not much conviction displayed today by bulls or bears, with major stock indexes finishing marginally mixed. Bears couldn’t gain any firm advantage off another downward revision to 1Q GDP, and bulls couldn’t capitalize on a slightly better-than-expected consumer sentiment gauge and frisky euro.

Speaking of the euro, US stocks seemed tethered to the single currency for much of the session, with some momentary disconnects early and then late in the day. At times, they display the type of synchronization that would make a drill instructor proud.

Aside from the encouragement provided by the euro, bulls may’ve been a bit disillusioned by the recent stream of data suggesting a stalling recovery. Meanwhile, bears seemed hesitant to get too aggressive, lest some central bank or government fire a renminbi-like weekend surprise at them (G-20 meets). Anyway, there’s always next week and potential for more proof (or not) that the recovery is laboring.

Key data include readings on personal income & spending, home prices, pending home sales, consumer confidence, June ISM and, of course, June non-farm payrolls.    

Financials soar today after overhaul bill’s finalized. That might tell you something about how toothy investors think the regulations will be. Consumer staples, telecom tumble. DJIA slips 8.99 to 10143.81, and Nasdaq Comp rises 6.06 to 2223.48. S&P 500 ends 3.07 higher at 1076.76.

- Yves Smith at naked capitalism doesn’t see much substance in China’s pledge to make its currency exchange rate more flexible. “While this does represent an announcement of an intent to liberalize, it lacks any particulars as to timing and mechanisms.”

- China pledging to make its exchange rate more flexible is, at this point, just an announcement “which may or may not be followed through,” Barry Ritholtz writes at The Big Picture. “As such, we should treat it as a precursor, and not the significant shift the market seems to be making of the announcement.”

- UC San Diego economics professor James Hamilton still sees deflationary forces swirling through the economy even as inflation is the bigger longer-term risk. “America needs leaders willing to talk honestly about our long-run fiscal challenges and what needs to be done to address them,” he says. “I can dream, can’t I?”

- The IPO market has become a “sad tale,” says Fred Wilson. “The cost is just too high and the benefits are just too low for most companies these days.”

- The biggest headwind to US growth isn’t the state of Europe, it’s a lack of credit here. it’s a lack of credit here. “Two years ago, when the government rushed to bail out Wall Street, the justification was always the same. We have to do it. If we don’t, the banks will stop lending. And then the world will end,” Henry Blodget writes at Business Insider. “So we bailed out Wall Street. And the world didn’t end. But the banks still aren’t lending (And you can’t blame them, really.)”

- Apple’s (AAPL) iPad will hurt Kindle sales for Amazon (AMZN), but it won’t be a Kindle-killer, MediaMemo blogger Peter Kafka says. Keep in mind AMZN still offers a wider range of e-books than AAPL and sells them for much less. “My guess is that even after Apple eats into Kindle’s share, Amazon is going to find plenty of people who just want an e-reader.”

- China’s announced currency move probably won’t amount to much in the short term, Michael Schuman writes at Time’s Curious Capitalist blog. “This is a baby step on a long road to a truly market-determined yuan exchange rate,” he says. “Until China allows a free-floating currency, controversy over its value will persist, and the yuan will play a limited role in the global economy.”

- The stock market has reached an important inflection point, as “valuations remain uncomfortably rich and market action is tenuous,” writes John Hussman. “When an overvalued market loses support from market internals, it frequently produces discontinuous outcomes ranging from brief ‘air pockets’ to ‘panics’ to ‘crashes,’” Hussman says.

- Former IMF chief economist Simon Johnson remains less than impressed with financial regulatory reform, labeling it “dead on arrival.”

- China isn’t the first country that has pledged to make its currency exchange rate more flexible. “Exiting up does not doom the economy to a Japanese-style lost decade,” VoxEU says.

That's right, pal, I'm pointing at you.

President Obama in a speech today apparently took some shots at Republicans, accusing the party of gutting regulation and putting “industry insiders in charge of industry oversight.”

“If you’re a Wall Street banker or insurance company or oil company, you pretty much get to play by your own rules, regardless of the consequences to everyone else,” the president said.

Typical demagoguery to which politicians like to resort, and sounds as if the president may be referring to Gramm-Leach-Bliley Act in 1999 that in part repealed Glass-Steagall. Better check the records on that one, Mr. President, because that legislative action was the type of bipartisan affair that seems almost like a fairy tale amid today’s political bickering.  

The act passed the Senate 90-8, with 38 Democrats voting in favor; the House passed it with 362 yes votes, 155 coming from Democrats.

Courtesy NY Times:

“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century…This historic legislation will better enable American companies to compete in the new economy.” Guess who? None other than the director of Obama’s National Economic Council and then-Treasury Secretary Larry Summers.

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- “When you hear about corporate insiders emailing undercover FBI agents with insider information in this day and age, you can only shake your head and ponder the utterly pathetic intellects of the people involved,” Josh Brown writes at The Reformed Broker. “As we hear more details about the investigation, I suspect there will be even more head-scratching over how it could be possible that these people haven’t learned better by now.”

- While pursuing financial regulatory reform, the Obama administration chose new regulations over structural change, an easier outcome but not necessarily the best choice. Mark Thoma has the details.

- Number of workers who voluntarily quit in February actually surpassed amount of folks who were fired for first time since October 2008, a positive for weak labor market, especially since turnover essentially froze during the height of the recession, Barry Ritholtz notes at The Big Picture. “The backlog of ‘workers waiting for better times to make a move to better jobs’ is now acting like pent-up consumer demand — only for employees.”

- April durable goods surged 2.9%, well ahead of analysts expectations, which is “just the thing to blow away the deflation blues that have been poisoning the party over the past few weeks,” James Picerno writes at The Capital Spectator.

- Why is Steve Ballmer still Microsoft’s (MSFT) CEO? “Microsoft still has a dominant market share in PC operating systems and office applications, but it’s managed to take that massive competitive advantage and waste it everywhere else over the past decade,” James Kwak says.

- Yahoo (YHOO) CEO Carol Bartz’s potty mouth generates ton of attention in blogosphere, but Reuters blogger Rob Cox says investors should be wary of executives who spout expletives at critics. Bartz used some questionable language in an interview yesterday with TechCrunch’s Michael Arrington, which “smacks of desperation,” Cox says. “Shooting the messenger is never a sign of strength.”

- Yahoo’s chase to the bottom. “The bottom line is that turning around a decline at an Internet company is tougher than elsewhere. That is at least partly because of the ease with which consumers can switch to a different website. Once a site’s image is impaired, it is very hard to repair,” Martin Peers writes at WSJ’s Heard on the Street column.

- Google says it generated $54B of economic activity in 2009. Digital Daily John Paczkowski believes the purpose of Google’s report is to show regulators it’s not anticompetitive. “What better way to counter perceptions that Google merits antitrust scrutiny than to highlight its positive effect on the national economy?”

- Google’s (GOOG) investment case getting muddled? “Most of [Google's] time nowadays seems dedicated to releasing products that don’t make a dime,” writes Chad Brand of Peridot Capital, who discloses his firm has a small position in Google. Downside looks limited based on declining P/E ratio, but “I have mixed feelings as to whether it warrants the commitment of new capital,” he says.

- Facebook attempts to appease privacy advocates by redesigning its privacy controls.

- “Whatever little trust Wall Street might have regained in the recovery since 2009 was surely dashed back to square one on May 6,” Ray Pelleccia writes on the Exchanges blog. The “flash crash” continues to defy easy explanation, and that only adds to the public’s widespread bafflement and distrust of what happens in our financial markets.”