High Speed Trading and Unabated Accounting Fraud, What is the Little Guy to Do ?

“WASHINGTON (MarketWatch) — Faced with a rash of insider trading in the markets, federal prosecutors and securities regulators in recent years have stepped up efforts to crack down on violations.

But insider trading and market fraud persist, perhaps at epidemic levels. Even though the Securities and Exchange Commission has brought more insider-trading actions in the past three years than in any three-year period in the agency’s history, and even though the U.S. attorney in New York City has convicted 73 people in insider-trading cases since 2009, the crime remains all too common.

That’s what MarketWatch found in a series of interviews with people convicted of insider trading and fraud. These felons painted a picture of an unfair market driven by widespread cheating that favors those with privileged information and expensive technology. The cheating also hurts individual investors and retirement savers trying to follow the rules of the road and produces a deeply unfair market environment.

MarketWatch reporters conducted a series of in-depth interviews with ex–investment brokers and others who lost their trading licenses and are either in prison serving multiyear sentences or have done their time in the slammer and now advise others on what not to do.

The results were discouraging.

MarketWatch found that insider trading may be one of the most common crimes on Wall Street and one of the least prosecuted. And that was only the beginning. MarketWatch discovered that the problem for retail investors goes far beyond a failure of regulators to identify insider-trading violations.

The financial criminals we spoke with said that not only do many investors routinely skirt insider-trading laws, but the explosion of computerized high-speed trading in recent years has made the situation even more unfair for the retail investor.

Those retail investors should be careful when relying on audited financial statements because accounting fraud continues unabated, according to one interview. Accounting-fraud cases are complex, and regulators don’t have the resources to enforce the law effectively, according to one felon.

As one fraudster put it to MarketWatch, the Securities and Exchange Commission has roughly 4,000 employees to regulate the financial industry while there are 35,000 cops in New York fighting blue-collar crime….”

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“A simultaneous drop in both U.S. and Chinese manufacturing threatens to give the global economy a double whammy.

American manufacturing companies reported fewer orders in May — the largest drop in their business in almost four years. The Institute for Supply Management (ISM) index fell from 50.7 percent to 49 percent, the third straight monthly drop.

Meanwhile, the China HSBC Purchasing Managers’ Index (PMI) dropped to 49.2 percent from 50.4 in April, the lowest since October 2012.

“This is not a good moment for the world economy,” David Bloom, currency chief at HSBC, told the U.K.-based Telegraph. “The manufacturing indices came in weaker than expected in China, Korea, India and Russia, and then we got America’s ISM.

“We thought we had a clear picture that the US was recovering, Japan was printing money and were we’re back to happy days, and now suddenly a huge spanner has been thrown in the works.”

Business executives attributed the drop in orders to falling government spending, a slowdown in China and a downturn in Europe.

Tightening fiscal policy in the United States is squeezing consumer spending, according to The Telegraph.

“People have been living in a psychological bubble,” Charles Dumas of Lombard Street Research told The Telegraph. “They ignored the cuts but now they are starting to feel it.”

The ISM drop came as a surprise….”

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“A Federal Reserve survey says economic growth increased throughout the United States from April through mid-May, fueled by home construction, consumer spending and steady hiring.

Eleven of the Fed’s banking districts reported “modest to moderate” economic growth, according to the Beige Book survey released Wednesday. The 12th, in Dallas, reported strong growth.

The survey is based on anecdotal reports. The mostly favorable results of the latest survey suggest that the economy and the job market are improving despite tax increases and government spending cuts that took effect this year.

But the modest or moderate improvement reported for most regions appears to fall short of the strong and sustained growth that several Fed members have said is needed before the Fed starts tapering its bond purchases. Those purchases have helped keep interest rates at record lows.

The Fed has been assessing the job market’s health in considering when to start scaling back its support for the economy, including $85-billion-a-month in Treasury and mortgage bond purchases. The information from the latest Beige Book will discussed along with other economic data at the Fed’s next policy meeting on June 18-19.

Investors are paying closer attention to the Fed after minutes of the past meeting showed that several members favored reducing the bond purchases if the economy demonstrates strong and sustained growth. And Chairman Ben Bernanke told a congressional panel last month that the Fed could slow the pace of the bond purchases over the next few meetings, if the job market shows “real and sustainable progress.” ….”

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“The recent bond market tumble will likely carry over into stocks, says Pimco CEO Mohamed El-Erian.

The 10-year Treasury yield jumped to a 13-month high of 2.23 percent last week and stood at 2.15 percent Tuesday night.

“May was important because every source of carry was under attack — interest rate risk, credit risk … whatever you name — came under attack,” El-Erian told CNBC. 

“My sense is that some of it will continue, … and there will be some cascading down into equities.”

The fundamental problem is that the Federal Reserve’s quantitative easing (QE) program “is taking virtually every financial asset to artificially elevated prices,” El-Erian said. “There’s a huge disconnect between prices and fundamentals.”

“The hope that’s priced into the market is that we’re going to replace artificial growth with real growth,” he noted, but so far that hasn’t happened.

“QE is a medication that comes with a warning, which says: ‘Do not use it for a long time because you’ll get side effects,” he quipped.

So how should investors deal with this difficult dynamic?

“Do what Pimco has been doing now for a few weeks, which is to pull back from risk, pull back from surfing this wave of central bank liquidity … and step back from risk a little bit,” El-Erian suggested….”

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“BRUSSELS (Reuters) – Banks under the watch of the ECB that run into difficulty could be shut by a European agency, under a proposal that is set to rouse opposition in euro zone capitals.

European officials are seeking to design a scheme to close troubled banks to complement a contentious new system of supervision in the euro zone led by the European Central Bank.

The first leg of this banking union is due to be completed next year when the ECB takes on the supervision of banks. Now negotiations are under way to build the second leg – an agency to close banks with a central fund to cover the costs involved.

The European Commission is drafting the plan and, on Wednesday, commissioners from each of theEuropean Union’s 27 members met to discuss an early outline of the blueprint seen by Reuters.

In it, officials suggest giving the European Commission and a newly-created agency powers to close banks were the ECB to spot a problem and, in the words of one person close to the matter, “ring the bell”….”

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“NEW YORK/CHICAGO (Reuters) – U.S. regulators sued U.S. Bancorp on Wednesday, alleging it knowingly allowed the head of a failed Iowa brokerage, dubbed ‘the Midwest Madoff,’ to use customer money held at the bank to help fund a lavish lifestyle.

The case is the first from regulators to target banks used by Russell Wasendorf Sr., the former chief executive of Peregrine Financial Group (PFG), who began serving a 50-year sentence in February for bilking $215 million from customers.

The revelation of a nearly two-decade fraud last summer has dealt another blow to confidence in the futures industry after the failure of MF Global in late 2011, and drew comparisons with New York money manager Bernard Madoff’s massive Ponzi scheme due to the length of his deception. Madoff is serving a 150-year prison sentence.

“(The bank) knowingly facilitated Wasendorf’s transfers of millions of dollars of customers’ funds out of this account to pay for Wasendorf’s private jet, his restaurant, and his divorce settlement, among other things,” the U.S. Commodity Futures Trading Commission (CFTC) said.

“Although the (account) was a customer segregated account containing Peregrine’s customer funds,U.S. Bank and Banker A treated the account as if it were a Peregrine commercial checking account.”

The lawsuit singled out a female employee, identified only as ‘Banker A’ and described as a ‘Assistant Relationship Manager’ at the bank’s Cedar Falls, Iowa, branch, who had close dealings with Wasendorf. According to the suit, the bank and employees involved with the account were aware it held customer money.

“Throughout the relevant period, Banker A personally facilitated telephonic and inbranch deposits and wire transfers of Peregrine customer funds,” the CFTC lawsuit said.

“Banker A and other U.S. Bank personnel perceived Wasendorf as a successful, desirable bank client with the potential to be a profitable, high growth client.”

The CFTC complaint, filed in the U.S. District Court for the Northern District of Iowa, alleged U.S. Bank NA, a unit of U.S. Bancorp, accepted customer funds as security on multimillion dollar loans to Wasendorf, his wife and his construction company….”

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DOW breaks 15k

Gold , silver, and bonds go higher on safety.

Oil remains higher on lower inventory data.

Markets begin to fear Friday’s employment data.

Financials and technology lead into the red.

Markets accelerating to the downside quick.

Market update 

[youtube://http://www.youtube.com/watch?v=Jg8hhOmJ3vo 450 300]

 

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“Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO.

In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates,J.P. Morgan Chase JPM -1.70% & Co. and Morgan Stanley MS -1.46%bankers in London are moving to assemble so-called synthetic collateralized debt obligations.

CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds.

Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice.

While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments.

During the financial crisis, CDOs pegged to soured mortgage loans caused losses to careen around the world.

Their catastrophic impact was denounced by many lawmakers and investors, and the market for all kinds of highly engineered financial instruments evaporated.

Some details of the deals being worked on at J.P. Morgan and Morgan Stanley aren’t clear, including the size of the CDOs and which investment firms have expressed an interest in buying slices of them….”

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“The Securities and Exchange Commission voted in favor of overhauling the $2.6 trillion money-market mutual fund industry, targeting the types of funds seen as most prone to investor runs during the financial crisis.

The SEC’s proposal would require “prime” funds catering to large institutional investors to abandon their fixed $1 share price, allowing the funds’ prices to float like other mutual funds, according to a fact sheet distributed ahead of the vote. Prime funds invest in short-term corporate debt; less-risky funds buy only government securities.

The SEC’s five commissioners supported the proposal unanimously.

Resolving long-standing concerns about money funds is a priority for Mary Jo White, the SEC’s new chairman, who is under pressure from U.S. and global regulators to address risks in the cash-like investments. An overhaul proposal favored by former SEC Chairman Mary Schapiro faltered last year.

In targeting prime institutional funds, the SEC believes it is targeting the part of the industry most likely to lead to trouble. Institutional investors’ concerns about prime funds’ exposure to Lehman Brothers debt caused them to withdraw about $300 billion from the funds in the week after the firm collapsed in September 2008.

Supporters say switching to a floating share price would make prime funds less susceptible to runs because investors would know the current share price and wouldn’t race to sell in anticipation that it could fall below $1, as happened during the crisis.

The industry is divided on the issue, however, with many firms warning a floating share price will turn off investors. Some former regulators who back additional rules worry the SEC’s proposal may leave retail investors unprotected. Retail funds would be allowed to maintain a stable share price.

Under Wednesday’s proposal, funds also would have to release immediately the detailed information about their portfolio holdings that they provide to the SEC each month. Currently, such data is subject to a 60-day delay before it is made public….”

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“The Shiller P/E ratio, or the cyclically-adjusted price-earnings ratio, is one of the most popular yet most misused measures of stock market value.

It’s calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings.  If the ratio is above the long-term average of around 16, the stock market is considered expensive.

Currently, the Shiller P/E is at 24.

While this certainly looks expensive, it would be a mistake to assume that stocks are doomed to crash until the ratio rights itself….”

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“It’s no secret that since 2008, most hedge funds have lagged the S&P 500. Because of that, now the world’s richest families are starting to wonder if hedge funds are really worth their incredibly expensive price tag.

And they’re starting to ask hedge fund managers some tough questions about it.

Yesterday, Bloomberg hosted a conference called “The Hedge Funds Summit” for (you guessed it) hedge funds and the people that invest in them. Many of the attendees were from Family Offices — investment houses where the fortunes of the world’s wealthy are put to work.

As you can imagine, hedge funds want a piece of that action. That’s why a solid portion of the afternoon was spent discussing Family Offices, though hedge funds probably didn’t like what these juicy potential clients had to say.

“We’re quite skeptical in general… of the hedge fund industry,” said Andrew K. Tsai, Co-Founder and managing principal, Chalkstream Capital Group.

Sixty-one percent of all hedge fund money is concentrated in the hands of the top 100 hedge funds, and Tsai went on to say that that concentration makes for some wacky correlations his office would stay rather away from.

However, Tsai did say that his office is willing to seed smart hedge fund managers that have solid strategies for specific sectors.

“We don’t think of hedge funds as an asset class, we think of them as a way to get exposure to something,” said John O’Hara, Senior Advisor and Managing Director, Rockefeller & Co…..”

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SOURCE
NYSE

NASDAQ

AMEX

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In Play ,

On the Wires

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“Here’s the latest analyst to double down on bullishness, with stocks remaining near all-time highs.

Paul Murphy at FT Alphaville flags the latest call from Credit Suisse’s Andrew Garthwaite, who predicts the S&P will surge to 1900 in 2014 (it’s currently at 1631)….”

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“As America’s population ages, the hard sell is on for reverse mortgages. Promising happier days ahead, the former “Fonz,” actor Henry Winkler, is giving the hard sell in relentless television ads. But the housing crash and the fiscal state of today’s seniors are causing many of these loans to backfire.

Reverse mortgages were originally designed for seniors who wanted to take out their home equity to spend during retirement. Unlike a regular mortgage, they require no monthly payments, and the borrower can take out a lump sum or receive regular payments.

“The wealth in the home is, in most cases, wealth that is sitting idly when people have a hard time making ends meet on a day-to- day basis, so having access to that allows people to basically tap that cash to pay needs or to do more comprehensive financial planning,” said Peter Bell, of the National Reverse Mortgage Association….”

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“The U.S. Federal Reserve is poised to evaluate and potentially make changes to its massive monetary stimulus, a top Fed official who is critical of the Fed’s bond-buying program said on Tuesday.

“The plot now thickens,” Richard Fisher, president of the Dallas Federal Reserve Bank, said. He likened developments in the Fed’s monetary policy to a Shakespearean play starring a “daring captain,” Fed Chairman Ben Bernanke, steering the ship of the U.S. economy.

“Act IV, just beginning, will involve the drama of introspection, with the FOMC evaluating the utility of its navigational tactics, and, perhaps, fine-tuning them, if not altering the course,” Fisher said, referring to the Fed’s policy-setting Federal Open Market Committee, in remarks prepared for delivery to the C.D. Howe Institute Directors’ Dinner in Toronto. Fisher is not a voting member of the committee this year.

Asked if he was concerned about the impact of rising bond yields on the economy, he said it should be monitored but that policymakers could not let markets dictate policy.

“We cannot live in fear that gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine,” he said…..”

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“WASHINGTON (AP) — The Treasury Department says it will sell an additional 30 million shares ofGeneral Motors stock this month in its on-going effort to dispose of all of its remaining shares of the giant automaker acquired as part of the government’s bailout of GM.

Treasury said Wednesday that it would sell its shares in conjunction with the sale of 20 million shares of GM stock held by the UAW Retiree Medical Benefits Trust, bringing the total size of the sale to 50 million shares.

In December, Treasury sold 200 million shares of GM stock…”

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“TOKYO (Reuters) – Toyota Motor Corp is recalling about 242,000gas-electric hybrid vehicles worldwide, including the bestselling Prius model, due to a brake design flaw, the automaker said on Wednesday.

Toyota is recalling the Prius produced between March and October 2009, and the Lexus HS 250hmade between June and October 2009, spokeswoman Shino Yamada said.

The recalled vehicles could experience greater stopping distances when braking because of amechanical design flaw in a brake part, Yamada said.

That part, the brake pressure accumulator, could crack with fatigue and release nitrogen gas into the brake fluid, she said, adding that no accidents, injuries or deaths have been reported as a result of the defect….”

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“Apple Inc. (AAPL)’s first loss against Samsung Electronics Co. (005930) in a U.S. patent case could mean a ban on imports of some older devices including the iPhone 4 while lessening prospects of the largest smartphone makers ending their legal battles.

The U.S. International Trade Commission’s decision, posted in a notice on its website yesterday, covers the iPhone 4 and iPad 2 3G sold for use on networks operated by AT&T Inc. (T), T-Mobile US Inc. (TMUS) and two regional carriers, General Communication Inc. (GNCMA) in Alaska and CT Cube LP inTexas.

With dozens of lawsuits spread across four continents in their battle for a greater share of the $293.9 billion market for smartphones, each side can now claim a victory in the U.S. With plenty of litigation remaining, Samsung’s victory probably won’t bring the two sides closer to settling, said Will Stofega, a program director at Framingham, Massachusetts-based researcher IDC.

“There’s too much skin in the game now,” he said. “It’s almost so ugly I don’t think they’ll come to any agreement. Both companies have a lot of cash and are generating a lot of money. It’s not like they have to worry about paying the legal bills.”

Obama Review…”

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