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

The Required Disclosures

The information presented in this blog and its individual articles is provided for informational use only and should not be considered investment advice or an offer for a particular security. The contents reflect the views and opinions of the individual writer as of the date the article was written and do not necessarily represent the views of the individual writer on the current date. They also do not in any way, shape, or form represent the views of the Firm Never-To-Be-Named. Any such views are subject to change at any time based upon market or other conditions and The Great Redoubt and its individual writers disclaim any responsibility to update such views. These views should not be relied on as investment advice, and because investment decisions for any security are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any contributor to The Great Redoubt. Neither The Great Redoubt nor any individual author can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.

Saturday, January 15, 2011

This Is NOT How Arbitration Works....

Ladies and gentlemen, let me introduce to you Vincent McCrudden.

Actually, that LinkedIn profile doesn't really do him justice. Here's how he describes himself on the web site of Alnbri Management, LLC:
Vincent McCrudden - CEO

Mr. McCrudden worked on Wall Street for over 20 years. He started his career on the floors of the New York Commodity Exchange executing orders for some of the largest institutions in the world including hedge funds and Commercial & Investment Banks. He then ran Global Desks in such areas as Foreign Exchange, Credit Derivatives & Equity Derivatives. He taught derivatives courses at the New York Institute of Finance.

Mr. McCrudden is a former soccer player at the University of Rhode Island, and then played professionally for the Tampa Bay Rowdies and Minnesota Strikers of the NASL. He also was an amateur boxer and has raised money over the years for the NYPD for slained [sic] and disabled officers. He has two beautiful children.
Sounds pretty straight forward, right? But wait, there's more. Here's the next paragraph:
Mr. McCrudden has spent the past 13 years and counting combating a colluded Government attempt to discredit and harrass Mr. McCrudden through repeated bogus procedures. Mr. McCrudden has sought relief by suing multiple agencies and officials for $1 Billion. But this has not stopped certain higher ranking officials because they know that Judges are Government employees too. In order to stop the libel, slander and harrassment at the hands of these entities, and with no available forum in the US justice system, Mr. McCrudden has started a process to enact payback for years of Government abuse. As a twice survivor of the WTC bombings, Mr. McCrudden knows all too well what the Government can do in the "name of public interest". Mr. McCrudden believes the 23 friends he lost on 9-11-2001 would have had their full support. Wake up my fellow citizens and middle class and go look into the mirror, because you my friends are the face of the new Al Qaeda! Civil disobedience can be a start for justice. Its us (middle class) against them (Government officials and the Bourgeosie). Start acting now before its too late!
Yes, sir. The crazy crawls out on paragraph three. FINRA BrokerCheck reveals that he was fined $60,063.81 and suspended from association with any FINRA member firm in any capacity for one year (beginning 12/20/2010) for "making abusive, intimidating and threatening communications to his former employer in violation of NASD Rule 2110" and "for inducing the filing of a misleading and inaccurate form U5 by his former firm, also in violation of NASD Rule 2110."

In addition, he is currently embroiled in a civil action brought by the United states Commodity Futures Trading Commission for failing "to register with the CFTC as an Associated Person (AP) of a Commodity Pool Operator (CPO), acting as a CPO without being registered and failing to give notice of an inaccurate claimed exemption from registration filed with the CFTC. Specifically, from May 8,2008, to September 30, 2008, McCrudden allegedly acted as an AP of his firms, without being registered, while soliciting customers to participate in a Commodity Pool."

So he's crazy? So he apparently hasn't met a securities regulation he hasn't violated? So what?

Well, apparently his call to "start acting now before its too late" boils down to "kill 47 SEC officials".

The FBI has him in custody, now. Making wild threats against government and SRO officials from Singapore, and then getting on a plane to come back to the US, that sort of thing is pretty much just asking the FBI to be waiting in the airport for you. A copy of the official criminal complaint against McCrudden is up on Scribd, and it is ten pages of glimpses into sheer high-grade insanity.

What can we learn from this?
  1. Register with the SROs that regulate your business. It's simpler in the long run.
  2. If you don't register with the SROs that regulate your business, don't threaten the regulators with death when they bring civil action against you. They're just doing their job.
  3. If you must threaten the regulators with death, consider not doing it on your company web site. It establishes probable cause.
  4. If you must threaten regulators with death on your company web site, Singapore is not a great place to do it from. We have an extradition treaty with them.
  5. If you must threaten regulators with death on your company web site while you are in Singapore, strongly consider not returning to the United States for a while. It attracts attention from the authorities.
  6. Before threatening any regulators with death from any location in the world, take your meds. They will quiet the voices, and you may see things in a different light.

Friday, January 14, 2011

And, On The Heels Of That, More Domestic Economic Data Than You Can Shake A Stick At!

The United States, not to be outdone by its European relatives, has a massive stack of economic data coming out today as well.  CPI, Retail Sales, Industrial Production, and Consumer Sentiment.
Starting with the CP, the Street is expecting to see a 0.4% increase for December (up 30 bps), with the "core"[1] unchanged.  According to the Bureau of Labor Statistics report, CPI is actually up a seasonally-adjusted 0.5% for the month (and a unadjusted 1.5% for the year).  Food prices were up only 0.1% for the month (1.5% for the year) and energy prices were up 4.6% for the month (7.7% for the year) but, since they don't really count[2], you'll be gratified to know that "core" CPI only increased 0.1%.  So, even though an average 24.6% of your budget saw a 7.7% increase in costs, you'll be gratified to know that you didn't really see all that much change in your living expenses[3].
So, on to Retail Sales, where the Street - feeling optimistic on the preliminary good news about the holiday season - is expecting to see a 0.8% increase in sales for December (with a 0.7% increase even taking out auto sales).  The results?  Well, according to the US Census Bureau, they really weren't as good as hoped for.  Seasonally adjusted, retail sales were up only 0.6%[4] for December (6.6% for the year).  Ex-auto, sales were up only 0.5% for the year.
So far, not so good.  Maybe Industrial Production will be better.  The Street is looking for a 0.5% increase for December, with a capacity utilization rate of 75.6% (a mildly optimistic 40 bps improvement).  The actual data comes to courtesy of the Federal Reserve, where we learn that we have a 0.8% increase, handily beating expectations.  For the year, industrial production is up 5.9%.  And capacity utilization?  That's at a level of 76%, also handily beating expectations.
That was a nice bright spot.  Let's see if Consumer Sentiment continues the trend.  December 2010 consumer sentiment was at 74.5%, and the street is looking for a 50 bps improvement to 75.0%,  The actual data is out (but not yet up on the web site), showing that consumer sentiment shrank to 72.7%.  Ouch.
[1]  Again, don't get me started.
[2]  Volatility, don't y'know.  Skews the results, don't y'know.  Can't be trusted, dashed blighters.
[3]  I got started, didn't I?
[4]  With a margin of error of +/-0.4%, so that could actually be anywhere from 0.2% to 1.0%.

International Metrics!

Let's start the cavalcade of international data off with Japan, where their Corporate Goods Price Index (think PPI, here) was up 30 bps to close out at a 0.4% increase for the month of December.  This means that, even though analysts were expecting to see 2010 CGPI to finish with a 0.8% increase, Japan has actually experienced a 1.2% increase for the year.  On average.  Petroleum & coal products were up 7.8% for the year and nonferrous metals were up 10.9% for the year, while information and communications equipment were down 5.8% for the year and electronics components & devices were down 3.7% for the year.
Hopping across the Sea of Japan to China, we find not so much economic data as economic news.  Chinese fund managers are gearing up for a series of sweeping regulatory reforms that will simplify the approval process for launching new funds, and will allow employees of fund firms to own stakes in their own companies (which is seen as giving fund managers extra incentive to perform, since their money is at stake as well).  They also plan to crack down harder on insider trading.  Despite this latter reform, international firms are nearly as excited about the changes as Chinese firms, as it will most likely allow increased international competition in China.
Bypassing the wastelands of Central Asia and the Middle East, we turn our attentions now to Europe.  Germany has released CPI figures for December and the end of the year, and they're right in line with expectations.  December saw a 1.0% monthly increase, with a 1.7% increase for the year - exactly what analysts were expecting to see and utterly unchanged from November.
Italy has joined it's one-time ally in releasing CPI data, and is "me tooing" the German "right in line with expectations" results.  For December CPI was up 0.4%, up 1.9% for the year - again, exactly what analysts were expecting to see and utterly unchanged from November.
Even the European Union is climbing on the CPI bandwagon, with HICP (Harmonized Index of Consumer Prices) coming in at 0.6% for December and 2.2% for the year.  This is exactly what analysts were expecting to see but, in a dramatic change of pace after Italy and Germany, December HICP was up 50 bps.
Ah, but CPI is not the only thing Europe has on its collective mind this morning.  Swiss PPI jumped 50 bps in December to close at a 0.3% increase (missing expectations by 10 bps), with PPI for 2010 also wrapping up with a 0.3% increase - not too shabby in terms of actual inflation, but still missing expectations for the year by 10 bps.
Great Britain overachieves on reporting PPI, looking at actual changes in input costs[1] as well as the change in output prices.  For December and for the year, output prices were up 10 bps.  The December output price increase was 0.5% (missing expectations by 10 bps), and for 2010 output prices were up 4.2% (missing expectations by 20 bps).  Input price changes were far more brutal for producers.  December input prices jumped 250 bps to finish up at 3.4% (missing expectations by 190 bps), while for the year input prices jumped 320 bps to wrap up at a 12.5% increase (missing expectations by 230 bps).  I have really only two things to say about that:
  1. Ouch.  And,
  2. Look for British output prices to work upwards in the next few months, as British producers look to keep profit margins from shrinking.
Finally, let's talk about European trade deficits.  Italy's trade deficit widened by E300 million to finish at E2.95 billion for November 2010.  The European Union as a whole saw their trade surplus shrink by E5.4 billion which, given that they only had a E3.5 billion surplus, means that they ended up with a E1.9 billion trade deficit.  This beat expectations, but only in the sense that a group of football hooligans and lager louts mobbed expectations and ended the experience screaming at the expectations to "bite the curb!" before stomping on the back of the expectation's head[3].
[1]  That is, the change in the cost of the raw materials and fuel used by the producer - although, given the current fetish for "core" figures, I'm surprised they actually use fuel and energy costs in calculating this.
[2]  This, on the other hand, measures the change in the prices asked for the goods the producer produces.
[3]  A colorful and roundabout way of saying that analysts were expecting to see the trade surplus shrink, but remain a E1.9 billion surplus.

Thursday, January 13, 2011

National "Pat Robertson Should Shut Up" Day

A year ago yesterday, a magnitude 7.0 earthquake devastated the nation of Haiti. A massive outpouring of international aid was the result.

A year ago today, a massive gusher of racism and hatred struck the nation of Haiti.

Mr. Robertson, on behalf of the portion of the world that isn't a collection of small-minded bigots that profit on misery and hatred, let me just say (and encourage everyone else to join me in saying):

"Shut up. We're sick of you and your ilk."

Where is George Takai when you need him?

Producer Price Index News Release

The latest Producer Price Index news release (http://www.bls.gov/news.release/pdf/ppi.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.

The Producer Price Index for Finished Goods rose 1.1 percent in December 2010, seasonally adjusted. This advance followed increases of 0.8 percent in November and 0.4 percent in October. The index for finished goods less foods and energy moved up 0.2 percent.

News releases archives: http://www.bls.gov/schedule/archives/all_nr.htm
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What's Happening At Home?

The short answer is:  we're unemployed, business costs are up, and we're running a significant (but mildly improved) trade deficit.  Hooray?
First off, the US International Trade Balance.  In October, we had a revised trade deficit of $38.4 billion.  There is no real optimism on the Street that this will improve - the consensus is that the trade gap will grow to $41.0 billion.  And the results?  According to the US Bureau of Economic Analysis the trade deficit actually shrank to only $38.3 billion, a $100 million improvement that also beats expectations by a substantial amount[1].  Drilling down a little, we see that:
  • The goods deficit increased $100 million
  • The services surplus increased $200 million
  • The not-SA advanced technology deficit was $11.2 billion,(a $1.6 billion increase)
  • We have a trade surplus with Hong Kong, Australia, Singapore, and Egypt.
  • We have a trade deficit with China, the EU, OPEC, Japan, Mexico, Germany, Ireland, Canada, Nigeria, Venezuela, Korea, and Taiwan.
Moving on to the Producer Price Increase, there is little optimism there either.  The Street is looking for a 10 bps increase for December (to a 0.9% increase), with "core"[2] PPI decreasing 10 bps to a level of 0.2%.  The Bureau of Labor Statistics has covered for this one, reporting that the PPI actually increased 30 bps to 1.1% (ouch), with "core" CPI decreasing to the expected 0.2%.  Here's the highlights;
  • Food production costs increased 0.8% for the month.
  • Energy production costs increased 3.7% for the month.
  • For the year, the cost to produce finished goods increased 4.0%
  • Production costs for intermediate goods and components increased 1.0%.
  • Production costs for crude goods and raw materials increased 4.0% for the month.[3]
And then, just when you thought things couldn't get any worse, we have the First Time Jobless Claims report.  If you recall, the week ending 1/1 had surprisingly good news - only 409,000 people (SA) filed for unemployment.  The Street is feeling optimistic on that news, and is calling for a further decline to only 405,000 new first time claims.  Unfortunately, the US Department of Labor is a dash of cold water to the face of that optimism.  We've got a seasonally adjusted 445,000[4] first time claims for the week ending 1/8, up 35,000 from the revised 1/1 figure of 410k first time claims.  And the details?
  • Not seasonally adjusted, 9,193,838 people were receiving unemployment insurance benefits as of the week ending 12/25/2010, up 422,523 from the previous week.[5]
  • Only two states saw UI claims decrease by more than 1000, while 14 saw UI claims increase by more than 1000.
[1]  $2.7 billion, to be precise.  A hit!  A palpable hit!
[2]  Just... just don't get me started.
[3]  Expect to see January and/or February PPI increase on that bit of news.
[4]  The number of actual claims filed was 770,413.  So both the trend and the actual situation are terrible.
[5]  I guess they got to keep Christmas by losing their situations?

What's Happening Abroad?

Everything.  Everything is happening abroad.
Let's start with the antipodes, where Australia has released it's Labor Force Survey.  This is, in essence, the Australian equivalent of the US Employment Situation, and it's mixed.  Employment only increased by 2300[1] (missing expectations by 27,700), but the unemployment rate dropped 20 bps to 5.0$ (also beating expectations by 20 bps).  On the down side, the indications seem to be that this decline in the unemployment rate was mostly due to people falling into the "marginally attached" category, so it's not really a cause for celebration.
Spinning westward to Europe, we find that France released its December CPI at 1:30 AM EST, and the news is not good there either.  CPI increased 40 bps for the month to end up 0.5% (missing expectations by 10 bps), with 2010 CPI finishing at 1.8% (missing expectations by 10 bps).
Escaping from Dunkirk and coming ashore on the British Isles, where even though large tracts of Europe and many old and famous States have fallen or may fall into the grip of the economic downturn, they shall not flag or fail.  Specifically, Great Britain has released Industrial Production figures for November and the Bank of England has decided what they will do with the official interest rates and their quantitative easing ceiling.  The industrial production figures are a respectable, if slightly disappointing 60 bps increase to close at 0.4% (which still missed expectations by 30 bps).  Manufacturing output remained stable at 0.6% growth, beating expectations by 10 bps.  Meanwhile, the BOE has decided (to nobody's surprise) to leave their official interest rate unchanged at 0.5% (with the QE ceiling at £200 billion).
Crossing back across the English Channel to push across France, we arrive in Frankfurt, Germany, where the European Central Bank has, to nobody's great surprise, also left their benchmark rate unchanged at 1.0%.
[1]  That's 1700 full time jobs and 600 part time jobs.

Wednesday, January 12, 2011

The Beige Book, Honey Laundering, And Fiduciary Standards

The Fed's Beige Book is out for January, providing an insight into some of the economic data that will drive Fed decisions about interest rates and other stimulus activities at the next FOMC meeting.  And right now, that insight seems to point towards more of the same.  Here's some highlights from the summary:
  • Economic activity expanded moderately from 11/2010 through 12/2010.
  • Conditions were better for manufacturers, retailers, and nonfinancial service than it was for financial services or real estate.
  • Manufacturers selling into the construction sector remained weak in the Boston, Atlanta, and Dallas districts.
  • Retailers did extremely well, thanks to the holiday season.
  • Retailers and manufacturers indicate that costs are rising, but competitive pressures are minimizing cost pass-through into final prices.
  • Most businesses are cautiously optimistic about the future, and businesses in the St. Louis, Minneapolis, Kansas City, and San Francisco Districts plan to increase hiring. The Philadelphia District, on the other hand, sees conditions improving but not strong growth for 2011.
  • Production levels are high and/or increasing, although Philadelphia District manufacturers describe the flow of new orders as "erratic".
  • The Boston, Cleveland, and San Francisco Districts are concerned about rising input prices.
  • Automobile sales were up in eight districts, and tourism was strong in six districts.
  • Residential real estate and new home construction was weak across all Districts, mostly on concerns about the pace of economic recovery (particularly employment).  the Philadelphia, Atlanta, and Chicago Districts also cited trouble in obtaining credit as a constraint on demand.
  • Loan demand was down in three Districts, with an increase in only one District.  Credit quality is reported as improving across all Districts.
  • Agricultural production was weak, mostly on the fact that it's winter out there, and output prices were up.
  • Labor markets are firming, but with no real upward pressure on wages.  Three Districts (Cleveland, Richmond, and Atlanta) reported plans to increase work hours instead of hiring.
In non-market news, the US government has essentially subpoeaned 600,000 people in regards to WikiLeaks.
Rising food prices are driving a new crime with a vaguely familiar name:  honey laundering.
The European Union is in talks with the International Monetary Fund to put together a package to solve Europe's debt crisis.  No specific word on what the package would be, but it seems to include an increase in the lending ability of the bailout fund (which can only lend E250 billion).
The SEC is getting ready to release a study on the regulation of investment advisers, looking at the possibility that they should be overseen by a self-regulatory group such as FINRA (this could be out on Friday), and a second (due January 21) that explores the imposition of a uniform fiduciary standard for brokers and investment advisers offering advice to retail customers.  Both have potential for significant industry impact, but the second will - if implemented - have the most significant impact.  It would eliminate the lower suitability standard that non-advisor brokers have, that only requires them to offer "suitable" products.  Advisors, held to a fiduciary standard, must actually act in the best interests of the client.  Look for excitement in this regard in the next few months.

Get Rich Or Die Tryin

So, have you ever heard of H&H Imports, Inc?
No?  Well, you must not be one of the 3.8 million Twitter followers of rapper 50 Cent, who seems to have indulged himself in a little[1] market manipulation last weekend.  His tweets included statements like "You can double your money right now.  Just get what you can afford"[2].  A few others have been archived on Thisis50.com.
But don't take my word for it.  Here's the chart for HNHI:
Pretty much $0.05/share until January 10, the first trading day after the tweets went out.  That day, HNHI opened at $0.45 and closed at $0.39, with a volume of 8.9 million shares (about 10 times greater than normal).
For what it's worth, it doesn't appear that Curtis Jackson III[3] was indulging in a "pump & dump" scheme, mostly because he owns 30 million shares (12.9%) of the company and there are no SEC filings indicating that he attempted to sell during that time.  On the other hand, he's got a massive stack of warrants that are really only valuable to him if HNHI manages to get its stock price above - get this - $0.50 per share.
What's the world coming to, when you can't trust a rapper to give you useful investment advice?
[1]  For purposes of this article, "little" is defined as an estimated $8.7 million.
[2]  There were others.  They have been deleted.
[3]  That's 50 Cent's real name.

U.S. Import and Export Price Indexes News Release

The latest U. S. Import and Export Price Indexes news release (http://www.bls.gov/news.release/pdf/ximpim.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.

U.S. import prices rose 1.1 percent in December, after increasing 1.5 percent in November and 1.1 percent in October. Import prices advanced 4.8 percent in 2010. The price index for U.S. exports increased 0.7 percent in December and 6.5 percent over the past year.

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"When Johnny Comes Marching Home Again, Hurrah, Hurrah"

"He'll find Import and Export Prices then,
"Hurrah, Hurrah!
"Tim Geithner speaks and the Beige Book comes out
"The Treasury Budget will also come out
"And we'll all place trades as Johnny comes marching home"
That's a convoluted and musical way of letting you know what's due out today.  I'm in a mood.  What else can I say?
Import and Export Prices are, of course, an index that tracks the overall change in the cost to import products and the overall revenue received from exporting products.  If export prices rise faster than import prices, that can indicate a narrowing trade deficit.  To prime the pump, both import and export prices were up 1.5% in November.  Looking to December, the Bureau of Labor Statistics shows us that import prices rose 1.1% in December (for an overall 4.8% increase for the year) while export prices only increased 0.7% in the same month (but were up 6.5% for the year).  Drilling into some specifics:
  • Fuel import prices were up 4.1% for December, 11.9% for the year.  This is paltry compared to 2009, which saw a 62.2% price increase.  Import petroleum prices were up 13.7%, but import natural gas prices were down 11.3%.
  • Agricultural export prices were up 1.7% for December, taking advantage of those rising world food prices and further boosted by cotton prices (up 10.5%) and soybean prices (up 5.0%).  For the year agricultural export prices were up 20.2% (with cotton prices - up 107.0% - in the driver's seat)
Meanwhile, Secretary Geithner's speech is banging the drum about how China's refusal to allow the yuan to appreciate is bad[1].  "China still closely manages the level of its exchange rate and restricts the ability of capital to move in and out of the country.  These policies have the effect of keeping the Chinese currency substantially undervalued."  China[2], however, does not appear interested in being lectured on how to maintain a viable economy by the United States[3], and Geithner even noted that this is driven more by a desire to reduce the competitive advantage possessed by Chinese exporters.
The Beige Book and the Treasury Budget are due out a 2 PM.
[1] M'kay?
[2]  Which has both a trade and a budget surplus.
[3]  Which has neither a trade nor a budget surplus.

"Over There, Over There, Say A Prayer, Say A Prayer For Over There"

"For Metrics are coming,
"Metrics are coming,
"And they've been announced Over There."
Let's start with Italy, shall we?  Industrial Production figures were released about 7 AM EST for that first among PIIGS nations, and results are actually not terrible.  They recorded a 1.1% increase in production for November (up 120 bps from October, and beating expectations by 0.5%).  Now if they can just get the trains running on time[1].
Moving on, Great Britain reported their merchandise trade figures around 4:30 AM EST, showing a trade deficit of £8.74 billion in November (expanding by £150 million from October and missing expectations by £340 million).
Finally, the European Union reported Industrial Production figures for the EU as a whole. November wrapped up with a 1.2% increase, unchanged from October but beating expectations by 70 bps.
[1] *rimshot*

Despire Failure, Most Public Pensions Safe

Well, those of you who actually still have pensions will be gratified to know this.

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Despite Failure, Most Public Pensions Safe

Pensioners and investment management professionals need not worry about retirement plans going bankrupt, experts say, despite a recent event that saw a municipal pension in Alabama go belly-up.

Most believe the undoing of the Prichard, Ala. pension was a one-time event, one that is not likely to be repeated elsewhere. In the case of Prichard, which is a small community near Mobile, pension executives knew of the impending failure, yet chose to let the system fail. It is no longer paying benefits to its retirees.

“I think this [pension failing] can be a one-off,” says Keith Brainard, research director for the National Association of State Retirement Administrators. “Everything I have seen about this tells me that the city saw the warnings and didn’t take action.”

Brainard, who has also worked at the Arizona State Retirement System as a manager of budgets and planning, says most pensions have enough assets to continue paying benefits for years. “For the ones that don’t, if they haven’t taken action yet, they likely will take action [soon],” he states. “Based on my information, I don’t expect [this occurrence] to catch fire.”

Despite Brainard’s confidence in the public pension industry, there are numerous states which are facing funding challenges. One of the most glaring is Illinois, where several state-wide pension plans have had to sell off securities in recent months to make pension benefits.

For example, as of last month, the $10.4 billion Illinois State Board of Investments had pulled nearly $500 million from its long-only asset classes to pay benefits – a case that distinctly illustrates managers being hurt by funding issues. The pension, which has taken out $80 million per month over the past six months, has seen its assets dip by 5% as it awaits a state Senate vote to approve a bond sale – a vote that would mean a $1 billion infusion if passed. Other state pensions would also benefit from that bond issue.

Municipalities in other states are feeling pension pain too, such as the town of Vallejo, Calif. The small city near San Francisco declared bankruptcy in 2008 and is now attempting to solve its shortcomings. According to a recent Bloomberg article, Vallejo is trying to deal with $195 million worth of unfunded pension obligations, its largest liability. The city is currently drawing up blueprints for its bankruptcy exit plan.

Despite such funding issues, public pensions usually have safety nets, however, to save pensions if problems do arise, says Ray Edmondson, CEO of the Florida Public Pension Trustees Association.

“If a [Floridian] city calls for a financial emergency, the state will take over, so the [retirees] are OK,” says Edmondson, adding there are strict laws on this issue to avoid pension failures. “And then there is [pension] insurance,” he adds

There are tens of thousands of public pensions in the U.S., he says, and the fact that so few have failed should lead one to a conclusion that this is not a trend.

“The pension plans are designed not to go bankrupt,” Edmondson states. “All we ask is that if the politicians negotiate benefits, that they then fund them.”

Schwab to Pay $119 Million in Yieldlus Settlement With Regulators

Just to put this fine in perspective, Charles Schwab's Q3 2010 net income was $335 million.  This fine represents about 35% of that income.

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Schwab to Pay $119 Million in YieldPlus Settlement With Regulators

Schwab has agreed to pay $119 million to settle with the SEC, Finra and Illinois regulators over misleading statements regarding its YieldPlus Fund.

The Securities and Exchange Commission also brought fraud charges on Tuesday against the firm’s former chief investment officer for fixed income and a current executive VP. That case continues.

The SEC claims the two executives failed to inform investors adequately about the risks of investing in the fund. While the fund was described as a cash alternative with only slightly higher risk than money market funds, it was actually much riskier than money funds, the SEC says in a press release.

Schwab expects to include an after tax charge of $97 million in its fourth quarter financial results related to the settlements, according to a statement from the firm.

Schwab neither admits nor denies the SEC’s findings.

“Schwab has acted in good faith by working with the SEC and FINRA to address their concerns as well as by resolving most client claims including entering into a substantial settlement of a federal class action lawsuit,” the firm states. “We are pleased that the bulk of associated payments will go directly to YieldPlus shareholders, further reducing the impact of the credit crisis on them.”

Indeed, private litigants nationwide that have sued Schwab over losses in YieldPlus will receive $200 million in a settlement with the firm; $35 million is allocated to California investors suing under state law.

The SEC also found that the fund deviated from its concentration policy without obtaining required shareholder approval. The fund invested about 50% of its assets in private-issuer mortgage-backed securities; its concentration limit was 25%, according to its policies, the SEC says.

Schwab had argued that it did not need shareholder approval to increase the fund’s investments in mortgage-backed securities.

The fund’s assets under management hit a peak of $13.5 billion in 2007, but declined to $1.8 billion during an eight-month period due to redemptions and declining asset values, according to the SEC.

While the fund’s net asset value fell, Kimon Daifotis, the firm’s former CIO for fixed income, and Randall Merk, executive VP and formerly president of Charles Schwab Investment Management, made misstatements and omissions regarding the fund during conference calls, in issued written materials, and through other communications with investors, the agency says.

“For example, in two conference calls, Daifotis made false and misleading statements that the fund was experiencing ‘very, very, very slight’ and ‘minimal’ investor redemptions,” the SEC release states. “In fact, Daifotis knew that YieldPlus had experienced more than $1.2 billion in redemptions during the two weeks prior to the calls, which caused YieldPlus to sell more than $2.1 billion of its securities.”

In addition, the agency also charged Schwab with failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information.

"For example, they did not have specific policies and procedures governing redemptions by portfolio managers who advised Schwab funds of funds, and did not have appropriate information barriers concerning nonpublic and potentially material information about the fund,” the SEC says. “As a result, several Schwab-related funds and individuals were free to redeem their own investments in YieldPlus during the fund's decline."

As part of the settlement, Schwab must correct all concentration disclosures for YieldPlus and the Total Bond Market Fund. The firm must also retain an independent consultant to review and make recommendations about their policies and procedures to prevent the misuse of material, nonpublic information.

Monday, January 10, 2011

"It is an ancient ECB, And he stoppeth two of three."

The Dow was down 37.31, the NASDAQ was up 4.63, and the S&P 500 was down 1.75.  What happened?
Portugal.  Portugal happened.
Portugal is the current albatross around the neck of the marketplace.
The European Central Bank kicked off the decline in the European and American markets by purchasing E113 million worth of Portuguese sovereign debt.  European markets, already jittery about the prospect of a third nation being hurled off the cliffs by Disney nature documentary makers[1], reacted by diving downwards.  Despite recent Chinese assurance that they would continue to purchase PIIGS debt, nobody wants to be caught holding the bag on bonds from nations that will be consumed by rioting[2] as their economies continue to dwindle away to nothingness.
The G20, meanwhile, is calling for urgent action on the current food crisis.  And no, crisis is not too strong a word.  Food prices last month passed levels that caused international food riots in 2008, and there does not appear to be an end in sight.  Drought and wheat rust in Russia drove wheat futures up 47% in 2010, sugar and meat prices are at their highest levels in 20 years, US corn prices are up 50%, and US soybean prices are up 34%.  This is what is known as a bad thing.
There is no word, of course, about whether the G20 called for urgent action on the current food crisis during the thyme-roasted rack of lamb (with tomato, fennel and eggplant fondue) course, or if they waited for the pear torte with huckleberry sauce before expressing concern about food prices.
[1]  I.E., lemming-like.
[2]  I.E., forced to implement austerity measures.