Market Talk

Our colleague and Dow Jones Newswires columnist Tomi Kilgore penned the following today:

The bank sector has given up its dividend boost, and then some. The SPDR KBW Bank ETF (KBE) gained 0.6% last Friday, after the many of the biggest banks got the Fed’s approval to increase dividends. The KBE has lost 1.9% since then, and is now 1.3% below last Thursday’s close. In addition, most of the banks that raised payouts are also now trading below their respective Thursday closes. The first to raise its dividend, BB&T (BBT), is now down 1.6% since then. Meanwhile, JPMorgan (JPM) has slid 2.3% in the last three sessions, but it still up 0.7% since Thursday.

Of course, the sector is also being dragged down by the likes of Bank of America, down another 2.5% today, which saw its bid to raise its dividend squelched by the Fed.

Is there anything these guys don’t profit off of?

From Newswires’ Brett Philbin:

Financial exchanges and investment banks are well positioned to benefit from energy/commodities volatility related to turmoil in the Middle East, Credit Suisse says. While commodities typically account for 8%-13% of revenue at Goldman Sachs (GS) and Morgan Stanley (MS), firm says year-to-date trends support its expectations for a strong sequential quarter rebound in fixed income sales and trading, helping to offset more muted investment banking activity. Says commodities could be a focus of 1Q EPS reports for GS and MS; adds IntercontinentalExchange (ICE) has 70%-75% of its revenue tied to commodities, while for CME Group (CME) it’s 30%-35%.

Amazing, isn’t it? Commodity prices spike, causing an upheaval around the globe, and it’s just one more source of profits for Wall Street. You know what else? When prices drop on the other side, these guys’ll make money off that, too. It takes some outrageous cataclysm to knock these guys off their stride, and when that happens they just call in some favors down in Washington, and down comes the bailouts.

Actually, there is one thing that is like kryptonite to financial markets: a central bank that’s tightening monetary policy. While Ben Bernanke certainly didn’t say he’s going to tighten policy in today’s Congressional testimony, he didn’t say the Fed would be looking to expand its QE program, and that was enough to spook the markets.

The Dow’s been off as much as 97 points (although, of course, somebody’s got to process those trades, right?) Don’t forget that even beyond any direct QE support, the Fed still has interest rates at a recklessly accomodative zero. The Greenspan Fed was able to tip the global economy into a near-death spiral with only a 1% rate. The Bernanke Fed may finish the job yet.

On Wall Street, it’s like the recession never happened. On Main Street, it’s like the recession never ended.

For bankers, it’s the salad days again. The Journal today reports that Wall Street compensation hit a record in 2010. Total compensation was up 5.7% from 2009, to $135 billion, as revenue is getting back to record levels.  “Things are shifting back to where they were before,” said J. Robert Brown, a law professor at the University of Denver who studies compensation.

There hasn’t been such a beneficial shift, however, for the rest of America. Consider the following comment from Deutsche Bank talking about Wal-Mart in a snippet penned by Newswires’ Chris Dietrich: (subscription required)

 The wealthy customer was the first to emerge from the consumer spending recession, and has since returned to more convenient and upscale shopping avenues…The low-income consumer continues to be under significant financial strain.

The firm cut its rating on Wal-Mart shares to hold from buy, saying there just aren’t any catalysts to drive shares higher – since, of course, the retailer’s bread-and-butter demographic is under “significant financial strain.”

Does it make sense to you that bank compensation’s at record levels, that corporate America is posting peak earnings and near-peak margins, while unemployment is around 10%, and wages are going nowhere fast, and many, far too many, of those jobs that are being created aren’t paying what could realistically be called a living wage?

There is a serious disconnect in the United States, and while Wall Street and the White House would love for you to think this is just the typical lag that occurs in a recovery, the realities of our globalized, decoupled, decentralized economy should make it clear to you that is not just a time-lag deal.

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Here’s a must-read for you, Brett Arends writing at MarketWatch perfectly captured Wall Street’s complete domination of Washington, how they sabotaged any real financial reform, and how they managed to get away with the biggest bank heist in, well, ever. (hat tip, Big Picture.)

The financial reform bill is nothing but the biggest regulatory loophole in the history of regulation. The banks demanded and received the biggest transfer of assets from the public in history, with hardly any debate whatsoever.

Do read the whole thing, reflect on it, think about it, and then listen to any talking head brag about how good things are. Listen to anybody tell you the people spoke in November, and were heard by the landed gentry in DC. Oh, I say friends we’ve been had, hoodwinked, bamboozled, let astray, run amuck. Which is why I’ll say, again, until these two parties are run out of Washington, and some safeguards put in place to protect whatever parties replace them from the sharks, we haven’t solved and won’t solve our biggest problems.

The real reform that needs to take place is political.

BOSTON (MarketWatch) — This was the year America finally took on the power and greed of the Wall Street banks.

And the banks won.

They dodged the bullet of real reform, probably for all time. They bounced back to post huge profits, helped by legal theft from the middle class. They completed their takeover of both political parties — and bought themselves a new Congress even more pliable than the old one.

Middle-class America is flattened, devastated and broke. The bankers that caused it all have escaped punishment. They’re raking in huge profits. Oh, and the tax cuts just got extended for high earners, too!

Game over.

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David Stockman, former OMB director under Ronald Reagan, had some spirited comments on the Fed’s QE2 gambit during a Bloomberg TV interview yesterday, well worth a watch. He finishes with a flourish by saying the central bank is “injecting high-grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient.”

Hat tip to Art Cashin’s daily morning comment for heads up on the Stockman interview.

By Steven Russolillo and John Shipman

Wall Street loves to play the expectations game. Now, it looks like the Federal Reserve is getting in on the action, and how it fares could have troubling consequences, not the least of which concerns the already battered U.S. dollar.

Ever since the Fed put the prospect of QE2 on the table, the stock market, along with Treasurys and a string of commodities, have been riding a one-way ticket higher, all at the expense of the dollar. All other factors have been put on the back burner. Earnings, economic data, breadth, valuation, sentiment, none of them matter nearly as much as the Fed’s potential to flood the financial system with more easy cash. Inflation expectations have taken the ride as well.

What seems clear is the Fed “has already begun a passive easing of monetary policy well before the actual QE2 has been implemented,” said David Beckworth, assistant economics professor at Texas State University. “Because future economic activity influences present economic activity, the Fed is already influencing current aggregate spending by altering expectations.”

But what if the FOMC in early November doesn’t announce it’s engaging in QE2? What if the committee acknowledges that the economy is still muddling along, but recent indicators suggest just enough pickup in economic activity to not warrant additional easing, for the time being?

That could certainly send short-term shock waves through markets, especially considering the high expectations for QE2. The historic September rally — based largely on QE2 coming to fruition — could go up in smoke, but maybe that’s a small price the Fed is willing to play.

The idea isn’t completely crazy. Richard Fisher, head of the Federal Reserve Bank of Dallas, mounted another strong attack against the notion that Fed intervention will solve the economy’s problems.

“While none of us are satisfied with the current pace of economic expansion and job creation, presently it is not clear that conditions warrant further crisis-like deployment of the Fed’s arsenal,” Fisher said.

It all comes back to expectations. If the Fed can keep investors convinced that QE2 is still on the table, and it’s not afraid to fire up the engines at the appropriate time, then it can keep playing this expectations game. The longer the Fed can go without showing its hand, the more time it buys, with the hope that the economy will improve enough on its own that it never will have to lay its cards on the table.

It’s a delicate dance, but managing expectations may be the best hand the Fed can play right now.

There’s a new movie about Wall Street and big business coming to theaters. No, not Oliver Stone’s over-hyped sequel to “Wall Street,” which as we all know gets released today (honestly, I feel like the only business reporter who hasn’t already seen it, seems like everybody in this ro0m except for John, Steve and I got invited to some press screening.) It also isn’t “The Social Network,” the anti-Zuckerberg screed being released today as well.

(Great side note: Zuckerberg is going on Oprah today to announce a $100 million donation to the Newark, N.J., school system. Of course, we’re all supposed to believe it has absolutely nothing to do with that movie. Of course not.)

No, the movie I’m talking about is “Inside Job,” which is being released here Oct. 8. It’s a positively scathing documentary about the financial crisis, and makes no bones about who is to blame: just about everybody inside banking and the government. I’ve seen only the trailer, again, no special press screenings for this reporter, but if you care about the things that this blog cares about, and if you’re reading I’ll assume you do, it ought to hold your interest.

(Interestingly, these aren’t the only business-related movies coming out; seems Hollywood is rediscovering Wall Street. Imaging how long it takes to get a movie from script-form to its premiere at Cannes, those producers must’ve jumped into action about Sept. 15, 2008.)

Yves Smith over at naked capitalism has a review. “‘Inside Job’ (is) an ambitious picture, clearly aiming to stir public anger and action by showing how criminally corrupt the financial services has become and how it has subverted government and the economics discipline,” she says. The film may not star Michael Douglas (although it is narrated by Matt Damon,) but then again old Gordo never wrecked the entire financial system. Just Bluestar.

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- Lots of chatter that Obama will appoint a CEO to replace Larry Summers, an idea that irks Paul Krugman. “For one thing, the NEC director is supposed to serve as a coordinator and honest broker among views — not, or at least not primarily, as a decision maker,” Krugman writes. “That’s not what CEOs are paid for — their job is to be decisive, not summarize other peoples’ arguments.”

- Blockbuster filing for Chapter 11 bankruptcy highlights how the mighty have fallen compared to the raging success of Netflix, Josh Brown says. “There is a cautionary business tale in here that is both timeless and essential for all investors to understand…It’s a story that’s been told a million times — the complacent giant felled by a nimbler, hungrier upstart with new ideas.”

- Initial jobless claims continue to portray a labor market stuck in neutral. “Make no mistake: The longer the job market remains stuck in a rut, the stronger the case for arguing that we’re suffering a potent bout of structural unemployment,” James Picerno notes.

- Cable giants publicly say the “cord-cutting” trend — consumers giving up cable for Internet video — is just a myth. But Verizon (VZ) CEO Ivan Seidenberg begs to differ, saying the cable bundle will follow wireline telephone as an example of old technology that eventually becomes obsolete. “Young people are pretty smart,” Seidenberg says. “They’re not going to pay for something they don’t need to.”

- The timing of Facebook CEO Mark Zuckerberg’s $100 million donation to Newark, NJ, public schools is getting the usual scrubbing in the blogosphere. Donation coincides with premiere of “The Social Network,” a movie that doesn’t exactly paint the prettiest picture of Zuckerberg. All Things D blogger Kara Swisher says: “Zuckerberg himself decided to move forward now, sources said, apparently concluding that even if a prominent movie was portraying him as the villain, he did not have to act like one in real life.”

- Existing home sales bounced off a record low and rose a better-than-expected 7.6% in August. But Calculated Risk points out inventory increased 1.5% in August from a year earlier. “The bottom line: Sales were very weak in August — almost exactly at the levels I expected – and will continue to be weak for some time. Inventory is very high, and that will put downward pressure on house prices.”

- Apple’s (AAPL) iPhone tops JD Power’s smartphone satisfaction study for a fourth straight year. But the results weren’t so sweet for Nokia (NOK), ranking below Palm, which isn’t even a public company anymore. “Another humiliating blow for Nokia which continues to struggle for relevance in the smartphone market,” Digital Daily blogger John Paczkowski says. “Incoming CEO Stephen Elop has his work cut out for him.”

- Stock-exchange operators and regulators are moving closer toward replacing new circuit breakers for individual stocks with curbs that would limit trading outside of a set range, WSJ reports.

- In the “Wall Street” sequel, Michael Douglas is splendidly slimy as Gordon Gekko but the rest of the film doesn’t measure up, says Joe Morgenstern.

- F-bomb your way to the top. “Swearing may help you do your @#!%ing job. Yeah, you read that correctly, WSJ’s Deal Journal blog says.

Falling prices aren't the same as sale prices.

Remember that scene in the first “Die Hard” (and the best one (well, the only really good one, I mean, the others are passable, except for that fourth one, but really, the first is a top-rate action movie, the others are just rehashed leftovers,) where John McClane throws the dead terrorist out of the window and the body plops down on the hood of the police cruiser that’s passing by, and McClane leans out the window, already a dirty, bloody mess with a machine gun in his hands, and screams “Welcome to the party, pal!”

That was the first thing that came into my head when I saw this Phil Izzo story (and that probably says something about me, but let’s leave that for some other blog) hit the Tape.

It appears that Wall Street economists, by a two-to-one margin, now believe that deflation is a bigger threat than inflation. So, for all the jawboning the Fed’s been doing about inflation, a con game they are likely to maintain this afternoon, Wall Street’s not buying it anymore.

A Wall Street Journal survey found that by a two-to-one margin Wall Street economists see deflation as a bigger threat to the U.S. economy over the next three years than inflation.

“Deflation is dangerously close,” said David Resler of Nomura Securities, one of 53 economists surveyed by the Wall Street Journal. Among economists who answered the question, nearly two-thirds said that deflation poses the bigger risk to the economy over the next three years; the remainder said inflation is the bigger threat. That compares to an April survey, when the economists were split 50/50 over whether inflation or disinflation posed the bigger risk over the next year.

I honestly don’t have much new to say about this; well, anything actually. We’ve been banging the drum on this topic for a long time. It’s just sort of, well, satisfying to see Wall Street coming over to our way of thinking. Even if the thoughts themselves are frankly depressing and even frightening. But you’ve got to face up to reality before you can start dealing with the situation.

- US GDP growth at 2% is unsustainable; economy either has to break higher or fade lower sooner than later, Stu Hoffman, chief economist at PNC Bank, tells Big Picture blogger Barry Ritholtz. “Just as a 747 cannot maintain altitude at 200 mph, neither can the economy sustain a 2% GDP,” Hoffman says. “So the captain of the plane must increase thrust and fly faster, or lose altitude and land. The economy…behaves the same way.”

- There were warning signs about former H-P (HPQ) CEO Mark Hurd that investors and the media largely ignored, writes Eric Jackson, founder and president of Ironfire Capital. He cites the “piggish behavior [Hurd] and his executive team were exhibiting at the expense of H-P shareholders,” in the form of excessive compensation and lavish perks in last few years. “In my book, if you’re piggish about the small stuff like expense reimbursements, you’re going to be piggish about the big stuff.”

- Disappointing jobs report last week as well as unfavorable monthly revisions don’t bode well for stock market and economic recovery. “Pending a change in policy mix which is anchored by meaningful structural policies, the equity market is unlikely to sustainably regain its composure and yield levels will continue to surprise on the downside,” says PIMCO CEO Mohamed El-Erian.

- S&P 500′s short-term uptrend remains intact. “Looking at the 15-day intraday chart, the index held the bottom of its uptrend channel nicely,” Bespoke Investment Group writes, noting technicals look pretty good this week. “It looks like traders are going to try and at least test the highs made last week.”

- “If you’re on Wall Street, and you’ve seen the stock markets recover and the banks go from virtual insolvency two years ago back to record profit numbers now,” then you may think the recession’s over, Rolling Stone’s Matt Taibbi says. But if you’re looking for a job “somewhere outside the Beltway and/or lower Manhattan, and you’re noticing that the only easy job openings this year were temp gig taking census surveys (and even those have dried up), then your view of things is going to be no way the recession has ended.”

- Investors should embrace the uncertainty and turmoil plaguing the economy rather than whine about it, Justin Fox writes at Harvard’s Business Review blog. “Think about the feelings of relative economic certainty and confidence that prevailed in 2006, or in 1999,” says Fox. “Investing right now may seem scary and dangerous, but chances are that it’s a lot less dangerous than investing three or four years ago.”

- Macroeconomic Advisers changes its stance on when it sees the Fed boosting rates, shifting to late 2011 from mid-2011. “Given our expectation that any downward revision to the forecast will not be ‘appreciable’ and that the recovery is not ‘faltering,’ we do not anticipate either easing steps or changes to the policy guidance,” Macroadvisers blog notes.

- About that whole “cash on the sidelines” argument, John Hussman says it’s nonsense. “Analysts are pointing to an apparent pile of corporate ‘cash on the sidelines’ as if these holdings of debt securities somehow make new corporate spending more likely.”

- AOL’s Daily Finance blogger Peter Cohan wonders how effective former H-P CEO Mark Hurd really was, especially since H-P’s cash and short-term investments have slipped from $13.9B to $13.3B and it’s long-term debt has jumped from $3.4B to $14B.

- Speculation swirling that the Fed this week could announce additional measures to boost the economic recovery. But University of Oregon economics professor Tim Duy isn’t so sure. “My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact.”