World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.
Equity futures are higher this Monday (hence forth to be known as Wave2day). The Euro started off lower yesterday afternoon but has bounced back to very close to break even.
Below is a daily chart of the dollar on the left and Euro on the right. The dollar is now right up against a major resistance line in the 88 area. Note the small triangles that were broken on Friday, the minimum target on the break is well above the resistance line at about 89.5, so it would take a failure of that minimum target not to reach it. If you count that triangle as a pennant, it could be targeting as high as 94:
Now let’s take a look at a 10 year chart of the dollar to show you a resistance line that the dollar is currently up against. This is a pretty major junction, a break above that line would signal a major uptrend for the dollar and would likely be quite negative for equities:
On the other hand, below is a chart from etf-corner.com showing that the last two times the dollar reached this area a sustainable low in equities was put in:
I think it breaks above that area, but it may not do it right away. More evidence that dollar resistance will not hold is found in the currency P&F charts. Below is the dollar P&F that shows an adjusted target now of 114!
The action in the Euro has triggered a new target on the Euro P&F diagram that is well below parity, all the way down at 88! That is a very major move should that target be reached, but there is precidence as the Euro was in that same region in the 2001 - 2003 timeframe:
The Head & Shoulders pattern I’ve been showing has a weak right shoulder, so it could be that we still need a bounce higher to finish that up:
That H&S pattern is not very well formed on the right side, but it doesn’t have to be. And, as I look around at other indices, like the Transports, I see that it’s even less well formed which leads me to believe that we likely will not go all the way up to form a more perfect right shoulder. And the Elliott Wave count suggests that it’s most likely getting close to rock and roll time.
The economic data is light this week, we’ll get Consumer Credit this afternoon.
Officials from Hungary are trying to smooth over their prior talk of default now saying that they are not as bad off as Greece! Riiiiggght. Which version do you believe and do you have confidence? What you really need to be asking is WHEN they default, who is going to eat the loss? All of the sudden Germany doesn't look so strong relative to the PIIGS.
The same resistance and support levels are in play, SPX 1,070 is overhead while 1,040 is the neckline support area.
Friday’s powerful down stroke could easily be the beginning of wave 3 of 3 down… that makes any bounce today wave 2. Friday’s move had what I think may be a record amount of volume on the downside, coming in at 99.1%! That means that effectively ALL the players in the market were selling. How many players is that is the question! Is it effectively four? Ten? I don’t think it’s many.
I learned something from watching some old archive footage of Martin Armstrong this weekend. He did a study in the early 90’s looking at the number of stock holders of record versus the movement of the broad market. What he found was the opposite of what you may think to be true – that at market tops there were far fewer owners of stock – they consolidated into a few hands. And at bottoms there was broad ownership – far more owners than at tops. While I don’t have data regarding ownership, and the whole stock ownership trail has become completely convoluted today, my suspicion is that there are very few market participants and that in fact stocks are highly concentrated into just a few players hands. That is dangerous as the “Flash Crash” proved.
I’ve also been warning that the number of 90%+ volume moves is a warning sign. McHugh picked up on the same thing and this weekend proposed that the fact that we’ve had twelve (!) 90%+ day moves since mid-April is the same exact type of warning as a Hindenburg Omen.
First of all, let’s note that there just hasn’t been enough time to generate the necessary new lows and highs combined for a Hindenburg. But at the root of the Hindenburg is a divided market, one that has internal splits with some sectors that are unhealthy while others are being bid up. And now we’ve had eight 90% down days and four 90% up days. That is a split that is dangerous and those lopsided moves add credence to the theory that there are fewer participants than is required for a healthy market.
Get below 1,040 and it will be painfully obvious that our 14 month rally based upon government handouts and accounting fraud is over. Heck, we’ll just call it foreplay…
What follows is Martin’s relatively short take on what occurred during the second half the Great Depression and why it is different this time. I believe he makes a lot of good and valid points, but I also believe his is flat out wrong on others.
First let’s go back to August 2009, and look at what he said about the DOW back then in his paper “Will the DOW Reach 30,000 by 2015?” This is where he said, “The main resistance area is 11,000 on the DOW. We need a monthly closing above that level to signal that the March 2009 low will hold. Otherwise, we should expect a retest of the lows or still even perhaps new lows going into 31.4 months down from the October 2007 high with a rally into the next target 2015.75 reaching 30,000+.”
The way I translate that is to mean that if we fail to produce a monthly close above 11k (we closed April at 11,008 – that was the peak and it has since failed – so I say resistance held), then we are likely to revisit the lows or break them, then hyperinflate into the year 2015. Okay, fine, I can buy that as a possibility and it does fit into my general thinking that we would experience another wave of deflation and that the reaction following would then likely produce inflation and that would eventually mandate a change in the structure of our money unless that change occurs first.
Now we have M3 collapsing, we are on the verge of countries defaulting (the same as wave C of the Great Depression), and we have a rush into the dollar and US debt instruments.
So, with that in the background, let’s take a look at Martin’s latest paper:
One of the areas that I disagree with Martin on is the importance of being on a gold standard then versus now. In fact, I believe that being on a gold standard had very little influence on the events and outcomes of the Great Depression. What was much more important was the fact that the Private Bankers had taken over control of the money creation power and despite a “gold standard” managed to produce one of the largest CREDIT bubbles in the history of man. Gold absolutely FAILED to keep the total quantity of money under control – the total being the amount of sovereign money (in this case backed by gold) versus the amount backed by debt (came into creation bearing interest as someone else’s obligation).
I think a very important piece of the credit bubble puzzle now is rooted in accounting fraud. Martin is right about this point, THE MARKET KNOWS. It knows that our major financial institutions are INSOLVENT – they have marked to fantasy, they have played the shell game, they have transferred unserviceable debts onto the public rolls making them insolvent in return. Wave A down did NOT clear the DEBT, it is still there! The market knows!
Mark to fantasy accounting was one of the major contributors to the credit bubble. In 2007 FASB changed the rules back to mark-to-market. The reality hit the financials and drug the entire equity market down. Price to earnings shot to all time extreme highs because of this accounting (reality). Then, pressure mounted as the equities collapsed to reinstate mark-to-fantasy, it was reinstated and now price to earning fell right back down to a falsely marked level, yet even with accounting fraud P/E levels are still far above historic norms.
The market knows – this P/E reading is FALSE, it is marked to fantasy, the debt is still there.
It's no more complex than understanding that the growth of debt outstripped the growth of income. This is the underlying cause of the shift in CONFIDENCE that Martin and so many others discuss in the markets. Confidence allows people to take on leverage (debt) and it grows until there is an event that shifts people’s confidence that the debt can be repaid, then markets correct. It is the underlying math that leads to angst and the lack of confidence. This is occurring now throughout the entire world, not just in the United States.
At this time ALL our money is CREDIT money. INTEREST is DEFLATIONARY! It is the attempt to create never ending growth to compensate for the deflationary pull of interest that creates stupidity like attempting to grow at 2% or more per year. It is this reaction to deflation that prompts other actions to create inflation! Those other actions include dumping Glass-Steagall, lowering reserve requirements so that the banks can fractionalize more money, allowing derivatives to create more leverage, allowing banks to mark derivatives to fantasy instead of to a real market price, etc. Those are the things that create inflation when your money is entirely comprised of DEBT.
If you don’t believe that interest is deflationary, let’s do a little mental experiment like I often do – isolate it, put it in a room, and then take it to one extreme and then the other… So, in this case we have 10 people in a room and each have $100 CREDIT dollars, or $1,000 dollars total in the room. They perform transactions between one another but because they are all in debt, they must pay interest to the bank that resides outside of the room – let’s say 3% of the money is paid to the bank each period. At the beginning you had $1,000, and at the end of the first period there was only $970. The supply of money went down, that is deflation! Again, it is the attempt to counter this deflation that produces imbalances.
Now, Martin later says this, “There is NO direct ratio of money supply to the rate of inflation. It is simply a matter of CONFIDENCE.” While it is true that it is not exactly direct, there is most definitely a correlation between the quantity of money and PRICE inflation. It is this correlation that enhances or destroys confidence.
This time in the room there are two people, a VERY bright and irritating light, and only one pair of sunglasses. If both people in the room possess only one dollar, then the MOST the glasses can be bought for is one dollar! However, if both people possess $100, then the glasses may be purchased for considerably more! It is the easy availability of money that gives them supposed confidence to pay more, and without the money it is mathematically impossible to pay more.
So, Martin goes onto say:
“In order to create a 1930’s style depression the United States would have to adopt the very advice the IMF is telling Greece that failed in the 1930s and will destroy the nation politically.
…By insisting that there be a balanced budget, the IMF is supporting the bond holders at the expense of the people.
…The reason why I do not believe there will be a Great Depression is because it would”
His response is cut off, but he is saying there will not be a Great Depression. Well, no two depressions are the same, but the parallels between then and now are stunning, and the greatest difference between then and now is not the gold standard, it is that per capita debt levels are still much higher now than then, and the credit bubble is much more global now than then!
Austerity is not a choice once income cannot support debt, it is brought to you. The only way to change that is to either clear out the debt or to change the system (and clear out the debt).
INCOME to DEBT – this is the key. So, the government took private sector debt and made it public. The math is impossible, sovereign countries have no bankruptcy procedure, they can either default or print (if able). People are now realizing that countries cannot repay and thus confidence is being lost. Money can be created, but as long as incomes cannot service debts, then balance cannot be restored. The proof of this is in the amount of “money” now held at the banks, but yet they can’t lend to consumers who are saturated with debt as their incomes cannot support even more. The same is now true for all western governments of the world. This is why we see the diminishing productivity of debt over time that has now entered a phase transition into less productivity for new debt entering the system, and it is why adding debt at this stage produces lower employment.
The psychology of wave C down is different than the psychology of wave A down. The government has attempted the bailouts, they failed because their actions were opposite those required to bring the math under control. That is what destroys confidence – and the cycle repeats, only this time is on a much higher order than the Great Depression of the 1930s.
If monetary change does not occur during this deflation wave and our reaction is to print without debt, then we will get hyperinflation later that will destroy any value remaining in our money as the quantity gets even further out of control. This could produce equity lower, then much higher. But for now, the total quantity of money is contracting.
The alternative to printing without debt is to print and use the money to directly pay down debt. That is an equity for debt swap, it can work to print money and keep the total quantity of credit and non-credit money under control. That would require many deliberate actions such as I’ve outlined in Freedom’s Vision. In the mean time history may not be repeating, but it is certainly rhyming except on a more grand and global scale.
Europe has now seen the loss of confidence, the Euro is sliding even faster in reaction to their bail out. We now have Geithner talking up more stimulus while Europe and the IMF are talking austerity. The dollar is strengthening because global deleveraging is occurring and the holders of debt must scramble to get dollars in order to pay down debt. The United States for now is continuing to finance our debt, but that WILL change and Geithner/Bernanke will learn the same lesson learned by the Europeans. Confidence is destroyed when the math is so obviously out of whack, make the math even worse and at some point they too will encounter a phase transition in confidence – I believe we are setting up for that now.
The bottom line is that Martin brings up valid points, but not all of his points carry validity and neither do his conclusions that he often plays in both directions. Hey, I don’t pretend to know the exact outcome, but I do know BS when I hear it. People who claim to know the exact outcome are immediately suspect and thus let’s take what knowledge we can and move very cautiously into the future. I still think that history shows those “other” events are coming. Our governments and bankers are losing control and they will do extraordinary things to attempt to remain in control.
Martin is right that ultimately it is the people who will win the day – they always do. Unfortunately, history also shows that between here and there will be much more pain. While money and governments are a construct of man, we are slow to change and we repeat mistakes as the pendulum swings. Two steps forward, one step back.
Equity futures are diving this morning on the Employment Situation Report. The dollar is breaking out to new highs, the Euro is diving to new lows after breaking down from a bearish triangle:
Bonds are up significantly, while both oil and gold are lower. Gold was down substantially yesterday, but it was on very high volume. If you look at the chart below, you will see that declines that begin on high volume usually have legs. We are also close to breaking support on the current uptrend, so short term traders should take note – long term believers may have a buying opportunity coming:
One thing’s for certain, the market is not buying into the Employment Situation Report. In fact, it’s a confidence losing event. The headline numbers? We added 431,000 “jobs,” and the advertised unemployment rate fell to 9.7 trumped-up percent. The Reality? We LOST massive jobs when you remove temporary Census workers and birth/death model false jobs. And the market finally gets it – Obama’s great jobs report isn’t really great at all, in fact it flat out missed the boat.
This report is 110,000 below consensus expectations and the prior two months were revised downwards. But if that’s not bad enough, get a load of the business “birth/death” adjustments for May – 215,000 “workers!”
Let’s look at Econoday’s report:
Highlights The headline number for payrolls for May was disappointing due to anemic growth in the private sector. However, overall payroll jobs in May surged 431,000, following a 290,000 boost in April, and 208,000 gain in March. April's spike came in much lower than the consensus forecast for a 540,000 jump. Net combined revisions for April and March were down 22,000.
But the real focus of traders is private payrolls to discount the impact of temporary Census hiring. Private nonfarm employment increased only 41,000, following a 218,000 boost in April.
The positive news in the payroll survey was in earnings and the workweek. Wage inflation picked up with a 0.3 percent rise in May, following a 0.1 percent advance the month before. The average workweek for all workers edged up to 34.2 hours from 34.1 hours in April. Analysts had expected 34.1 hours.
From the household survey, the unemployment rate slipped to 9.7 percent from 9.9 percent in April, coming in below the market forecast for 9.8 percent.
On the news, equity futures fell sharply while Treasury prices rose.
They couldn’t even mention the number of Census workers… of the 431,000 “surge,” 411,000 were temporary Census workers! That’s right, the great job resurgence is created by spending 3 times the amount of money ever spent on a Census so that really unemployed Americans can stand around and pretend to count one another! Oh wait, they don’t really even do that:
One of the first standouts of the report is that the civilian participation rate fell by .2%, this means that they are counting the workforce as being smaller despite a growing population. Also, “the number of long-term unemployed (those jobless for 27 weeks and over) was about unchanged at 6.8 million.”
Without Census hiring, government employment fell by 21,000. This is important, it shows that municipalities are finally beginning to lay people off in earnest.
Note in the alternate table below that both Seasonally adjusted and non adjusted U6 fell by about half a percentage point:
All I can say is that these U6 numbers USED to be closest to representing how unemployment numbers were tracked. Now, however, I think it’s fair to say that none of these numbers represent anything even close to reality. I think this report is an eye opener, it is a confidence destroyer that exposes the government and their statistics for what it is – a great big lie and a great big fraud.
Reality? John William’s numbers are probably the closest to that – try nearly 22%...
So, back out the temporary Census workers (411k), and the fantasy “birth/death” job creation (215k), you are left with a number of MINUS 195,000! Oh, and we need 250k minimum REAL jobs just to keep up with population growth. Can you say debt saturation? I thought you could.
What’s most disturbing is not the fact that job creation is actually negative. No, what’s most disturbing is that your President and your government are working so hard to deceive you. If you haven’t lost confidence yet, then you are not thinking.
The market certainly is reacting negatively to the report as is appropriate. We are below the 1,090 support area, but we need to get beneath 1,069 to be sure that wave 3 has begun. This is certainly an impulsive move lower and it’s within a day of what I was expecting, so it very well could be. With the Euro sliding in the background to new lows, I think it’s far past time that we start being honest with ourselves.
Very well said, he is someone who obviously understands the larger power structure, especially when discussing wars and the drug trade. It would be even more on target if he went more in depth into our debt-backed money structure and diminishing returns of debt, but overall a good overview.
Equity futures are higher this morning following yesterday’s no volume melt-up. The dollar is close to flat, the Euro is following its downtrend line but is also close to even, bonds are down significantly, while oil and gold are both down.
Yesterday’s move was yet another 90%+ move, this time a huge 94.7% of the volume was on the up side. Of course there was very little volume, coming in at only 80% of its ten day average. The frequency of these 90% days is quite alarming, I don’t think there’s any precedent for it; although there was a slug of them at the ’07 top, there were not this many. They are most definitely not a sign of health, and when they do occur, they tend to occur at major turning points. What this cluster says to me is that there are far fewer real market participants and that High Frequency Trading (HFT) computers have taken over the market.
That’s not a good thing, the market is very fragile because of it. Yesterday when we broke the most recent downtrend line you could just see the price shoot up in response. That’s computers all taking the same cue at the same time. How can a market that functions like that be performing a role of price discovery? It can’t, and the real value of the market isn’t anywhere near where it is.
Accounting fraud and failure to take losses on debt that can never be repaid is the foundation of why the market is mispriced. Want to see a symptom?
June 3 (Bloomberg) -- Overnight deposits with the European Central Bank rose to a record yesterday as the sovereign debt crisis made banks wary of lending to each other.
Banks lodged 320.4 billion euros ($394 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros the previous day, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999. Deposits have exceeded 300 billion euros for the past five days.
Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking industry. The ECB said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.
“The banking crisis is back,” said Norbert Aul, an interest-rate strategist at Commerzbank AG in London. “The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it’s deemed safer to park cash with the ECB rather than lend it on.”
Tensions Money market tensions are resurfacing even after the ECB started buying government bonds and said it would offer banks as much cash as they want for up to six months. The measures accompanied the European Union rescue package, agreed on May 10, to counter the worsening debt crisis and promises by Greece, Spain and Portugal to rein in their budget gaps.
Money market rates are rising, with the euro interbank offered rate, or Euribor, for three-month loans yesterday increasing to 0.704 percent, the highest this year. Banks borrowed 9 million euros from the ECB at the marginal rate of 1.75 percent, the central bank said today.
The efforts by the EU and the ECB failed to allay investor concerns. Fitch Ratings lowered the credit grade of Spain, the euro area’s fourth largest economy, to AA+ from AAA on May 28. Standard & Poor’s in April cut Greece’s debt to junk and lowered the ratings on Portugal and Spain.
Portuguese 10-year government bonds fell today, increasing the premium investors demand to hold the debt instead of benchmark German bunds.
The yield on the Portuguese security rose five basis points to 5.08 percent as of 8:56 a.m. in London. The spread over bunds widened six basis points to 231 basis points, according to Bloomberg generic data. Spain’s yield over Germany was unchanged at 177 basis points.
Seriously, if you’re not in fear mode, then there is something wrong with you – those who don’t understand math and history are the ones who would exhibit no fear in the face of the debt and the fraud. Until the debt problem is resolved, and really until the monetary system that created that debt is fundamentally fixed by changing WHO controls the creation of money, fear is the appropriate response. “Market psychology” in this case is rooted in the math of debt.
The Monster Employment Index released this morning for May came in at 134, up from April’s 133. ADP says May’s employment added 55,000 jobs, this compares to April’s report of a 32,000. Both would indicate that we can expect more jobs added in tomorrow’s employment situation report than last month’s 290,000 jobs added report – which, if you remember, was built upon the “Birth/Death” model and temporary jobs.
Separately, the weekly jobless claims came in at 453,000 for the week, higher than the consensus figure of 450k, but lower than the previous 460k report. Here’s Econoday:
Highlights Unemployment claims continue to come in at a steady rate and indicate no improvement in the labor market. Initial claims totaled 453,000 in the May 29 week, right in the middle of a three month trend. The four-week average, up slightly for a third straight week to 459,000, is unchanged from four weeks prior. The continuing-claims side is similar, up 31,000 in the May 22 week to 4.666 million. Here the four-week average, at 4.654 million, has been almost motionless since late March. Today's report won't heighten expectations for strong data in tomorrow's employment report. Markets are showing limited and mixed reaction.
According to the DOL, there are more than 5 million people claiming Emergency Unemployment:
States reported 5,081,015 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending May 15, an increase of 21,172 from the prior week. There were 2,347,218 claimants in the comparable week in 2009. EUC weekly claims include first, second, third, and fourth tier activity.
Still nearly 3 million more than the year prior while politicians are playing the short term financing game with never ending votes to extend benefits a now never ending part of the debt money framework.
Productivity and Costs for Quarter 1 of this year were revised downward on this morning’s release. The prior report was 3.6% productivity growth, they were expecting 3.4%, and it came in at 2.8%. Quarterly labor costs fell 1.3%, that was on consensus. Here’s Econoday:
Highlights Productivity growth was revised down but is still healthy-just not as robust as in recent quarters. First quarter productivity was revised to an annualized increase of 2.8 percent, compared to the initial estimate of 3.6 percent and the consensus forecast for 3.4 percent. Growth in unit labor costs was nudged up to a 1.3 percent annualized decrease from the initial estimate of 1.6 percent decline for the first quarter. The latest number matched analysts' projection for a 1.3 percent decline in costs.
The less strong productivity number for the latest period was due to a downward revision in output growth from 4.4 percent annualized to 4.0 percent and due to hours worked nudged up to 1.1 percent from 0.8 percent.
Year-on-year, productivity advanced 6.1 percent in the first quarter-up from 5.6 percent in the prior quarter. Year-ago unit labor costs came in at minus 4.2 percent, compared to minus 5.1 percent the previous quarter.
There was little market reaction to the numbers. But looking ahead, it seems that firms do not have much room for boosting productivity further by cutting labor. Basically, improved business will mean hiring and expanded hours-good news for the recovery.
What’s there’s really little room for is claims of huge productivity increases when we don’t actually produce anything! What we produce is financial engineering and accounting fraud. And we’re excellent exporters of those products!
Our “productivity” in this regard fluffs our GDP to levels unrecognizable from reality. Falling labor costs? Once again proof that adding debt based paper into a debt saturated economy will not make anyone wealthy besides those who produce the paper.
Factory Orders and Non-Manufacturing ISM are released at 10 Eastern.
If McHugh’s Elliott Wave count is correct, you are near your last chance to escape the markets with any semblance of what you think you may have in terms of equities. His count shows this to be wave c up of wave 2 up of wave 3 down. Wave 2s are your exit point and they are the point at which it pays to get short the market as it nears completion as wave 3 of 3 will follow if that count is correct.
In an ideal world, we would rise up into the SPX 1,140 to 1,150 area and then roll over finishing a proportional right shoulder of the large Head & Shoulders pattern that’s developing. That area is coincident with the downtrend line from the April 26th top:
Wave ‘a’ of the current a,b,c lasted for three days, proportionality says that wave c should take about the same, and that means wave 'c' could be finishing up as early as tomorrow or into next week. I would suspect this count is incorrect if we exceed 1,173 on the SPX.
Hey, I think those who don’t recognize what’s occurring to our markets, our financial system, and to the monetary system of the world are close to a major league spanking. The debt that underlies the world’s monetary systems is poison, it is producing appropriate fear and that is the underlying tension that leads to other “events” like we are beginning to see all over the world. Those who believe the propaganda of the debt pushers have simply taken one too many tokes… Don’t believe them, there are real solutions, but they reside outside of their debt-backed money box.
Uncle Warren snubbed his nose at an invite to comment on rating agencies and instead wound up with a subpoena. Today he, and others, defended the ratings agencies that, from my perspective, are indefensible.
Not mentioned in this article, I saw Buffett respond to a question that he did not believe non-brand name agencies would be a good idea because people are only “comfortable” with the brand names they recognize! LOL, what a self-serving crock of manure. The brand name agencies are exactly the ones who I would trust the LEAST to accurately assess risk. Their pay for rating business model ensures that they over-rate and downgrade too late – long after all the horses have been stolen from the barn.
I think there’s something wrong in our system, frankly, when people like Buffett are held up to be “experts” in the workings of a healthful economy. His interests are so tangled in the current system that his words should almost be considered a contrary indicator - the OPPOSITE of what is correct – pretty much like the way I take Jim Cramer’s “advice.”
NEW YORK (CNNMoney.com) -- Berkshire Hathaway CEO Warren Buffett defended the role that Moody's and other rating agencies played in the financial crisis, even as the industry missed the signs of an impending housing market collapse.
"They made the wrong call. I was wrong on it too," Buffett said, before a hearing of the Financial Crisis Inquiries Commission in New York on Wednesday.
Buffett, one of Moody's largest shareholders, suggested that the company, like homebuyers and investors, simply got swept up in the frenzy that defined the housing market earlier this decade.
He was also quick to defend Moody's management, including chairman and CEO Raymond McDaniel, who testified alongside Buffett Wednesday.
"In this particular case, I think they made virtually the same mistake everyone else made," said the Berkshire Hathaway (BRKA, Fortune 500) chief.
Buffett had originally declined the commission's offer to participate in the hearing, before he was later subpoenaed. Buffett did not provide prepared remarks for the hearing.
Wednesday's hearing marks the latest in a series examining the root causes of the financial crisis. So far this year, the 10-member commission has probed various culprits in the crisis including Wall Street firms, subprime lenders, as well as government agencies including the Federal Reserve and the Securities and Exchange Commission.
Critics have suggested that Moody's, as well as its main rivals, Fitch and Standard & Poor's, a division of McGraw-Hill (MHP, Fortune 500), assigned top marks to securities issued by banks that would eventually turn toxic. They have also been accused of moving too slowly to warn of the risks of bonds and other securities tied to subprime mortgages.
"Wasn't the role of the rating agencies to be refs in a game that got out of control?" asked Phil Angelides, the former treasurer for the state of California and chairman of the FCIC. "Don't we expect referees to make the call?"
Several former Moody's executives that testified Wednesday suggested that the firm strayed from that role during the housing boom, competing fiercely to rate mortgage deals produced by investment banks.
Eric Kolchinsky, a former managing director with the company's derivatives division, suggested that maintaining or growing market share became so important that the company rarely turned away deals, even if they were backed by crummy mortgages.
"While there was never any explicit directive to lower credit standards, every missed deal had to be explained and defended," Kolchinsky said.
Others highlighted some of the seemingly questionable business practices that went on within the firm during the same period of time.
Mark Froeba, a former senior vice president in the derivatives division, alleged that higher-ups within the company employed a variety of techniques to grease the wheels in the mortgage rating process, such as understaffing the residential mortgage rating group so analysts could not look at any single deal too closely.
He also cited instances in which certain analysts were blocked from participating on new deals at a banker's request out of fear that they might not assign the new security the coveted 'AAA' rating. Assigning top ratings to mortgage-related investments were not uncommon by Moody's during the housing boom. Of the $4.7 trillion in securities backed by consumer home loans that the firm rated between 2000 and 2007, more than three-quarters of those bonds, based on dollar amount, received a 'AAA' rating, according to a preliminary staff report published by the commission.
McDaniel downplayed those allegations and also attempted to deflect some of the criticism his firm has endured since the crisis erupted, including its inability to foresee troubles in the housing market during the boom.
"We certainly believed we were on top of this and that the information we provided was adequate," he said.
He also defended the firm's "issuer-pay" business model, which some have charged led to cozy relationships between banks and the rating agencies.
His remarks were echoed by Buffett, even as he acknowledged that he "hates" that Berkshire Hathaway must pay to have any securities his firm issues rated.
"If you go to something other than user-pay it gets tricky," said Buffett.
Members of the commission also pressed McDaniel about his own personal responsibility for the firm's missteps. He has served as chairman and CEO since April 2005.
"If we reach a point where shareholders or the board don't believe I am best positioned to lead the firm through this period and into the future then I will not be in my job," said McDaniel.
The FCIC's examination of Moody's practices turns up the heat on the firm and the entire rating agency industry. Lawmakers are currently considering a number of proposals which threaten to shake up the industry.
One amendment currently on the table, proposed by Sen. Al Franken, D-Minn., would create a board to divvy up the work of rating so-called structured securities.
The company also recently revealed it is potentially facing enforcement action from the SEC after Moody's allegedly made "false and misleading" statements about its procedures when it applied to become a preferred rating agency in June 2007.
Moody's shares gained nearly 3% in afternoon trading Wednesday.
Personally, I don’t believe that any ratings agency should be allowed to receive any compensation from the companies it rates. False ratings absolutely create risk. Our system got way too cozy with ratings agencies and then everyone bought “insurance” (credit derivatives) to mitigate risks away. Of course all that meant was that no one was performing due diligence and that they were, in fact, creating systemic risk instead.
Warren Buffett and his mantra are part and parcel of that systemic risk. He is allowed to spout his self-interests uncontrollably in public while people who actually understand the risk remain ignored. The game of “investing” is thus no longer about managing risk, but instead is entirely about managing perceptions and politics – exactly the way companies like JPM and GS have come to dominate as well. This is why it’s so important to separate special interest money from politics. Real risk won’t be correctly evaluated until they are.
It used to be the rule of law that individuals who got into a situation where they could no longer service their obligations could file for chapter 7 bankruptcy and discharge those debts via courtroom procedures. Generally, this is no longer an option for most people as the laws were changed to make it harder for individuals to discharge their debts under chapter 7. Instead, most citizens are forced into chapter 13 where a court ordered repayment plan is directed. That legislation, of course, was brought to you courtesy of the banking industry.
And now the State of California is proposing to ban bankruptcies for cities:
NEW YORK (CNNMoney.com) -- A bill that clamps down on municipal bankruptcy filings is headed for Gov. Schwarzenegger's desk, which is bad news for Los Angeles and other cash-strapped California cities.
If the governor signs Assembly Bill 155, it would place a hurdle in the path of filing for Chapter 9 municipal bankruptcy. The bill stipulates that a city may only file for bankruptcy with the approval of the California Debt Investment Advisory Commission, which provides information on debt to public agencies.
"California's taxpayers who rely on public safety, senior, park and library services, as well as those who own and operate businesses in our communities, deserve every effort that state and local government can make to avoid the long-term devastation of bankruptcy," the bill says.
In particular, the bill says it intends to protect retirement pensions and health benefits for public employees, which would be disrupted and renegotiated in the wake of bankruptcy.
This could have a direct impact on the state's largest city, Los Angeles, which is facing a huge budget shortfall.
L.A. is projecting that city revenues will fall 11.2% short of projected expenses in the current fiscal year, which adds up to a deficit of $492 million, according to Pew Charitable Trusts, a non-profit research organization on public policy. The city had a shortfall of 12.1% the prior year…
Ah yes, this bill is meant to “protect” retirement accounts and is in favor of the people, LOL. I can guarantee you it was written by bankers to benefit themselves.
Any time a debt is discharged via bankruptcy the issuer of the debt sustains a loss. Of course knowing that you may sustain a loss would make you more cautious with whom you lend your money to, right? So from my perspective these types of changes not only don’t protect the people, they cement risk into place. They also fail to allow for swift removal of debt, and that means an anchor will continue to pull down the economy for quite some time should laws like this be enacted in this debt saturated environment.
Once again the banks can’t seem to take a loss, that is a systemic problem that ultimately ensures the debts don’t get cleared out and that is exactly why the debt money system is destined to fail. This type of law is not congruent with the nature of math. If you follow the supporters of this legislation you will find people who have relationships with the bankers.
Equity futures are up this morning, seesawing in a rising symmetrical pattern. The dollar is up fairly sharply with the Euro still descending with the lower channel trendline. Oil is up slightly after a large decline yesterday; gold is down, correcting yesterday’s up move.
The worthless MBA Purchase Applications fell deeper into record territory by losing another 4.1% in the past week. Refinancing activity, however, supposedly rose 2.4%. This fall in activity over the past month bodes ill for the home sales reports coming this June and July.
The number of layoff notices tracked by Challenger for the month of May grew over the month of April, here’s Econoday:
Highlights Challenger's job-cut count held at a pre-recessionary 38,810 in May, little changed from April and compared against 111,182 in May last year. The report said state and local government, hit even harder now by budget gaps, is a key weakness. Otherwise it notes that summer is the slowest time for downsizing. This report supports expectations for sizable payroll gains in Friday's employment report.
Motor vehicle sales will be released throughout the day, and the Pending Home Sales Index is released at 10 Eastern this morning.
I know that it’s hard to follow waves unless you’re up on the Elliott Wave rules, but let’s take a look at a daily chart of the SPX and RUT and discuss what we see and what McHugh sees:
To me this is an obvious leg one down into the flash crash pin lows, a wave 2 bounce, a wave 3 down that is followed by a wave 4 bounce, and what appears to be the beginning of wave 5 down. But that’s not what McHugh sees and he’s the expert, so I spent a little time trying to figure out why he sees it differently.
What he sees is the flash crash low as wave 1, then a wave 2 bounce, and then the decent into the most recent low as wave 1 of 3 (of 1), the bounce over the past few days as wave 2 of 3. He believes wave 2 is most likely comprised of an a,b,c and that we probably made most of b yesterday and are getting ready for wave c to take us up into the SPX 1,140 area. His alternative is that wave 2 truncated and that we just began wave 3 of 3 (of 1).
Why does he think that? Because on all the indices except the RUT, what I was counting as wave 3 is not as long as wave 1 if you count the flash crash pin as a part of wave 1. Therefore wave 3 must be longer, and that means that we were only looking at wave 1 of 3, follow? On the RUT, however, wave 3 exactly equals wave 1 and so it is possible that we made a wave 4 movement and are just starting wave 5 down.
The bottom line is that I think we do need to count the pin lows and that McHugh’s count is most likely correct but we need to watch the action to see what the market is saying.
Yesterday’s action was relatively benign until later in the day and then volume was quite heavy on the decline. Believe it or not, yesterday was another 90%+ down day (92%), the seventh since the April 26 high. Again, the ability for so much volume to be traded in the down direction on a day that was up for a good portion of the day shows how fast the HFT machines are at chasing the direction. This is not healthy for the market, it is a very bad omen in my opinion. Just imagine and let’s say that the vast majority of the market liquidity comes from only 4 players… What happens when just one of the players decides, for whatever reason, to stop playing? Uh, huh – and we already know what happens when they all stop playing, that equals no bids – in other words no real market participants.
Yesterday at the close we did have some extreme readings, so I think we need to be on our toes today. Normally you would expect a fairly strong bounce following readings like that, but then again we are in the danger zone.
If McHugh is right about his count, it’s quite bearish as wave 1 still has quite a way to go. Again, his possibilities are that we are either going to bounce here to finish wave 2 of 1, or that we have already begun wave 3 of 1. Subwave 3 of 3 will likely feel like a crash. Right now support is at 1,070, once we get below 1,040 we’ll break the large H&S neckline and that will produce a target down around 860.
Are the fundamentals really that bearish? Yes, they are. Spain, whose top rated debt recently lost its AAA rating, has 5 times the amount of debt as Greece. Most of Greece’s debt is held by banks in Europe. A large percentage of Spain’s debt, however, is held by banks in the United States. When defaults or write downs happen, our banking system is going to be left standing naked and dramatically over leveraged – as in insolvent. This is inevitable. Why? Because incomes cannot possibly support the debt that’s been created. Creating more debt will not work. The only reason our major financial institutions still stand today is because of accounting fraud – period.
Equity futures are down substantially this morning with the DOW all the way back down to just above the 10,000 area. The dollar is higher, while the Euro made a new low overnight. Bonds are higher, oil is lower, and gold continues higher against the rest of the commodity complex signaling underlying trouble in our monetary system and geopolitical instability.
Unfortunately, it was a very memorable Memorial weekend… BP’s “topkill” failed and their stock is down 14% this morning. Israel boards activist ships in international waters, 9 activists die. China’s economy continues to show signs that the bubble is bursting, Europe continues to show debt stress, while Korea tensions remain high. Of course no change to the fundamental debt picture and so while these may sound like transitory events, they are not, they are just the beginning of the “other” events that will likely continue to ripple around the globe – the underlying tension is a money system that doesn’t work… the bad math of debt allows other events to rise.
Don’t worry though, “buy when fear is high” is the usual mantra, and that was again being touted on Bloomberg this morning:
June 1 (Bloomberg) -- The biggest monthly drop in the Standard & Poor’s 500 Index since February 2009 is ratifying Mohamed El-Erian’s prediction for a new normal of below-average returns. Analysts say not so fast.
Combined price estimates from more than 2,000 forecasters tracked by Bloomberg show the S&P 500 will rise 25 percent in the next year, the fastest projected rate since February 2009, data compiled by Bloomberg show. The rally above 1,350 will be led by industries most tied to the economy, according to analysts who boosted individual share projections by an average of 0.9 percent in May, the 14th straight monthly increase.
The estimates show Wall Street firms are discounting El- Erian’s assertions as well as Europe’s credit crisis and instead focusing on economists’ growth projections, which call for U.S. gross domestic product to expand 3.2 percent this year and 3.1 percent in 2011. Analysts are telling investors to buy landlord AvalonBay Communities Inc. and tractor maker Deere & Co. to benefit from the fastest expansion in six years.
The S&P is forecast to rise 25% next year? LOL, will that be after it falls another 50%? To me this type of statement is proof positive that bearish extremes are not anywhere near.
By the way, the monthly drop in the DOW was the largest May drop in 70 years! It was the largest May drop in the S&P going back to 1962. "Sure," say the bulls, "but the next two months that follow were average up months." That's exactly the type of thinking that occurs when you don't understand the underlying fundamentals.
ZeroHedge ran an article this weekend stating that the ECB has been withdrawing the liquidity, now 78 billion Euros, it recently placed as a part of that trillion Euro bailout. It would seem that they are pandering to the markets which reacted quite negatively to the bailout. That type of flip-flopping will not calm markets, it shows that they are grasping at straws and don't understand the fundamentals or psychology at play.
Manufacturing ISM and Construction spending are released later this morning, the big report of the week will be the Employment situation released on Friday. Speaking of employment, HP just announced that 9,000 more layoffs are coming.
Below is a 60 minute chart of the SPX. To me this now clearly looks like we just dropped out of a rising wedge that was wave 4 and that we are now in wave 5. Together, the five waves comprise the larger wave 1 down. Rising wedges when broken to the downside usually target the base of the wedge at a minimum, thus I would expect prices to fall at least to the prior lows and probably to new lows on this wave.
If the wave 5 scenario is playing out, we should get a wave 2 of 5 bounce and then more sharp selling. Wave 5 would be followed by a significant and longer lasting bounce for a larger wave 2.
Keeping mindful that there are always other possibilities, it’s also possible that the rising wedge is not wave 4, and that it’s the ‘a’ wave of an a,b,c. I personally don’t like that count, but it’s there. If that’s playing out, then we will rise up into the 1,140 area sooner, that move will then likely be followed by a larger wave 3 down movement.
SPX 1,090 is still a key level. Get back above there and it's more bullish, otherwise bearish. There's support in the 1,056 and then 1,040ish levels. A break below that 1,040 level will trigger what looks like a larger Head & Shoulder's pattern - we may need more time to fully develop the right shoulder, but it doesn't have to be proportional time wise. It may be that we develop a more complex movement that takes us up to 1,140 and that would make it more proportional.
Hey, I hope you had a good weekend. It was a rain filled one in the Great Northwet, we'll just have to take this week as it comes...
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