"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Wednesday, January 26, 2011

Market News That Isn't The State Of The Union

Yeah, sure, the State of the Union and its promises of job creation and freezes in government spending and reductions in corporate taxes has excited the market.  But that's not everything that's going on today.  What else is happening?
 
Well, let's start off with Monday's approval for a $150 million settlement with the Securities and Exchange commission.  The SEC had originally filed two lawsuits against Bank of America, alleging that the bank had misled shareholders about Merrill Lynch bonus payouts (about $3.6 billion) and losses (around $15.8 billion) when they were persuading shareholders to approve the purchase of Merrill Lynch.  The approval of the settlement ends BofA's legal battle with the SEC, but US District Judge Rakoff seems to have made it clear that he doesn't really care for the settlement.  He stated that it was clear that BofA failed to adequately disclose the scope of Merrill's losses or bonus payments - "a prudent bank shareholder, if informed of the aforementioned facts, would have thought twice about approving the merger" - and indicated that he approved the settlement only because the law requires him to give "substantial deference to the SEC in these matters.  Both Bank of America and the SEC are reported to be pleased with the results, but legal experts believe that the scathing acceptance will actually serve as both guidance and ammunition for additional lawsuits against Bank of America.
 
In a separate suit, Bank of America has agreed to pay $10 million to settle SEC charges that "first, Merrill's proprietary traders misused institutional customer information which was improperly disclosed by the firm's market makers.  Second, Merrill traders improperly charged mark-ups and mark-downs on certain riskless principal trades[1] of institutional and high net worth customers for which the firm had agreed to charge only a commission equivalent."  The settlement is largely considered a slap on the wrist.  But, before you get outraged by this, consider the fact that this Equity Strategy Desk hasn't operated since BofA took over Merrill, so BofA is paying a fine for something they didn't actually do.
 
The SEC is also looking into changing the legal definition of an "accredited investor".  Currently, anyone with a net worth of more than $1 million qualifies.  The proposed new definition, while leaving the $1 million threshold intact, would require the value of an individual's home to be excluded from the net worth calculation.  The change is proposed to bring securities regulations into compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the proposal is open for comment until March 11, 2011.
 
Toyota, which is still struggling to no longer known as the Russian joke company[2], has announced that it will recall over 1.7 million vehicles worldwide.  1.34 million vehicles are being recalled because of a faulty fuel pump and connecting pipe[2], and 335,000 Lexus vehicles are being recalled due to a faulty fuel pressure sensor.
 
New Home Sales figures are due out at 10 AM, and the consensus estimate is that sales will climb to a level of 300,000 units for December 2010.
 
The FOMC announcement is due out at 2:15 PM EST.  The markets will no doubt hold their collective breaths, then relax when the Fed announces that they will not change anything.  Expect to hear that they are glad to see economic optimism, but remain concerned about unemployment.  You know, the same things they always say.
 
[1]  According to FINRA, this is "a transaction in which a member after having received an order to buy (sell) a security, purchases (sells) the security as principal and satisfies the original order by selling (buying) as principal at the same price.
[2]  "In Soviet Russia, the car accelerates you!"
[3]  Toyota's second biggest recall for a single defect.

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