This was posted at my blog on Tue. July 27, and I just now got around posting on zh.  To those bullies chasing my post all over net: I stand by my opinion, so let it rip!!

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By Dian L. Chu, Economic Forecasts & Opinions

There is no shortage of news from BP on Tuesday:

• The oil major reported its first quarterly loss--$17.15 billion--in eighteen years, and will sell about $30 billion in assets. 
• The company also announced that CEO Tony Hayward will step down on Oct. 1 to work at TNK-BP--BP’s joint venture in Russia.
• Bob Dudley, an American BP executive, will succeed Hayward as the new Chief Executive

The more eyebrow-raising news; however, is that BP plans to claim almost $10 billion in U.S. tax credit as a direct result of the Gulf oil spill. Here is how the tax code and math work.

Under the U.S. corporate tax law, companies can take credits up to 35% of their loss. Since BP reported $32.2 billion charge related to the cost of the spill, 35% of that will give you roughly $10 billion in credit. So BP’s claim is pretty much what its spokesman said.

"This is the accounting process, we are going by U.S. laws.”

The intention of the tax code is to encourage investments and to help companies even out profit and loss, along with the associated taxes. Lawmakers just forgot to incorporate a rider clause for public safety and/or environmental damage related expense. 

The tax credit, if claimed, could mean $10 billion of the Gulf aftermath costs would come out of taxpayers’ pocket. This could potentially be quite an embarrassment for the Administration as President Obama vowed that BP will "pay every dime owed" for the spill damage.

Of course, BP could conceivably “do the right thing” and drop its tax credit claim to avoid a crashing tsunami of public anger and outrage. However, don’t expect BP to give up on this sizable cost offset that easily, since BP has made considerable concessions such as a voluntary $20 billion oil spill fund, and speculation of U.S. government’s involvement in Hayward’s dismissal and Dudley's appointment.

As reputation goes, it is hard to imagine the IRS would let this $10 billion slip by.  Could revenge of the IRS be in the cards, or as Leona Helmsley famously said “Only the little people pay taxes”?

Dian L. Chu, July 27, 2010

Just because "extended" and "exceptional" is so H1, 2010. With three brand new doves on the board of the Fed, it was only a matter of time before the printers realized that there is no reason why ZIRP should hold the central bank back, now that even hotdog vendors know all about the deleveraging double dip the US finds itself in. Up on deck we Nomura, which issued the first official change in a call for QE-Light. The firm's economists David Ressler and Zach Pandl, no doubt after consulting with Richard Koo, say, "we now expect the FOMC to 'ease' at the 10 August meeting. Exactly what form this easing might take is debatable. Our assumption is that they will change the language of the statement to signal that the balance sheet will remain expanded, and change policy around the MBS program to start reinvesting paydowns." It won't be the last. Should the Fed telegraph further easing, expect stocks to surge at least another 10% as the 10Y approaches 2.5% as nothing makes sense any more.

More from Market News:

Nomura Friday became the first major firm to formally anticipate a change in Fed policy as soon as August 10 to alter course toward some renewed quantitative easing, arguing that without thechange, Fed policy is becoming less accommodative week by week.

"We think there will be something in the (FOMC) language that maybe reverts back to the language of 2009, around the first time they made this statement, that the Federal Reserve needs to maintain an expanded balance sheet," David Resler, chief North American economist for Normura, told Market News International.

"That begs the question, what does that mean to expand," he continued. "We don't think they will actively buy things," he said, but
that they will have to "back up their language."

While the Fed now is committed "only to rolling over guvvies," he said, "they are becoming less accommodative each week. Mortgages are not being replaced" and other shrinkage is taking place.

"They need to have a strategy for preserving (the balance sheet's) size. Does that mean they will reinvest paydowns. I don't know, and we're agnostic on how they will do it."

Just lowering rates "is not on the table any more," he said, and changing the rate of interest on excess reserves "is the last option they would resort to." At present "they are losing assets, so I think they would not want to lose them."

Getting into the practical implementation issue, "do they offset dollar for dollar every prepay they at the time they get it?" Resler asked. "They may not be able to do that."

In any event, the change in language, while having its own effect, won't be enough. There will have to be activity, he said.

Resler and colleague George Goncalves have dubbed whatever is to be done "QE light," with a risk of other actions, such as cutting the rate on excess reserves.

Overall, the Fed must do something because of the deterioration in the data since March and the downward revision in the Federal Open Market Committee's outlook, Resler said. Nomura does not see another recession, but a sufficient case based on economic performance for some manner of easing.

Courtesy of Libanman Futures

Submitted by RCS Investments

Bullish

+ Global trade continues to expand.  Industrial production in emerging market economies is up more than 10% from their prerecession peak. (Link Courtesy of News-to-Use). 

+ Chicago PMI shows an increase in activity during the month of July. Manufacturers continue to report expansion in the Mid-West, a very important manufacturing hub.  All sub-components rose, particularly the all important “New Orders” implying that activity is set to increase in the months ahead.  (Links Courtesy of Briefing.com )   
+ Earnings reports continue to impress and various global trade bellwethers cite improved outlooks in the quarters ahead.  These negative macro trends that the bears cite are not affecting company bottom lines.  In fact, revenues are showing more signs of life.

+ Continued reports of Eurozone financial tensions easing as yield spreads continue to contract and the Euro is near a 2.5 month high.  Eurozone sovereign woes? Where?  Meanwhile more countries are finding themselves having to raise rates as economies are overheating in growth. (Courtesy of The Big Picture)

+ The American Staffing Association’s staffing index shows that demand for temporary workers continues to rebound.  Demand levels are quickly approaching 2006 & 2008 levels.  This shows that demand for labor is out there and will soon translate to more robust job reports.

+ Mortgage Applications for purchase rose again for the second week in a row and lends more credence that a floor for demand has been formed. 

+ Case-Schiller Home Prices Index shows that property values are stabilized and will help reinforce consumer confidence and spending.
 

Bearish

- Durable Goods Orders surprised to the downside.  The one sector that was keeping this recovery alive is fading.  The demand side of the equation is still a no show.  The last line of defense for the bulls is looking quite tenuous at this point.

- Chicago Fed’s National Activity Index (one of the best proxies for GDP) came in negative as production and employment related indicators led the deterioration.  This further confirms that employment is not making a significant rebound and end-demand has not taken the baton from the “inventory-bounce-led” recovery.

- GDP growth comes in lighter than expected and the recession was deeper than once thought.  Meanwhile the consumption sub-component grew at a measly 1.6% vs. an already weak 1.9% increase in the first quarter.  Consumption = 70% of the economy and unfortunately it is slowing.  End demand continues to not show and this is what ultimately drives everything else.  A good breakdown can be found here (Courtesy of CalculatedRisk Blog)  

- Beige Book confirms what the Bears (at least me) have been saying: “Economic growth is decreasing rapidly a double-dip is coming much much sooner than anyone is expecting”.  Investors are not prepared for this scenario as most, if not all “pundits” write it off.

- Evidence of a fall in consumer confidence continues to mount as this time the UMich Sentiment survey confirms that confidence took a turn south in the last month. Despite the “better than expected” headline, let’s not forget that this level is far below last month’s closing level of   Cautious consumers = Wallets held close.  

- Dangerous  signs are surfacing that foretell a possible sharp drop in economic activity in the immediate months ahead.  The lights from the oncoming train are getting bigger quickly. (Courtesy ZeroHedge)

- The housing “supply-restraint” dam, which had been in place to buoy home prices, is beginning to crack.  Foreclosures are set to increase a good bit, and with recent underwhelming performance of purchase mortgage applications, prices have nowhere to go but down.  Banks will be under renewed pressure as their "extend-and-pretend" schemes blow up in their collective faces.

 
Observations/Thoughts

>This is welcomed news for the whole country.  Perhaps further good news will actually work to increase overall psyche given that we’ve had solid evidence that confidence has taken a turn for the worse.  Why this recent bout of pessimism?  Perhaps everyone is collectively realizing how big of a mess we are in and how long it will take to actually resolve the structural imbalances.     

> First, an example of what I’ve feared for a while now and mentioned in my Q1 Outlook.  Look for it to get worse.  Second, this is an interesting story in the continued move for more fiscal austerity (something I expect to happen in the quarters ahead: see my Q2 Outlook).  I believe that letting the Bush tax cuts expire on the wealthy would hurt consumption.  Even though it may affect approx. 2% of the population, those 2% account for a large portion of consumption.  However, Obama and the democrats, looking more desperate by the day it seems, may have hit the political hot button they’ve been looking for.  Letting the tax cuts for the wealthy expire is something that they support, and by the way, most of the nation supports as well.  The growing division between the wealthy and the rest is alarming and will no doubt cast a shadow on the build up to the big decision.  I believe that tax cuts for the wealthy will be allowed to expire.  However it is way too soon to be completely confident in that outcome.  If recession hits before the November elections, this sentiment may change quickly. 

>India seems to be having some trouble containing inflationary pressures.  Stimulus and loose monetary conditions are now biting back.  China is having these problems as well.  Various reports of labor unrest (higher wages) and inflationary CPI/PPI reports are becoming daily fodder over there.  I believe they are in a particularly tough spot.  Raising interest rates would help contain inflation, but at the expense of possibly popping a real estate bubble, while letting the Yuan rise would cause another headwind for their already pressured export sector.

> So we have Barton Biggs who nailed the recent bottom with his “I’m off risk” after touting risk all the way over the edge and now we have Barton Biggs &“perma-bear” Richard Russell announcing to get back in.  Since then the market has gone down.  Like Rosenberg says, a “meat-grinder” market is what we have on our hands here.  It loves making fools out of us all doesn’t it?! (Links Courtesy of Zero Hedge and ETF Daily News)

> So we’re in a sustainable recovery?  Yawn…

SEATTLE (MarketWatch) -- Two bank closures in Florida on Friday brought the total number U.S. failures for the year to 106. The Federal Deposit Insurance Corp. said in a statement that Port Saint Joe, Fla.-based Bayside Savings Bank, and Panama City Beach, Fla.-based Coastal Community Bank were closed. The two banks had combined deposits of $415.6 million, and their failures will cost the deposit-insurance fund $110.7 million, the FDIC said.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

Via Pension Pulse.

Luca Di Leo and Darrell Hughes of the WSJ report, U.S. Growth Slowed in 2nd Quarter:

The U.S. economy slowed in the second quarter as the government said the recession was deeper than earlier believed, adding to concerns over the recovery's strength.

The Commerce Department Friday said U.S. gross domestic product, or the value of all goods and services produced, rose at an annualized seasonally adjusted rate of 2.4% in April to June. In its first estimate of the economy's benchmark indicator, the government report showed growth was lifted by business investments and exports. Consumer spending, a key growth engine for the U.S. economy, made a smaller contribution to growth.

 

Economists polled by Dow Jones Newswires were expecting GDP to rise by 2.5% in the second quarter. Stock futures weakened after release of the data; Standard & Poor's 500 futures were recently down about 11 points to 1086; Dow Jones Industrial Average futures were off 82 points to 10327.

 

In the first quarter, the economy grew by 3.7%, revised up from an originally reported 2.7% increase. But growth estimates all the way back to the start of 2007 were revised lower.

 

The report showed a bright spot continuing in the economy: the growth of business spending on equipment and software. This spending continued to surge, increasing by 21.9% in the second quarter, compared with a 20.4% rise in the first three months. The figures highlight the contrast in the economy between high company profits and a persistently feeble jobs market keeping consumers at bay.

Business spending actually climbed at the fastest rate since 1997, but the big story was the downward revision in the level of real GDP in Q1 2010, a point that Yanick Desnoyers, Assistant Chief Economist at the National Bank, addressed in his comment on the report:

The U.S. economy increased 2.4% in the second quarter, slightly below market expectations. Q2 delivered slower GDP growth compared to Q1 but with a marked acceleration in real domestic demand from 1.3% to 4.1%. We prefer to see a weaker GDP growth due to a rise in imports with strong domestic demand than a weaker GDP growth due to a weaker domestic demand.

 

That said, what was more striking in today’s report was the BEA’s annual revisions to the National Income and Product Accounts. The level of real GDP in the first quarter of 2010 was revised down by $100 billion. From a component perspective, consumption registered the largest revisions in dollar terms with a decrease of $134 billion. Accordingly, U.S. consumption is not in an expansion mode as originally reported but rather still in the recovery stance.

 

There are mainly two consequences with the BEA’s revisions. First, it means that the savings rate probably was higher than first thought and job creation is more than ever needed to sustain consumption growth (conversely it means that the U.S. consumer is deleveraging more quickly than expected). Secondly, the U.S. output gap is deeper in excess supply territory than before the BEA’s revision.

 

Bottom line: The Fed is on the sidelines for a longer period of time.

The output gap is deeper than we previously thought, but there is another reason why the Fed will remain on the sidelines for longer than we think: it wants to see asset reflation translate into mild inflation and avoid a protracted deflationary scenario at all cost.

Importantly, Fed policy remains geared entirely towards banks, allowing them to continue borrowing on the cheap to invest in risk assets all around the world as they shore up their balance sheets. This is why I remain bullish on stocks.

But what about bonds? I recently wrote a comment asking whether or not we're on the cusp of a global bond hiccup. My point was that global growth will put upward pressure on bond yields, and I thought the US economy was in better shape than what most analysts thought.

Obviously today's downward revisions in US GDP will continue anchoring down long-term inflation expectations. Some strategists think that Treasuries are still a buy:

Treasury yields fell Friday, with the 2-year note hitting a record low 0.55%, after the government said U.S. GDP grew a weaker-than-expected 2.4% in the second quarter.

Get used to both more weak economic data and lower Treasury yields says, Yves Lamoureux, investment advisor at Macquarie Private Wealth.

 

"If you're looking at leading [economic] indicators, they are pointing down," he says.

 

"There's no doubt the next quarter and the one following are going to be disappointing." (On Friday, the ECRI said its weekly leading index rose to 121.1 for the week ended July 23 from 120.6 the prior week; but the index's growth rate fell for an eighth-straight week.)

 

With the economy slowing, the "secular bull market" in Treasuries should continue, Lamoureux says, predicting 30-year bond yields will fall as low as the average of comparable debt in Japan and Germany, which is currently 2.575%.

 

Furthermore, he argues the high rates of the 1970s and 1980s were the "black swan" resulting from the Fed's mismanagement of the money supply. Excluding that period, Treasury yields have mainly been in the 2-4% range since the 1900s;

 

Lamoureux calls that the "natural equilibrium" for yields, while expressing faith the Fed has learned its lesson of the 1970s.

 

"I believe the Fed won't make the same kind of mistake again," he says. "From a long-term perspective, inflation is coming down. You will not get a big inflation shock."

Lamoureux's reasons for why Treasuries are still a good buy (and not in a bubble) also include:

 

Financial deflation: While the price of many goods and services continue to rise, Lamoureux estimates there has been a 2-4% annual contraction in the money supply since 2008. In other words, deleveraging is overcoming the expansion of the Fed's balance sheet.

 

Diversification: Treasuries are "the only asset class that compensates you" if stocks go down, he says, calling U.S. debt the "last diversifier left."

You can watch the interview with Mr. Lamoureux below. His views on financial deflation are echoed in Hoisington Investment Management's Q2 economic letter.

Also, his point on diversification is important because in a low interest rate environment, asset classes tend to be a lot more correlated than investors think. With so much pension money flowing into real estate, private equity, commodities, and infrastructure, this should worry us.

If a protracted period of deflation does materialize, it will ravage private markets. The Fed will do whatever it takes to avoid such an outcome. Bottom line: We might be in for a long period where both bonds and stocks trade in a range. Better pick your spots carefully.

WASHINGTON (MarketWatch) -- Companies that drill for oil in U.S. waters would be required to pay 100% of spill-related damages under a bill approved Friday in the House of Representatives. Written in response to the BP oil spill, the bill removes a $75 million liability cap now in place; requires independent certification of equipment and sets up other new offshore-drilling standards; and creates new agencies to oversee the industry. The bill would need to be merged with a Senate version for it to become law, a process that at the minimum can't be completed until the House returns from a recess in September.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

SEATTLE (MarketWatch) -- Acworth, Ga.-based NorthWest Bank and Trust was closed by regulators Friday, marking the 104th U.S. bank failure of 2010. NorthWest Bank and Trust had $167.7 million in assets and $159.4 million in deposits as of March 31, the Federal Deposit Insurance Corp. said in a statement. The Georgia bank's failure will cost the deposit-insurance fund $39.8 million, the FDIC said.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

SAN FRANCISCO (MarketWatch) -- The Federal Deposit Insurance Corp. said Friday it sold securities backed by $471.3 million of performing single-family mortgages originated by 16 failed banks. The FDIC pilot program marks the first time the agency has securitized assets during the current financial crisis. The lead underwriter was RBS Securities, with co-underwriters Bank of America/Merrill Lynch, Deutsche Bank and Williams Capital.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

The quote of the week comes from Bob Costello, Chief Economist of the American Trucking Association who is warning of an economic slowdown:

ATA Chief Economist Bob Costello said that the two sequential decreases reflect an economy that is slowing.  Furthermore, growth in truck tonnage is likely to moderate in the months ahead as the economy decelerates and year-over-year comparisons become more difficult.  Nevertheless, Costello believes that tonnage doesn’t have to grow very quickly at this point since industry capacity has declined so much.  “Due to supply tightness in the market, any tonnage growth feels significantly better for fleets than one might expect.”

This came on the back of yesterday’s data release showing the second consecutive month of declines in truck tonnage:

The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 1.4 percent in June, although May’s reduction was revised from 0.6 percent to just 0.1 percent.  May and June marked the first back-to-back contractions since March and April 2009.  The latest reduction lowered the SA index from 110.1 (2000=100) in May to 108.5 in June.

Source: ATA

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This guest post previously appeared at The Pragmatic Capitalist >

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LOS ANGELES (MarketWatch) -- Brazilian equities rose Friday, leaving the market's key stock index with its 10th consecutive win, and with its biggest monthly percentage gain in 14 months. The Bovespa index rose 0.8% at 67,515. For the month, the index rose 10.8%, its best performance since May 2009. Elsewhere in Latin America, Mexico's key index closed down 0.5% on Friday, but ended July with its best monthly performance since March. Chile's IPSA, which hit a number of record closings this month, ended July up more than 7%, its strongest gain since December. Argentina's Merval closed Friday with a 0.5% loss, but ended July up 9.6%, its best month since September 2009.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

NEW YORK (MarketWatch) -- Concerns about growth led U.S. stocks to finish with a whimper on Friday and for the week but still failed to dent much of the market's strong gains in July. The government earlier reported a slowdown in second-quarter growth, though much of the impact on the market was curbed by other reports showing a slight improvement in consumer sentiment and in Chicago-area business activity. On Friday, the Dow Jones Industrial Average fell 1.22 points to 10,465.94. The S&P 500 index rose 0.07 point, or 0.01%, to 1,101.60 and the Nasdaq Composite gained 3.01 points, or 0.1%, to 2,254.70. For the week, the Dow rose 0.4%, the S&P 500 fell 0.1%, and the Nasdaq was down 0.7%. For the month, the Dow still gained 7.1%, and both the S&P and Nasdaq rose 6.9%.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

It was an oddly news-filled, but quiet session in the market today. In the end, despite having been down most of the day, stocks ended up.

But first, the scoreboard:

Dow: +-1.22
NASDAQ: +3.01
S&P 500: +0.07

And now, the top stories:

• World markets were mostly subdued overnight, perhaps in part due to a weak industrial production number out of Japan, and also because of carryover from yesterday's emotional day in the US.

• James Bullard's 'we are Japan' paper continued to garner a lot of talk this morning, culminating with 2 hours on CNBC this morning, where he expressed displeasure with the prospect of ending the Bush tax cuts.

• The big action in the US started at 8:30. GDP came in on the weak side of what was expected -- not horrible, but stocks sold off instantly on the news. On the other hand, Chicago PMI and University of Michigan Consumer Sentiment both came in better than expected.

• But the market action was decidedly down beat (though again, not wildly so) for most of the day. In addition to equities, notable winners (and this should obviously concern the bulls) were Treasuries and the yen.

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Citigroup settlement shows low cost of lying to markets and is a reminder to investors and creditors: the potential rewards for financial shenanigans are great, while the likely costs are minor >>

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The capital markets, which are celebrating accelerating deflation and inflation at the same time, are now officially insane, as the Dow has diverged from its credit implied fair value by about 170 points! This will all end in lots and lots of tears. We hope the computers enjoy trading with each other as much as all carbon based lifeforms relinquish the en masse abandonment of the stock market.

NEW YORK (MarketWatch) -- U.S. stocks turned positive within the last stretch of Friday's trading session, as gains in consumer stocks following a slight improvement in a sentiment survey helped offset concerns about growth. The government earlier reported a slowdown in second-quarter growth. The Dow Jones Industrial Average gained 13.24 points, or 0.1%, to 10,481.91. The S&P 500 index rose 2.06 points, or 0.2%, to 1,103.59. The broad index was lifted by gains in its consumer discretionary sector, itself lifted by the stock of Expedia Inc. , up 7.8%, after the travel website reported earnings, and of Sears Holdings Corp. , with the retailer's stock up 3.6%. The Nasdaq Composite gained 7.80 points, or 0.3%, to 2,259.31.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

Paul the Octopus Receiving More Endorsement Offers Than LeBron James

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SAN FRANCISCO (MarketWatch) -- Coinstar Inc. said late Thursday its second-quarter net income rose to $13.7 million, or 41 cents a share, from $7 million, or 23 cents a share, in the year-ago period. Revenue rose 35% to $342.4 million from $253.8 million a year ago. Analysts surveyed by FactSet Research had expected earnings of 34 cents a share.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

Louis Moore Bacon's property in Lyford Cay in the Bahamas was apparently raided recently because of four military grade speakers that were sitting on it.

This is one of the stranger stories you'll read today.

A Bahamian paper, The Bahama Journal, says:

For weeks there has been much speculation about how the four pieces of military grade sound equipment got in the posh, gated community.

The speakers are said to emit certain frequencies of irritating and annoying soundwaves that could possibly stretch over a wide range... if used properly, the speakers have the potential to cause structural damage and even death.

A Nygard Cay Property Manager, Eric Gibson, apparently said that before the speakers were taken away, he heard them make awful noises:

"They would find the most annoying sounds like anything with a high string, or anything with a high pitch that they could play, and they would just play the sounds as loudly as they possibly could."

And on a whim, he takes a random and unfounded stab at why the speakers were there in the first place:

"I think the sounds are being directed at Peter Nygard [international fashion designer and Nygard Cay owner], who usually sleeps in his boat, which is just 10 feet away from where the speakers were erected."

There may or may not be charges related to the speakers, says the Bahama Journal.

It is also understood that some charges could be filed soon regarding this incident.

This is the second time Moore's Bahamian house is the location of a scandal. A few months ago, a naked man was found dead in his hot tub.

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Geoffrey Raymond's art, just like fine wine, only gets better with time. This is particularly true if the art is subjected to accelerated aging via repeated days of annotations. Raymond's latest piece: the Naked Cramer, is now on its day four of soliciting random and assorted  commentary, and the prevailing sentiment on CNBC's permabullish stockpicker is certainly starting to shine through. The results are below.

Although it does not appear until almost the end of this article in the Financial Times, BIS Gold Swaps Mystery Unravelled, the source of the gold provided in the dollar swaps with BIS is coming from customers of about 10 European banks who are holding their gold at the banks in 'unallocated accounts.'

The gold used in the swaps came mainly from investors’ deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called “allocated accounts”, which restrict the custodian banks’ ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper “unallocated accounts”, which give banks access to their bullion for their day-to-day operations.

The European Banks, including HSBC, Société Générale and BNP Paribas, were desperately in need of dollars because of a repeat of the short squeeze which we had previously identified. Their customers were withdrawing dollars previously on deposit at the banks, which were unable to meet the demand because of the deterioration of the dollar assets they held, and because of the fractional reserve nature of their operations.

So the BIS stepped in and swapped its dollar holdings for the some of the banks' customer's gold. Let us be clear about this. The gold is on deposit at the banks, in the same way that customer dollars had been on deposit.

In lending out the gold to BIS, they were relieved of their dollar short squeeze and were able to supply their customer demands. BIS obtained a fee of some sort in the swap, and so it is happy, although it is foolish to think of BIS as a primarily profit-motivated organization. It is more like the Federal Reserve than Goldman Sachs.

The question remains unanswered though. What is the duration of the swap, and does BIS intend to hold the gold or use it in other interbank operations?

Yes, the nice high level chart the FT includes shows the spike in gold holdings at the BIS, but does this mean that it is sitting there in their reserves unencumbered, or are they leasing any or all of it out, 'putting it to work' as they say? Central banks are notorious for making little distinction between unencumbered gold assets and real assets in the vault.

But it is nice to see verification in the mighty Financial Times that if you hold your bullion gold in an 'unallocated account' even with a prestigious bank, it may very well not be there when you wish to have it, and the prices will soar as the banks scurry to cover, just as has happened twice of late with their US dollar assets.

Or you may be asked to settle in cash if there is some clause in the contract, as in the case of the ETFs or the Comex.

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SAN FRANCISCO (MarketWatch) -- Crude-oil futures settled 0.8% higher on Friday, shaking off early weakness to settle at $78.95 a barrel on the New York Mercantile Exchange. Oil futures gained 4.4% in July, oil's best month since March and its second consecutive monthly gain. Natural gas futures notched a 6.5% gain in July, which follows gains of 7.2% in June. Natural gas for September delivery added 10 cents Friday, or 2%, to settle at $4.92 per million British thermal units.

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Remember when the UK imposed a 50% bonus tax at the beginning of this year?

When the UK announced a 50% bonus tax, Alan Howard almost immediately opened an office to allow many of his hedge fund's, Brevan Howard's, employees to move out of London to Switzerland.

Now Moore Capital is also opening a new office outside of London, mostly so that traders who don't want their bonuses cut in half can leave if they want to.

The firm confirmed to Bloomberg that two of their traders are leaving, one of whom is a really big deal for London to lose.

Jean- Philippe Blochet, a senior partner at the firm. The other is Kornelius Klobucar, a portfolio manager. Both traders leaving London just cost the city millions of pounds in taxes.

London will have to add those numbers to the growing amount that high paid individuals are costing the city as they leave for places with lower taxes.

Take the massive exodus of Brevan Howard employees for example.

When the tax went into effect on April 6th requiring anyone earning more than 150,000 pounds to pay 50%, it was almost funny how quickly Alan Howard, whose fund manages more than £30 billion, personally left London for Switzerland.

He filed his departure as soon as June.

The Brevan Howard Geneva office alone can apparently house about 40 employees. So let's say that, on average, each of those employees earns £10 million (Howard alone earns at least £300 million per year (2% of £30 billion is £600 million), so that's a fair if not very conservative estimate (another example: Moore Capital star trader, Kaveh Alamouti, 52, took home between £50 million and £75 million in 2007, according to This is Money).

Fifty percent of ten million dollars forty times over (40 employees) is £200 million, plus Howard's ~minimum £150 million per year. That's £350 million, at least.

Now add £50 million for each of the Moore Capital traders now leaving London, assuming both make ~£50 million each.

It hasn't even been six months since the tax was in place and the city of London alone has lost well over £400 million.

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Investors are understandably scared of the sovereign debt crisis unfolding in Europe. Amid their angst, however, they are ignoring a more likely, and significantly larger, debt catastrophe that is about to hit the nation with the second-largest economy in the world — Japan. Two decades of stimulative, low-interest-rate fiscal policy have made Japan the most indebted nation in the developed world, and as new Prime Minister Naoto Kan recently said, in his first address to Parliament, that situation is not sustainable. Japan has little choice but to raise interest rates substantially, with dire consequences far beyond its shores.

The prelude to the current crisis began in the early 1990s, after Japan’s housing and stock market bubbles burst and its economy slipped into recession. For the next 20 years, using flashy names like Fiscal Structural Reform Act, Emergency Employment Measures and Policy Measures of Economic Rebirth, the government cut taxes, increased spending and borrowed money to finance itself. Today, Japan’s ratio of debt to gross domestic product stands at almost 200 percent, more than twice that of the U.S. and Germany and second only to Zimbabwe.

A country with ballooning debt needs to have an expanding economy to outgrow the burden. Economic growth is driven by two factors: productivity and population growth. Although the Japanese economy may continue to reap the benefits of productivity gains, population growth is not in the cards.

Japan has one of the oldest populations in the developed world — every fourth person is 65 or older — and its number is on the decline. The Japanese birth rate is one of the lowest in the world, a meager 1.2 children per woman. To maintain its current popu­lation level, the average woman in Japan would need to give birth to 2.1 children. (Of course, only economists know how a woman can give birth to a fractional child.)

The severity of the debt problem in Japan has been masked by the fact that government spending on interest payments has not changed over the past two decades, as the average interest rate paid on the country’s debt declined to 1.4 percent in 2009 from more than 6 percent in the 1990s. This is about to change. Historically, more than 90 percent of Japan’s government-issued debt has been consumed internally by its citizens, directly or through its pension system. But the savings rate in Japan, which was in the midteens in the 1990s, today is approaching zero and will likely go negative in the not-so-distant future.

The Japanese economy operates on the assumption, soon to be proved false, that the government will always be able to borrow at low interest rates. As internal demand evaporates, the government will have to start hawking its debt outside Japan — in a more realistic world, where interest rates are a lot higher. Japanese ten-year Treasuries currently yielding 1.3 percent will not stand a chance against U.S. or German bonds of the same maturity, which yield 3.5 percent and 3 percent, respectively. Japan will have to offer rates far in excess of its U.S. and German counterparts. Although they have their own set of problems, the U.S. and Germany still have much lower indebtedness and superior demographic growth profiles.

Higher taxes and the austerity measures that undoubtedly will follow, combined with higher interest rates, will further slow Japan’s economy and drive the country toward insolvency. Unlike Greece, which because of its size could be bailed out by Germany and friends — with a little help from the ever-willing International Monetary Fund — Japan is too big to be bailed out. Defaulting on its debt, especially when the majority of it is held by its own citizens, is a political impossibility. But unlike European nations that socialized their currencies and cannot print euros on their own, Japan has complete control over its currency printing press. And print it will! Decades of deflation will turn into hyperinflation, which will destroy the purchasing power of Japanese citizens’ savings and collapse the yen.

The consequences of the economy’s slow but sure unraveling in Japan will spill over to the rest of the world. Japan is the second-­largest holder of U.S. government debt, and most likely it will start selling Treasuries. To make matters worse, Japan will start competing with the U.S., not just in cars and electronics but for buyers of sovereign debt. As Japan exports inflation, interest rates around the globe undoubtedly will rise.

Timing bubbles — and Japan is in the late stages of an enormous debt bubble — is very difficult. They tend to last longer than rational observers expect. But as Japan’s debt continues to swell, the eventual bursting of the bubble grows more catastrophic.

Japan is proof that a country cannot borrow itself to prosperity. The U.S. and other developed nations still have a chance to make the politically difficult but right decision to cut fiscal spending and stop looking for government to be the source of sustainable growth — which it never is.

When Angela Merkel visited China this month, after a stop in Russia, she brought with her an array of German CEOs. Some signed deals during the trip, others started negotiations, but they all have one thing in common: they want a slice of the Chinese.

With trade of over $100 billion between the two countries, Germany is China's top European partner.

And the trend should continue: Chinese Commerce Minister Chen Deming recently stated that foreign direct investments were most welcome, as they would bring technology know-how to China. He said China would "open wider in the future", probably responding to both BASF and Siemens' leaders who openly criticized Chinese regulation and the lack of protection of intellectual rights.

But for leading German companies, especially in the car industry, Chinese demand has already boosted their latest quarterly results.

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The latest and most damning confirmation that it is none other than the president and his errant policies that are the primary cause for the credit crunch spreading among individuals and small and medium businesses like a paperborne version of the plague, comes direct from the Minneapolis Fed, where in a paper titled "Come and get it--please: Banks and credit unions say they have money to lend, but credit markets are still struggling for a variety of reasons" the Ninth Fed district puts the blame for the credit freeze flatly where it belongs: the president himself, and more specifically his destructive economic advisors. "The most-cited reasons—though only by a small margin—were organizational uncertainty about future financial system reforms and regulatory restrictions on bank lending. A Minnesota institution stated flatly, “The regulatory environment has impacted our willingness to make loans.” And stunningly enough, the desire by an ever-greater portion of Americans to forgo future credit and to splurge on idiotic purchases like iPods even as they no longer pay their mortgage and destroy their credit rating is having repercussions. "Said a South Dakota institution, 'We have money to lend, but cannot always fund applicants due to inability to borrow. Their poor credit histories keep them from obtaining credit.'" Who would have thunk that while Wall Street is immune from the causal relationship between action and reaction, and in fact blowing itself (and being rescued by taxpayers) up leads to infinite creditability by the US government, the opposite is absolutely not true, as Americans are now less able than ever to procure loans from these very same bailed out banks

Full Minneapolis Fed paper:

As the weather has warmed in the Ninth District, credit conditions have barely thawed, according to a recent poll of bank and credit union executives in district states by the Federal Reserve Bank of Minneapolis.

Financial institutions report that they have money to lend, thanks to growing deposits. However, there’s not a lot of demand for loans and other credit—a situation exacerbated by the fact that creditworthiness continues to sag among businesses and consumers. Financial institutions also continue to tighten their credit standards, with banks reporting a decline in small business lending, in part, due to concerns about the current and future regulatory environment.

Show me the money

There’s little doubt about the liquidity of financial institutions, as 70 percent reported that insured deposits had increased over the previous three months, while only 11 percent said they had declined.

But banks and credit unions reported that consumers and businesses are not asking to put much of that available credit to work (see Charts 1 and 2). Business borrowing appears to be mostly a wash, as fairly even numbers said the volume of credit to business was higher (35 percent) and lower (39 percent), and unchanged (26 percent) over the previous three months; responses from the Dakotas and Wisconsin were more upbeat than those from Minnesota and Montana. Consumer borrowing was markedly down; 50 percent of respondents said consumer borrowing had dropped, 29 percent saw an increase and the rest reported no change.

Large Chart

Large Chart

One Minnesota institution commented, “People are still saving more than borrowing.” A Wisconsin credit union added, “We have an enormous amount of liquidity to lend out to our members when they are confident enough in the economy to start borrowing again.” Finally, a Montana bank noted, “We have observed a trend that our best, most highly qualified borrowers are choosing to not borrow.”

Tighter credit standards and poorer credit quality also explain some of the lower demand for credit, according to those surveyed (see Chart 3).

Large Chart

Almost universally, credit standards have either tightened or remain unchanged from three months earlier (see Chart 4). Among the responses, not a single institution said it had loosened credit standards for business applicants, while just six of 307 institutions reported relaxing credit standards for consumers.

Large Chart

A Minnesota bank said it was “not seeing the opportunity to lend. When we do, we are much more stringent.”

Among various credit standards, collateral requirements and documentation were most frequently tightened (by almost half of respondents); about one quarter also tightened the size and number of credit lines. The only standard that saw even the slightest loosening was interest rates; the percentage of institutions that loosened interest rates was slightly less than the proportion that tightened them. In fact, significantly more Wisconsin institutions reported loosening (32 percent) interest rates compared with tightening (19 percent), and about half left interest rates unchanged.

Small biz on the sidelines

Credit quality among business and consumer applicants continued to deteriorate; only about 10 percent of respondents said that business or consumer credit scores had risen, while about half said they had declined for both groups. Said a South Dakota institution, “We have money to lend, but cannot always fund applicants due to inability to borrow. Their poor credit histories keep them from obtaining credit.”

The survey also asked specifically about credit conditions for small business. Results showed that demand for small business loans and lines of credit was mostly a wash across the district as a whole; those institutions seeing an increase were offset by those seeing a decline. However, responses were positive for every district state, save for Minnesota, where responses were much more pessimistic.

Those reporting a decline in credit to small business were also asked about the underlying source. The reasons cited for tight credit were all over the map, including a decline in demand and sagging creditworthiness among small businesses.

The most-cited reasons—though only by a small margin—were organizational uncertainty about future financial system reforms and regulatory restrictions on bank lending. A Minnesota institution stated flatly, “The regulatory environment has impacted our willingness to make loans.”

Not all respondents felt that way about the role of regulators, however. The percentage of respondents saying regulator influence was the most important factor for the decline in small business lending (27 percent) was slightly lower than those saying it had no role or influence (29 percent).

"We have met the enemy and he is us," Pogo used to say. Well, we've also now met the recovery, and he is ugly.

The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 2.4% during the second quarter. The latest GDP numbers bring our Econbrowser Recession Indicator Index for 2010:Q1 down to 5.4%. This index is based on a very simple pattern-recognition algorithm for characterizing economic recessions. It is not a prediction of where the economy is headed, but rather a backward-looking assessment of where the economy stood as of the first quarter, using today's 2010:Q2 data release to help inform that assessment.

University of Oregon Professor Jeremy Piger maintains a related index which has been at or below 1% for each month so far of 2010, while the most recent value calculated by U.C. Riverside Professor Marcelle Chauvet's algorithm is 7.8%. All three approaches agree that the economy remains in a growth phase that began in the third quarter of last year. A subsequent economic downturn would be described as the beginning of a new recession rather than a continuation of the previous recession.

*The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date, with 2010:Q1 the last date shown on the graph. Shaded regions (with the exception of 2007:Q4-2009:Q2) represent dates of NBER recessions, which were not used in any way in constructing the index, and which were sometimes not reported until two years after the date. The most recent recession is shown on the graph as ending in 2009:Q2 as implied by the index; as of this writing the NBER has not yet assigned an end date for this recession.

But a pretty recovery it's not. The economy has grown by 3.2% in real terms over the last year, about the average annual historical growth rate since World War II. But since recessions are characterized by below-average growth, expansions should typically exhibit above-average growth, and particularly in the first year of an expansion we often see very strong growth as a result of the positive contribution of inventory restocking in the initial stages of recovery. Inventories have done their part this time around as well, contributing 1.9 percentage points of that 3.2% growth over the last year. But that's the problem-- inventories have been essentially the sole factor driving the recovery so far.

Imports were a huge drag on GDP in the second quarter. It is as if all the additional spending by U.S. consumers and firms went to buy imported goods and services, with no net positive contribution to the demand for domestic production. Added purchases by the federal government provided an important boost to the second quarter, though that seems unlikely to continue and faces headwinds from future spending cuts by state and local governments. Housing made a modest positive contribution to the second quarter, though Bill McBride expects residential fixed investment to decline in Q3 with expiration of the tax credit.

Exports and nonresidential fixed investment were relative bright spots. But could they be enough to carry the economy into a sustained recovery without inventories and fiscal stimulus? The most pessimistic participant at the June FOMC meeting was calling for 2.9% real GDP growth for 2010 as a whole.

James Hamilton is a professor of economics at the University of California, San Diego. This post was originally published at Econbrowser.com and was republished here with permission.

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http://watch.bnn.ca/featured/#clip327942

Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo.  He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007).  To receive Vitaliy’s future articles my email, click here.

NEW YORK (MarketWatch) -- Barclays Capital raised its forecast for the euro versus the dollar Friday and now expects the shared currency to fall less over the next few months as previously predicted. The euro will decline to $1.27 in the next month, compared to a previous forecast for it to fall to $1.20 from $1.3065 currently. In three months, the euro will decline to $1.25, strategists at Barclays wrote in a research note Friday. The euro has recovered from a four-year low in recent weeks as data in the euro-zone has been surprisingly strong, while U.S. economic reports have missed, they said. "The most likely course in the short run is that data will be the most important factor in relatively thin summer markets," analysts including Paul Robinson wrote. "This is likely to support the U.S. dollar, both because we think that prospects for the U.S. economy are somewhat better than has currently been factored in and because the rally of the euro is going to have something of a dampening impact on the euro area." A stronger euro reduces the competitiveness of exports, which are a big component of the European economy.

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William L. Givens, the former chairman of the Japan Fund, has targeted Nomura for their failure to live up to their objectives associated with the strategic partnership the company has with the Japan Fund, according to FT Alphaville.

The report, thus far, is somewhat vague, but it clearly points to William Givens as stepping forward with complaint about how Nomura handled their business. Notably, the 9 funds the partnership manages were meant to be worth billions, but, instead are only worth $231 million.

Read the full story at FT Alphaville >

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Hedge fund icon Stanley Fink visited an a prep school recently to discusss his views of the economic climate in the UK.

From MenMedia:

The UK economy will recover, but “only after four or five years of austerity” and never to the three to four per cent annual growth rates it achieved in the past, hedge fund guru Stanley Fink told an audience at Manchester Grammar School.

“I do not think we will ever sustain those exceptional levels of economic growth again because of greater life expectancy, the need to care for the elderly, the diminution of the earth's natural resources and the lack of cheap energy.”

He said Britain should look to develop new jobs in sectors such as engineering and hi-tech manufacturing, while also continuing to back the financial services sector.

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Today, the FT provided some additional information on the BIS' "goldgate" as relates to its 346 tonnes of gold disclosed as swapped recently by the ubercentral bank. As the FT says, "Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee." There was nothing necessarily new in the article, and as expected the swap was merely put in place to collateralize a dollar funding crunch ahead of the European insolvency, allegedly resolved by the guaranteeing of $1 trillion in the world biggest bail out fund by the IMF and the ECB. Nonetheless, at least now we can end speculating as to who benefited: it was not entire countries that had pledged their gold reserves to the ECB (contrary to the rumor that Portugal had given Bernanke a lien on its gold), but merely ten banks, of which HSBC, Société Générale and BNP Paribas were the biggest. While HSBC's presence is somewhat surprising, the latter two banks having found themselves in a massive currency crunch makes sense: as Zero Hedge had previously noted, this is confirmation that it was precisely the French banks that had found themselves on the wrong side of some major euro trades (one need only to recall BNP's call for subparity in the EURUSD from a month ago). Yet what is without doubt is that physical gold will play an increasingly prominent role as a hard collateral asset. In light of this, we present to you the thoughts of Sprott's John Embry on the precious metal, titled "Gold's on the cusp of parabolic move up" whose conclusion fits with the implications of the BIS action: "Central banks can no longer supply the amount needed  to balance supply and demand while mine production continues to stagnate at best. It is imperative that investors ignore the volatility created by the anti-gold cartel and use every opportunity that is created by them to purchase more physical gold." Yes John is conflicted, and yes, he has said comparable things in the past... maybe, as more and more piece of the puzzle come into place, this time he will finally be right?

Full Embry essay

06_23_2010 Gold's on the cusp of a parabolic move up

h/t Kyle

SAN FRANCISCO (MarketWatch) -- Aetna Inc. said Friday that its board authorized the buyback of up to $1 billion in common shares. Aetna, which plans to make share repurchases from time to time, had about 417 million shares outstanding as of June 30.

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According to the worker-survey site, glassdoor.com, Goldman employees love working for the firm and think Lloyd Blankfein is the best >>

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SAN FRANCISCO (MarketWatch) -- Copper futures notched their best month since April 2009, rising 12% in July as concerns about the pace of the global recovery eased. Copper for September delivery added 2 cents, or 0.7%, to $3.31 a pound on Friday. Copper's July run contrasts with gold's 5% loss in the month, gold's worst since December. Gold for December delivery, the most-active contract, ended Friday adding $12.70, or 1.1%, to $1,183.90 an ounce on the Comex division of the New York Mercantile Exchange.

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Police officers raided the Bahamas estate of Moore Capital Management founder Louis Bacon on Monday, seizing what are alternately described in the Bahamian press as “military-grade” or industrial loudspeakers and “lethal ‘ultrasonic weaponry.”

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Irving Picard filed lawsuits against three Madoff family entities, a family fund, an oil and gas properties business and a trading business, seeking $30 million that the family had invested in them.

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SAN FRANCISCO (MarketWatch) -- Donaldson Co. said Friday it raised the quarterly dividend 4% to 12.5 cents a share. The dividend is payable Sept. 10 to shareholders of record as of Aug. 20.

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A few times we've highlighted how the ups and downs of the market can be nicely overlayed with the second half of the year 2000, and that big decline.

Anyway, here's an update. If we're really on that path, then get ready for the next big leg down.

Click to enlarge:

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The Justice Department is investigating Jeffrey Epstein for child trafficking, The Daily Beast has learned—and has widened the scope of its probe to include a famous modeling agency.

Hedge-fund manager Jeffrey Epstein completed his sentence for soliciting prostitution with a minor last week. But it appears his problems may not be over. Now The Daily Beast has learned that:

• Federal investigators continue to investigate Epstein’s activities, to see whether there is evidence of child trafficking—a far more serious charge than the two in his non-prosecution agreement, the arrangement between Epstein and the Department of Justice allowing him to plead guilty to lower-level state crimes. Trafficking can carry a 20-year sentence.

• The FBI is also investigating Epstein’s friend Jean Luc Brunel, whose MC2 modeling agency appears to have been a source of girls from overseas who ended up on Epstein’s private jets.

Under the concept of double jeopardy, Epstein can no longer be prosecuted for any of the charges covered by his non-prosecution agreement, in which he agreed to serve a short term of incarceration, fund the civil suits of named victims, and register as a sex offender. The victims who accepted cash settlements in these civil suits agreed not to testify against him or speak publicly about the case. However, new evidence developed by the Department of Justice on other offenses not covered by the agreement, including allegations by additional victims who come forward, could lead to new charges. There is no statute of limitations in the federal sex-trafficking law, which was also enacted by the state of Florida in 2002. Because his predatory habits stretch back many years and involved dozens of young-looking girls, there may well be more evidence to uncover. (Several young women who claim to be Epstein victims have recently contacted a Ft. Lauderdale lawyer, but to date no new civil complaints have been filed.)

These new developments come one week after the publication of two articles in The Daily Beast about Epstein’s pattern of sexual contact with underage girls, which Palm Beach police began investigating in 2005 and the U.S. Attorney’s office then settled in a 2007 plea deal. The first article quoted a deposition by then-Palm Beach Chief of Police Michael Reiter, in which he stated that Epstein, a billionaire with many powerful friends, had received special treatment in both his plea deal and the terms of his incarceration. Although federal investigators at one point produced a draft 53-page indictment against Epstein, he was eventually allowed to plead guilty to only two relatively minor state charges and receive a short term of incarceration: 13 months in the county jail, during which he went to the office every day, and one year of community control, during which he traveled frequently to New York and his private island in the Virgin Islands.

The Daily Beast has now discovered another instance in which Epstein apparently received special consideration: As a convicted sex offender, he is required by law to undergo an impartial psychological evaluation prior to sentencing and to receive psychiatric treatment during and after incarceration. This is because child molesters tend to be repeat offenders with high rates of recidivism. According to a source in law enforcement, however, Epstein was allowed to submit a report by his private psychologist, Dr. Stephen Alexander of Palm Beach, Florida, whose phone has since been disconnected with no forwarding information.

The Daily Beast’s second article provided details about Epstein’s systematic abuse of underage girls at his Palm Beach mansion, where members of his staff allegedly recruited and paid a parade of teenagers, most of them 16 or younger, to perform daily massages that devolved into masturbation, groping, and sometimes full-blown sexual contact. It also revealed a monetary relationship between Epstein and Jean Luc Brunel, a frequent visitor to whom he gave $1 million around the same time that Brunel was starting his MC2 modeling agency. Some of the young girls MC2 recruited from overseas—often from Eastern Europe and South America—are known to have been passengers on Epstein’s private jets.

The U.S. Attorney General’s Office in Florida says that it is against policy to confirm or deny the existence of an investigation. Jeffrey Epstein’s lawyer, Jack Goldberger, says he has no knowledge of an ongoing probe, and he told The Daily Beast, "Jeffrey Epstein has fully complied with all state and federal requirements that arise from the prior proceedings in Palm Beach. There are no pending civil lawsuits. There are not and should not be any pending criminal investigations, given Mr. Epstein’s complete fulfillment of all the terms of his non-prosecution agreement with the federal government."

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The ex-wife of hedge fund titan Steven Cohen has lowered her asking price in her controversial racketeering lawsuit against the SAC Capital Advisors founder.

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With succession in mind, one of the world’s most famous investors is poised to hire a hedge fund manager to help him run his firm’s portfolio.

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One of the world's most realistic people (which for some reason the permabulls take as an indication of extreme bearishness: which is fine - after all they themselves live in an imaginary world populated with market marking unicorns and benign computer programs), David Rosenberg has shared ten things that would make him bullish. Alas reading through these gives one the impression that Hades would first turn endothermic before any of these actually were to come true. And for some more practical views from Rosie, we also include his spot on interpretation of today's GDP data.

I was recently asked to provide a list of developments that would make me more bullish on the macro and market outlook. Here are a few:

1. Initial jobless claims below 400k on a sustained basis. This would lead to job growth strong enough to generate organic wage growth.

2. Improvement in housing inventories to a 5-6 months’ supply backdrop. This would help establish a floor under home prices.

3. Signs of a turnaround in the money multiplier, money velocity and the ratio of commercial bank non-liquid assets/total assets. Any sign that the debt deleveraging cycle has run its course.

4. A new "killer app" or some major technological breakthrough would be nice.

5. A sustained decline in oil prices that is induced by new supplies (or peace in the Mideast?) as opposed to demand destruction would act as a de facto tax cut.

6. Structural economic reforms in the world's "surplus saving" countries like China, India and Germany that stimulate their domestic demand, and hence bolster our exports and reduce the global reliance on the U.S. as the consumer of last resort, would be a huge plus.

7. A peaking out in the personal savings rate (the sooner we get to 6%-8%, the better) – get to a level consistent with pent-up demand.

8. Consumer confidence closer to 100 (typical of expansion) than the current 50 reading.

9. An end to the steep cutbacks at the state and local government level.

10. New and more effective political leadership globally – could the Cameron victory in the UK be a leading indicator towards fiscal probity?

And here is Rosie's take on today's most important economic data point:

The economy underperformed expectations in the second quarter with the initial estimate of real GDP growth coming in at a 2.4% annual rate. The revisions to the back-data also showed the Great Recession to be even greater than initially thought with the economic loss now totaling 4.1% from 3.7% previously. And the revisions also reveal a policy- and inventory-induced recovery that is now losing steam at a faster rate than was thought before, especially with respect to consumer spending – the 2.4% GDP pace is down from 3.7% in the first quarter and 5% in the fourth quarter of last year.

There are legions of economists out there who claim that it is normal to see the economy take a breather at this stage of the cycle, but in truth, what is “normal” in the context of a post-WWII recovery is that four quarters into it, real GDP expands at over a 6% annual rate. That puts 2.4% into a certain perspective. And with the revisions now showing the downturn deeper, the level of economic activity in real terms is still 1% below the pre-recession peak. Again, when you look back at 55 years worth of post-war data, what is normal 2-1/2 years after a recession begins is that by now we are at a new peak already (breaking above the prior high in GDP by 8%, on average).

The big story in the second quarter as has been the case for much of the past year was the contribution from inventories – there was a “build” of $75.7 billion and this added over a percentage point to headline GDP growth. This follows a “build” of $44 billion in the first quarter so this is no longer the case that companies are merely reducing the pace of inventory withdrawal. Businesses actually added to their stockpiles at the fastest rate in five years. And with sales lagging behind, this inventory contribution is likely to fade fast in coming quarters. Real final sales – representing the rest of GDP (excluding inventories) – came in at a paltry 1.3% annual rate last quarter and has averaged 1.2% since the economy hit rock bottom a year ago in what is clearly the weakest revival in recorded history.

Normally, real final sales are expanding at closer to a 4% annual rate in the year after a recession officially ends. Then again, we haven’t heard anything official just yet about the one that began in December 2007 – and so the fact that it is averaging at around one-third that typical pace in the face of unprecedented policy stimulus is rather telling. And frightening.

Looking at the components of GDP, it appears as though the economy is set to slow even further and a flattening in Q3 and perhaps even contraction by Q4, barring some positive exogenous shock, cannot be ruled out. First, one of the primary contributors to the renewal in economic growth, business capital spending, which has expanded at a double-digit annual rate for three quarters in a row – expanding at a 22% annual rate in Q2 – is starting the current quarter at a pace that is closer to high single-digit growth. That alone may trim a halfpercentagepoint from headline growth this quarter.

With durable goods inventories-to-sales ratios rising to eight-month highs and most manufacturing diffusion indices rolling over, it would stand to reason that the inventory contribution to growth is over. Though to be fair, that will also mean that the import boom will subside and provide some offset (foreign trade actually subtracted 2.8 percentage points from GDP growth last quarter). The government sector added 0.9 percentage points to second-quarter GDP growth with an apparent seasonal skew from defense spending and there was a rare increase in state & local spending, which is hardly going to be repeated this quarter as the budgetary cutbacks deepen. The housing tax credits triggered – get this – a 28% annualized surge in residential construction in the second quarter and while a tiny share of the economy now, this still added 0.6 percentage points to the headline. All the incoming data point to a huge reversal in the real estate sector in the current quarter.

In the final analysis, it is the consumer that is key. With a 70% share of GDP, even a tepid 1.6% annualized growth rate in Q2 – the consensus was looking for 2.4% – can end up adding 1.2 percentage points to GDP growth (which is almost as much a contribution as a 22% surge in capital spending).

But after back-to-back months of declining retail sales and consumer confidence running at half the level it usually does in the context of an economic expansion, the data are pointing to virtual stagnation in household spending this quarter. In fact, what really came to light in the revisions to the data was just how lacklustre the pace of consumer spending has been over the past year – so much so, in fact, that the savings rate is now estimated to have risen to 6.2% in the second quarter from 5.5% in the first (revised sharply higher than the prior estimate of 3.5%). We have long highlighted consumer frugality as crucial deflationary secular theme and the revisions to the savings rate go a long way towards bolstering that view – underscored by the near-0% annualized trend in the pricedeflator for Gross Domestic Purchases last quarter.

So even though the second quarter corporate earnings season was decent, one reason why the equity market is struggling of late is because you can only drive and gaze through the rear-view mirror for so long. At some point, you have to look through the front window, and the prospects for a double-dip or some facsimile thereof were bolstered, not hindered, by the contours of the second quarter GDP report.

If indeed, the inventory cycle is behind us, then what we have on our hands is an underlying baseline trend in GDP of 1.2% at an annual rate. And if we are correct in our assumption that the looming withdrawal of fiscal stimulus at the federal level and the cutbacks at the state and local government level subtract 1.5% from growth in the coming year, then it begs the question: How exactly does the economy escape a renewed moderate contraction over the next four to six quarters, barring some unforeseen positive boost? In turn, how does a strong possibility of such a contraction square with consensus views of a 35% surge in corporate profits to new record highs as early as next year? The answers to these questions are as painful as they are obvious.

Perhaps it bears pointing out that one may consider adjusted Rosie's new frugality concept: as Bloomberg pointed out, US consumers are only frugal if they can default on existing payment obligations. Because buying iPads while broke is not quite the frugal behavior one would expect out of rational, or in fact even normal, consumers (although it confirms what we have been saying for about a year now, that any marginal purchasing power in the US exists only courtesy of defaulting on mortgages, credit cards and other deferred payment plans by the evaporating middle class).

In April the New York Times outed the penthouse at 31 West 21st Street as the apartment cast as the crash pad for Shia LaBeouf's banker character in Wall Street: Money Never Sleeps, the sequel to Oliver Stone's 1987 classic. The brokers said they were banking on the movie to provide marketing muscle for the 6,250-square-foot duplex (which has 3,500 additional square feet of outdoor space), and a $12-$14 million asking price was expected. With the movie set to come out in September, the Flatiron District condo has finally hit the market, for a surprise $15 million. Guess the flick is tracking well with test audiences!

The Aligned Real Estate listing doesn't actually have the price, though the StreetEasy page does. The penthouse, purchased for just $1.4 million in 2003—before the second level was built—has previously been on the market for as much as $16.5 million. Here's a bit of the brokerbabble:

The lower level features roughly 3,300 square feet of open living/dining space with spectacular northern views, plus a media room, 2 wood burning fireplaces and 3 full bedrooms. The upper level features a dramatic master suite, including another wood burning fireplace, gigantic walk-in closet and a six fixture limestone bath, with radiant heat floors, Jacuzzi tub and rainhead shower. Also on the upper level is a large indoor entertainment area with wet bar, opening onto a park-like 3,300 square foot wrap terrace, all wired with a Bose indoor/outdoor sound system. Entertain one or one hundred in this trophy penthouse residence.

Yep, life's a party, until the Blue Star deal blows up in your face and suddenly you're in and out of rehab and hookers are your best friends and you wind up on a CBS sitcom selling third-rate punchlines to canned audience laughter. It's the same old cautionary tale.

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Northlight Financial has begun fundraising for a “pure play” corporate credit hedge fund, which it hopes to launch by the end of the year.

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Hedge fund Metacapital Management soared 28% in the first half, with half of that return coming during the second quarter, the worst for the hedge fund industry in a decade.

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Until now, the only thing missing from the news that Sandra Abrams was suing two former employees of her husband's hedge fund, Titan Capital management, for blackmailing her with the topless photos she took on her honeymoon, were the photos-in-question of Sandra.

Read the background story (and comments demanding a picture of Sandra) >>

We couldn't find those, but we did find this pic of Russell Abrams of Titan Capital with a woman that we very much suspect is his wife, whose full name is Sandra Piedrabuena Abrams.

The picture is currently set as his facebook profile picture.

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From today's Lunch With Dave:

Over half the S&P 500 have reported (304 to be precise) and so far the season
has been rather jolly with 75% beating bottom-line estimates and even 63%
doing likewise on the revenue line – both above average (of 70% and 60%,
respectively in recent quarters).  It now looks like EPS growth is going to test
+50% YoY, which is impressive indeed.  Companies are retaining more than 10%
of their profits (post all operating costs), which is good news for bondholders,
that is for sure.  

So why isn’t the equity market reacting better?  A few reasons:  

First, a lot of this good news was already priced in to begin with. 

Second, the second quarter is a bit like ancient history right now – guidance has
not been that good with three companies providing downbeat assessments for
the coming quarter for every one that had something positive to say about the
near-term outlook.  Over the long-term, that negative-positive ratio is generally
closer to two-to-one than three-to-one .  

Third, analysts have stopped raising their estimates for the year – in fact, for
every one that is doing so there is another one who is cutting forecasts.  The
future is muddled despite the nice things we see through the rear-view mirror,
which is why the equity market has been in this tug-of-war lately.  When the
market was strengthening to the April highs, one of the catalysts at the time was
that analysts were coming out of the Q1 reporting season at that time upgrading
their EPS estimates three times faster than they were cutting forecasts. 
 
Fourth, while revenues have been above expected, they are running at about
one-fifth the pace of profit growth and as a result margins are hitting new highs.
What happens when they begin to compress (especially with 80% of the
incoming economic data disappointing over the past month)?

Fifth, with the monetary and fiscal policy stimulus behind us, we can see what
the economy looks like – back-to-back declines in retail sales, durable goods
orders and shipments, and household employment. Not to mention consumer
and producer prices.  

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Hedge fund billionaire Samuel Wyly and his brother and business partner, Charles, have been accused of running a $550 million fraud, replete with allegations of insider-trading and hiding assets.

According to the Securities and Exchange Commission lawsuit, filed yesterday in Manhattan, the Wylys set up an “elaborate sham system” of offshore companies and family offices to skirt disclosing their holdings in public companies on which they served as directors.

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WASHINGTON (MarketWatch) -- The nation's auto industry is on the rebound, President Barack Obama said Friday, with all three U.S. automakers operating at a profit for the first time in six years. "There's no doubt the auto industry is growing stronger," Obama said at a Chrylser assembly plant in Detroit. Obama said his administration's $60 billion bailout of the industry is beginning to pay off.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

If you don’t normally read the comment section, I encourage you to click through to yesterday’s post about “clean slate” thinking. I particularly want to endorse this perspective from Jed Harris:

I think it turns on on whether one gives more weight to models or observations. The modernist architects and planners had very strong models, and ignored or had contempt for actually existing social reality, so they didn’t work very hard to observe or understand it. They didn’t feel any obligation to test their theories in the small before trying to apply them in the large. They didn’t have to listen to “the little people” who didn’t understand the theory and only knew what they personally observed.

This is exactly right, and it succinctly makes a point that I’ve tried to make in the past. Jed goes on to argue that “the most serious threat from theory run amok at the expense of observation seems to be neo-classical economics.” Prompting a thoughtful response from some other readers, especially Jess.

I think I share Jed’s sentiment but wouldn’t quite put it this way. Models by themselves aren’t threats to anything. What matters is how models are used. The neoclassical model, like all models, is an approximation of reality, and it fits some problems better than others.

To pick a silly example at random, a few weeks ago there was some online chatter about this article where Terry Savage chastises some little girls for running a lemonade stand where the product was available for free:

“You must charge something for the lemonade,” I explained. “That’s the whole point of a lemonade stand. You figure out your costs — how much the lemonade costs, and the cups — and then you charge a little more than what it costs you, so you can make money. Then you can buy more stuff, and make more lemonade, and sell it and make more money.”

This is, of course, ridiculous. There’s no reason all lemonade stands need to be for-profit enterprises. Kids learn a variety of lessons from lemonade stands. Charging might teach valuable lessons about budgeting and self-sufficiency, but giving lemonade away can teach equally valuable lessons about generosity and public service. Savage apparently doesn’t care what the girls’ parents might have hoped their kids would get out of the experience. The mere fact that the girls were failing to conform to the neoclassical model of homo economicus was enough to condemn their activity.

That’s a frivolous example, to be sure, but the same mixture of intellectual laziness and arrogance crops up in more serious contexts. I’ve written before about this Richard Epstein column where he criticizes the free software movement for, basically, failing to conform to the assumptions of the neoclassical model:

The open source movement shares many features with a workers’ commune, and is likely to fail for the same reason: it cannot scale up to meet its own successes. To see the long-term difficulty, imagine a commune entirely owned by its original workers who share pro rata in its increases in value. The system might work well in the early days when the workforce remains fixed. But what happens when a given worker wants to quit? Does that worker receive in cash or kind his share of the gain in value during the period of his employment? If not, then the run-up in value during his period of employment will be gobbled up by his successor – a recipe for immense resentment. Yet that danger can be ducked only by creating a capital structure that gives present employees separable interests in either debt or equity in exchange for their contributions to the company.

This passage bears no relationship to reality. Free software projects scale up just fine without “a capital structure that gives present employees separable interests in either debt or equity.” Contributors are not employees or shareholders. The inability to cash out does not, in fact, generate “immense resentment.” And Epstein could have learned all of this pretty easily if he’d talked to a few people in the free software community before writing his column. But why let facts clutter up a perfectly good theory?

I sometimes get the same vibe when I talk to legal academics about software patents. Many software patent supporters in academia hail from the law-and-economics tradition, and they have a coherent neoclassical story about how patents create incentives for innovation in the software industry. The problem with the story is that it’s utterly at odds with how the software industry actually works. And they don’t seem to understand (or maybe they don’t care) why software patents have generated so much opposition among the people who are actually responsible for producing software innovation.

A humble, bottom-up thinker takes this kind of disconnect between economic theory and lived reality as a reason to re-think the theory—or even better, to learn about a domain before trying to theorize about it. A top-down, “clean slate” thinker takes it as evidence that he needs to do a better job of explaining the theory to the uninitiated or, at worst, to tweak a few of the implementation details.

This “clean slate” vice isn’t unique to neoclassical thinkers by any means; all ideologies are prone to similar excesses. But I think Jed is right that abuses of neoclassical theory are pretty common. Precisely because the neoclassical model is such a powerful way to explain certain social phenomena, a lot of people have convinced themselves that it can be usefully applied to every problem. This isn’t a bad parlor game, but it’s a terrible way to do public policy.

This is a guest post from the author's blog.

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Yesterday may go down in the history books for being the only day in months in which the daily decoupling, either between risk and FX, or risk and Bonds did not occur. Alas, today the binary market hijacking mutants are back to their signal chasing momentum ploys, as a result despite the 10 year about to plunge below 2.90, stocks are flat. As either stocks are rich (no question there) or bonds are (yields are low), the intraday recoupling surefire trade is back, and promises to pay a few nickels to those willing to short stocks and short the 10 year (and pray there is no steamroller in the vicinity).

NEW YORK (MarketWatch) -- Sources familiar with the matter said Facebook Inc. will likely put talks of going public on the back burner, giving itself more time to add users and increase sales, according to a media report on Friday. The popular social-networking site may aim for a 2012 initial public offering, instead of investor speculations of a 2011 deal. For now, Chief Executive Mark Zuckerberg holds control of the board and the power to decide when to sell shares. Sources told Bloomberg the extra time would allow Facebook to bolster its user base beyond the 500 million mark, and clear up mounting criticisms over privacy issues. They estimate 2010 sales of $1.4 billion, while private-company exchange SharePost Inc. valued the company at $24.9 billion.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

The New York Times’ “Weddings and Celebrations” pages are filled every week with stories about the weddings of beautiful young hedge funder to one another. But one hedge fund trader’s wedding to a former hedge fund employee has already stolen an unusual number of column inches in the Grey Lady and breathless coverage around the world.

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SAN FRANCISCO (MarketWatch) -- Chrysler Group LLC, managed by Fiat SPA , will add a second shift to its Sterling Heights, Mich., assembly plant, resulting in the addition of 900 jobs in early 2011, the carmaker said Friday. Chrysler also intends to keep the Sterling Heights plant open beyond 2012. "After a careful review of all of our manufacturing operations, it became evident that more production capacity was needed and it made good business sense to extend the life of [the Sterling Heights plant]," said Chrysler Group Chief Executive Sergio Marchionne in a statement.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

Since Athens agreed to budget cuts approaching 11% of GDP, local governments have seen a sharp decline in funding. Yesterday, the cut-off caused the city of Piraeus to announce a stop payment on $275 million of debt.

Mayor Panagiotis Fasoulas demanded immediate payment of three years of owed funding or his city would abandon its own debt.

Kathimerini:

Addressing a press conference, Fasoulas requested a meeting with government officials to find a solution that will allow the municipality to make good on its obligations - to citizens, employees and creditors. The mayor did not rule out the possibility of strike action - without determining what form this would take - to demand the monthly disbursement of some 1.6 million euros.

Piraeus City Hall currently owes some 210 million euros in debts amassed over the past 20 years. Over the past three years, the government has withheld state grants from Piraeus municipal authorities. Fasoulas yesterday described the government's stance as «provocative,» noting that a total of 44 million euros had been spent on paying off municipal debts during his three years as mayor, while only 12 million euros had been spent during the eight years that his predecessor, Christos Agrapidis, had held the post. Fasoulas said his municipality was not seeking privileged treatment but wanted to renegotiate the payment of its debts, paying larger installments at a lower interest rate.

Needless to say, Athens doesn't have the money for a bailout. So what happens if when Piraeus defaults -- Elliniko won't be far behind -- and great swaths of local government abandon their debts. And then...

See who gets screwed in a Greece default -->

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Mike Krieger, who has been a staple poster at Zero Hedge courtesy of his willingness to speak the truth no matter how gory or controversial, was on the Max Keiser show, discussing everything from trivial items such as Goldman Sachs movie casting, to far more serious issues such as Obama's failed presidency, corporatism, information oligopolies, the overturn of various core fundamental democratic principles, consumer culture, the Federal Reserve, and gold as the one true money standard. As always an objective and highly informative discussion between Mike and Max.

Fast forward to 14 minutes in the clip below for the full Krieger interview.

LONDON (MarketWatch) -- Spain's economic recovery will be "weak and fragile," underperforming the euro zone, the International Monetary Fund said Friday in a report following a regular consultation between IMF staff and Spanish officials. The IMF has forecast Spanish gross domestic product to shrink by 0.4% in 2010, followed by growth of 0.6% in 2011. The IMF said its executive board stressed the need for Spain to follow through on deficit reduction and pension reforms, as well as efforts to increase the flexibility of the labor market. The IMF said Spain's banking sector "remains sound, but faces elevated and unevenly distributed risks." They applauded the recent consolidation of savings banks and regulatory reforms as well as the decision to publish bank-by-bank stress-test results.

Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.

Avenue Capital Group’s bid for Newsweek magazine has been imperiled by the hedge fund’s ties to the publisher of sensationalist grocery-store tabloid the National Enquirer.

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Just one day after pleading guilty to defrauding investors in his hedge fund, WG Trading’s Paul Greenwood has settled Securities and Exchange Commission charges stemming from the same allegations.

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A London appeals court will allow a former New Star Asset Management hedge fund manager’s bullying lawsuit against his old firm to proceed.

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BNP Paribas has hired a prime brokerage executive from Bank of America, whose prime brokerage business it bought two years ago.

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The boarding of a Turkish ship by Israeli commandos and the international brouhaha that it sparked has thrown a searing spotlight on that emerging nation. Several hedge fund friends and not a few readers of this newsletter in Istanbul have urged me to explore this intriguing nation further. So I thought I would use this otherwise glacial news day to do exactly that.

I first trod the magnificent hand woven carpets of the Aga Sophia in the late sixties while on my way to visit the rubble of Troy and what remained of the trenches at Gallipoli, a bloody WWI battlefield. Remember the cult film, Midnight Express? If it weren’t for the nonstop traffic jam of vintage fifties Chevy’s on the one main road along the Bosporus, I might as well have stepped into the Arabian Nights. They were still using the sewer system built by the Romans.

Four decades later, and I find Turkey among a handful of emerging nations on the cusp of joining the economic big league. Q1 GDP grew at a blazing 11.4% annualized rate, second only to China, exports are on a tear, and the cost of credit default swaps for its debt is plunging. Prime Minister Erdogan, whose AKP party took control in 2002, implemented a series of painful economic reform measures and banking controls which have proven hugely successful. Since the beginning of this year, Turkey’s ETF (TUR) has outperformed BRIC poster boy China’s ETF (FXI) by a whopping 11.8%.

Foreign multinationals like general Electric, Ford, and Vodafone, have poured into the country, attracted by a decent low waged work force and a rapidly rising middle class. The Turkish Lira has long been a hedge fund favorite, attracted by high interest rates. With 72 million, the country ranks 18th in terms of population and 17th in terms of GDP, some $615 billion. It has a near perfect population pyramid; with young consumers greatly outnumbering expensive retirees (click here for more depth in my “Special Demographic Issue” at http://www.madhedgefundtrader.com/november_6__2009.html ).

Still, Turkey is not without its problems. It does battle with Kurdish separatists in the east, and has suffered its share of horrific terrorist attacks. Inflation at 8% is a worry. The play here long has been to buy ahead of membership in the European Community, which it has been denied for four decades. Suddenly, that outsider status has morphed from a problem to an advantage.

Growing economic power brings political influence with it. The last year has seen Turkey broker settlements in the Balkans and facilitate the Iranian uranium swap with Russia. Some analysts claim this new flexing of diplomatic muscle has a pronounced Islamic, anti American bent. Remember, Turkey refused transit rights to US forces during the invasion of Iraq.

The way to play here is with an ETF heavily weighted in banks and telecommunications companies, classic emerging market growth industries (TUR). You also always want to own the local cell phone company in countries like this, which in Turkey is Turkcell (TKC). Turkey is not a riskless trade, but is well worth keeping on your radar.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.