Madoff, The SEC, Tax "Compromise", And Predator Drones

Quick highlights to wrap up the day:

Jeffry Picower's estate has agreed to settle civil suits to the tune of $7.2 billion. What? He's not a household name? He was an investor in Bernie Madoff's trust fund, and he died back in October of 2009. The $7.2 billion represents the profits of his investment in the Madoff Ponzi Fund.

The SEC has issued subpoenas to a number of banks[1]. Why? It's the next step into their ongoing investigation of how they packaged mortgages for sale to investors. They're looking into the role of the "master servicers", which are the firms that select and maintain the pool of home loans that go into mortgage-backed securities. They also want to know how the performance of the underlying loans were monitored and whether or not the loans were properly transferred to the trusts. At least, that's what the anonymous source says, because it's not public. Why? Beats me[2].

President Obama signed the tax cut "compromise" bill into law today. Christmas is saved.

And we have apparently sent armed drones into Pakistan, where over 50 people have been killed. There's no word on whether or not we asked permission before violating Pakistani air space yet again[3], but we are being assured that only militants have been killed.

[1] Including Bank of America, JPMorgan Chase & Co, Goldman Sachs and Wells Fargo.

[2] It wouldn't be the first time the SEC hasn't bothered to really take action on information, though. I'm not saying that they're going to cover this up. Just that it wouldn't be the first time.

[3] Apparently we launch attack drones into Pakistan on a several times weekly basis.

Regional and State Employment and Unemployment (Monthly) News Release

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The latest Regional and State Employment and Unemployment news release (http://www.bls.gov/news.release/pdf/laus.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.
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In November 21 states and the District of Columbia had over-the-month unemployment rate increases, 15 had decreases, and 14 showed no change. Nonfarm payroll employment fell in 28 states, rose in 20 and the District of Columbia, and was unchanged in 2 states.

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Forecast Is for "Bad Craziness"

That's right. We're having one of those news days that cries out for the mad prose stylings of Hunter S. Thompson himself.

Unfortunately, you'll have to settle for me.

So let's get this party started right by inviting in the Crown Prince of Crazy himself, the Dear Leader Kim Jong Il and the People's Glorious Revolutionary Atomic Mushroom Brigade! South Korea has announced that they will be conducting a live fire artillery drill on Yeonpyeong Island from December 18-21. The response from North Korea Crazy? A neopolitan ice cream of insanity, offering three distinct flavors for the price of one. They are now accusing the south of attempting to "kick up hysteria of war of aggression against the DPRK"[1], they have put forward the claim that the reason the south is doing this is to undermine "the progress made in the June 15 era of reunification" and to derail "the dialogue and cooperation between the north and the south", and they are warning[2] that the live-fire exercise "will play out a more serious situation than on November 23 in terms of the strength and scope of the strike"[3].

There is some speculation that all of this is just a way to improve the north's position when negotiations begin again. Rather like the way a small child attempts to improve his position regarding the acquisition of a toy by pitching a tantrum. Only with high explosives. And death.

China, which is no doubt banging its collective head on its collective desk over the antics of its crazy eastern neighbor, has hit a 28-month high for consumer inflation. It's up 5.1% from November 2009 (mostly on food prices), about 210 bps higher than the 3% target they had for 2010 and 110 bps higher than their 2011 goal. This, of course, is considered an omen of rising reserve requirements and interest rates[4].

Spinning the globe around to Europe, Moody's has cut Ireland's credit rating from Aa2 to Baa1, putting them on the same level as Russia and Lithuania. That's still investment grade, but you almost have to throw the air quotes when you say that. Meanwhile, on day two of the EU summit to create a permanent financial safety net for the euro zone, leaders refused temporary steps such as increasing the size of the EU bailout fund or using the bailout fund to buy bonds. European traders pouted and demanded that the summit offer more short term guarantees, and possibly milk and cookies before bed.

On the positive side for Europe - or, at, for the two-time would be rulers of Europe - the Ifo Business Climate Germany is out. The business climate index, the business situation index, and the business expectations index are all showing an across-the-board 60 bps improvement. So, overall, businesses are doing well and expecting to continue to do well in Germany.

Closer to home, the House passed the tax "compromise" on a 277-148 vote. The IMF Managing Director is pleased, although I'm not certain why Reuters felt the need to bring his opinion into the article[5]. In possibly unrelated news, Senate Democrats also threw in the towel on passing a budget, and agreed to a temporary funding measure.

So that's some of what's driving the markets around. Fear and madness and bad craziness. And four witches.

[1] No, really. That's the official English translation.

[2] "Warning" as the word is defined in North Korea, means "kicking someone in the teeth out of nowhere, and then threatening them with a switchblade if they try to punch back".

[3] For good measure, they also threw a diplomatic bone to the US: "The state of armistice is persisting on the Korean Peninsula and danger of war is not defused there because of the U.S. hostile policy toward the DPRL and its wild ambition for aggression."

[4] And you don't even need to visit Delphi on the seventh of the month for that one.

[5] Although the CIA World Factbook confirms that our public debt as a percentage of GDP is actually 30 bps higher than Spain's, so maybe we should be courting the IMF's good graces now...

Quadruple Witching?

"Fair is foul, and foul is fair,

"Hover through the fog and filthy air."

The day is upon us. As a reminder, this is the day on which stock index futures, stock index options, stock options, and single stock futures all expire. Traditionally, it's a volatile day in the market.

Housing Gets Started, Unemployment Insurance Gets Claimed, And Spain's Pains Stay On The Plains

We've got some stuff happening today. About an hour ago, Housing Starts and Jobless Claims came out. Then, at 10 AM, we get the Philadelphia Fed Survey. Busy, busy day. And that's not even considering President Obama's tax cut "compromise" going to the House today[1], or FedEx (FDX) second-quarter profits missing expectations.

Last month, we had a heartily disappointing 519k new Housing Starts in October (we were expecting 590k). For this month, the Street is looking for 550k new starts. Meanwhile, last week, we saw 421k new jobless claims for the week ending 12/4 (marginally better than the 425k that had been predicted), and the Street is going conservative and predicting a mild improvement to only 420k new claims,

The reality is slightly better than expected. Housing starts for November hit 555k, beating the revised October figure of 534k (yes, the final number was revised upwards) by 3.9%. 465k of those were single-family homes, while only 72k were buildings with five units or more. 513k privately-owned housing units were completed in November (up 14.1% from October) and 530k new building permits were issued (up 4%). the bulk of these were in the region the Census Bureau describes as "South", so I guess that makes sense.

Turning to the First Time Jobless Claims, we came in at 420k new claims for the week ending 12/11, down 3k from the previous week's revised figure of 423k. Yes, that's right. The 12/4 421,000 new claims were revised upwards, meaning more people lost their jobs than was originally reported. Iowa and Idaho came out the best (they had a decrease in the number of claims), while 30 states had more than 1000 new claims (New York was worst off at +16,863, with North Carolina, Pennsylvania, and Georgia hot on it's heels with over 15k new claims each).

Combine all of this with the fact that Spain hasn't taken Europe's economy down in flames yet, and it shapes up to pretty good news for the morning.

[1] I'd expect it to be DOA. But I expected that when it hit the Senate as well, so now it's a wait-and-see game.

Everything Is More Expensive, But CPI And Industrial Production Will Still Be Counted A "Win"

We've got two major market movers for today - Consumer Price Index (CPI) and Industrial Production. The first tells us the overall change in the cost of living for consumers (i.e. everyone) and the second tells us about the rate of change in, well, industrial production.

Last month[1], the CPI was up a moderate 0.2%[2] while industrial production showed us a whopping 0.00% change. Will things be better this month? Let's find out.

Analysts were expecting an additional month of 0.2% increase in CPI (with a 0.1% increase in the core), and 0.4% increase in industrial production (with a capacity utilization rate of 75.1%). The reality?

The reality for the Consumer Price Index is a 0.1% increase, with the same increase showing up even after excluding food and energy costs. Groceries (well, "food at home") saw a 0.2% increase, while eating out saw a 0.3% increase. Energy costs went up across the board, with a 0.7% increase in gasoline costs, and a 4.2% increase in fuel oil costs.

And Industrial Production? Up 0.4%, with capacity utilization at 75.2%. Most of the losses came from final products, specifically consumer goods final products (down 0.5%), while business equipment and nonindustrial supplies were the big winners (each category up 0.9%).

All in all, the market will see this as a minor win. Both measures beat expectations, after all. Just try not to think too hard about how things are 1.1% more expensive than November 2009.

[1] October. These are lagging indicators, after all.
[2] Or 0.00% if you look at "core" CPI. I won't rehash that argument today.

PPI, Retail Sales, And Upper Respiratory Tract Infections

I've been terribly sick - upper respiratory tract infection. There is no joy in the Great Redoubt right now.

The Producer Price Index and the November Retail Sales figures are out right now - have been for a few hours, in point of fact.

October saw the PPI up 0.4% (far better than the expected 0.8%), with "core" PPI declining 0.6%. For November, analysts were expecting a 0.7% increase in PPI, with a 0.3% increase in the core. Retail sales were surprisingly strong last month as well, showing 1.2% increase; analysts weren't that optimistic about November, and called for only a 0.6% improvement.

If you've been paying attention the news, and not to a horrible hacking cough, you already know how all of this came down. But what the heck, let's have a look anyway.

The official word on November PPI is a 0.8% increase in overall finished goods PPI, with a 0.3% increase in "core" PPI. The PPI increased 1.0% for finished foods (rising on eggs, fresh fruits, and melons) and 2.1% for finished energy (mostly on gasoline prices). Meanwhile, retail sales were up 0.8% overall.

At 2:15 PM EST, look for the FOMC to announce that they are concerned about current economic conditions, and that they are holding the Fed Funds target rate to between 0 and 25 bps. One of the Fed Bank Chairmen will probably vote in opposition.

No witty commentary today. Sick.