Behind Market Selloff: Fed ‘Taking Punch Bowl Away’
You have to appreciate the honesty in headlines like this. It highlights that this current rally or recovery in the markets are in most part due, to the massive stimulus our central bank as provided through bond purchases and historically low interest rates.
Correspondingly, it makes sense that without that assistance that markets prices would drop lower with the potential reality of that not being available. I believe without the unprecedented support the Federal Reserve and U.S. Treasury has provided, we will resume natural deflation to bring asset prices across multiple classes back to a level that can be sustainable with the available credit & money to support them. This will be look down upon from most mainstream economist and commentators but in the end it will be the most sustainable path forward and as such, it should be looked to as positive development.
CNBC - Stocks were headed for their worst day in a month Wednesday after the Federal Reserve signaled that it may be less willing to provide more stimulus to the U.S. economy.
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Breaking News: CEO Jon Corzine of MF Global allegedly orders customer funds to be used for covering overdraft
This could be very damning evidence if this turns out to be true. To be fair, this email just surfaced and we need to let the authorities to do their job and determine the validity and authenticity of this email. What is interesting is that the transfer is to a JP Morgan Banking unit in London.
I would have to believe this may be tried to the bets MF Global made on Europe that would force credit lines and positions to be covered. It doesn’t look good and we will need to stay on top of this to see what happens. Customers are largely still without over $1 billion in deposits and this needs to be gotten to the bottom of so that confidence can be fully restore that deposit taking institutions can not take client funds and use them to cover their own bets.
Bloomberg:
Jon S. Corzine, MF Global Holding Ltd., chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in one of the brokerage’s JPMorgan Chase & Co. (JPM) accounts in London, according to an e-mail sent by a firm executive.
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Treasury could reap 40% profit in sale of some Citigroup stock
Good to see the government unload their shares back to the private sector. They did not really involve themselves much in management or compensation issues other than the general TARP mandate so this will take the overhang off the stock. Citigroup is the posterboy for the “Too Big to Fail” Koolaid that everyone was drinking for the last 24 months.
This has got to stop and if any large bank commits such bad mistakes then they need to pay the ultimate price like any other company. Until we understand that no matter what the cost, the long term cost will always be greater if we let bad companies stay in business and keep good companies prosper the lessening of competition as well as preventing new entrants from entering the field because of the embedded players.
This is at the very core of our problems in this country, we shun the dynamism that failure brings to our economy. We want to support existing companies even when it does not make a business case for having them around. This only helps our foreign competitors. If we are using our resources to support failing companies then we are not letting those resources go to where the future jobs will be generate along with natural growth.
USA Today – The Treasury Department said Monday that its first sales of Citigroup stock (C) will cover up to 1.5 billion shares.
That would amount to about 20% of the 7.7 billion shares of Citigroup common stock the government owns.
It received the shares as compensation for the financial support it extended to the bank during the height of the financial crisis.
In a statement Monday, Treasury said it plans to proceed with the sales of the Citigroup common stock “in an orderly fashion under a pre-arranged trading plan with Morgan Stanley, Treasury’s sales agent.” Treasury did not disclose in its brief announcement exactly when the stock sales would begin or how long the sales would last.
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Goldman Sachs Board Rejects Shareholder Demands on Pay Restrictions
No surprise this request from Goldman shareholders fell on deaf ears. This issue will only be settled in the courts. Goldman has a reputation of lavish compensation and that creates an environment that makes smart people who want to work hard and make oddles of cash. That could be the reason why the board didn’t want to do anything that could possible tarnish that image regardless of the the public opinion is off their compensation.
Wall Street Journal - Goldman Sachs Group Inc. said its board of directors rejected demands from shareholders that the investment bank investigate excessive compensation and take steps to recoup some awards given to executives.
The company reported in a filing with the Securities and Exchange Commission that it received several letters from shareholders asking for the firm to revamp the way it pays out salaries, benefits and compensation. Goldman’s board “rejected the demands,” according to the filing.
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Bankruptcy Bloodbath May Hit Municipal Bond Owners Next
This is one of the great questions, will the U.S. federal government let the states default or will they bail them out? Investors are betting they will be made whole if the states default and if they aren’t, we will see a major backlash especially after the bailout of Fannie Mae and Freddie Mac. It will be interesting to see who is right in the end.
Public officials shouldn’t think about filing for Chapter 9 municipal bankruptcy to solve mounting labor costs and pension liabilities. Even talking about this action will invite an inquiry from Fitch Ratings, the company said in a report published Jan. 27.
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Morgan Stanley CEO John Mack declines bonus for third year in a row
It is refreshing to see a CEO that understands the unprecedented backstop put up by taxpayers to help a practically insolvent banking system. John Mack is to be congratulated for taking this action and hopefully it will send the right message and maybe we can get a more humbled Wall Street that appreciated the early Christmas we provided them. Happy Holidays John.
Morgan Stanley’s outgoing CEO John Mack has declined a bonus for the third year in a row.
In a memo sent to the investment bank’s employees on Friday, Mack said he recommended to the board last week that he receive no year-end bonus “given this unprecedented environment and the extraordinary financial support governments provided to our industry.”
Morgan Stanley was one of hundreds of U.S. banks that received assistance through the Troubled Asset Relief Program to help it manage through last fall’s credit crisis. Morgan Stanley repaid the $10 billion it owed the government in June.
Mack said financial firms cannot ignore the lessons of the market crisis, and called for the need for more regulatory reform, including efforts to better align executive compensation with long-term performance.
Mack will step down as CEO on Jan. 1, but will remain at the company as chairman. He is being succeeded by co-president James Gorman.’
Source: AP
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Fed Officials Said Low Rates May Fuel Speculation – Ya Think?
May? I would say that low interest rates for low or extended periods of time, always creates speculation. It is not because people are greedy but more they are “forced” to speculate on other and riskier asset classes that traditional government debt like Treasuries. Many investors rely on fixed income investments because they need a guaranteed rate of return, like retirees, pensions funds and insurance companies.
When we keep rates artificially low, they are forced to invest in other assets even if they are fundamentally not sound investments, when enough money does this, you see prices rise even during a bad economics environment. Right now with 10% plus unemployment in the United States, I would say that is happening right now.
Federal Reserve officials said record-low interest rates might fuel “excessive” speculation in financial markets and possibly dislodge expectations for low inflation, according to minutes of their meeting released today.
“Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period,” minutes of the Nov. 3-4 meeting said, “including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations.”
While policy makers agreed that the chances of such effects were “relatively low, they would remain alert to these risks,” the minutes showed. Fed officials at their meeting indicated the benchmark lending rate would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline.
Source: Bloomberg
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