Plosser Gives a Speech on the Troublesome Topic of Breaking Up Too Big To Fail

“Charles Plosser, President and Chief Executive Officer of Federal Reserve Bank of Philadelphia, gave a speech on Thursday afternoon discussing how to end the “Too Big To Fail” conundrum of the big banks at the fourth Annual Simon New York City Conference. We are not interested in regurgitating Plosser’s speech today. What we want to show you is how and why the “too big to fail” conundrum cannot easily be solved and why it is so difficult to just unbundle the concentration of risk here.

This is an interesting take because it has yet another call to increase the capitalization of the so-called too big to fail banks. It sound great and 24/7 Wall St. is all in favor of big banks being on solid ground. The ultimate problem is that the big banks are so big that increase their capitalization requirements effectively withdraws too much capital from the economy.  It is without any doubt that you have heard of the calls to break apart the big banks before. You will here those same calls tomorrow and beyond as well.

When you consider that a mere handful of banks have about half of the country’s personal and commercial bank deposits you have a right to be scared. Increasing the capital requirements above the 10% hurdles set by Basel banking standards. Imagine how strong and able these banks would be able to hold up in another recession if their bank capital requirements went from 10% to say 15%.   Now for the bad news if you look at the tally of assets as of the end of 2012. J.P. Morgan Chase & Co. (NYSE: JPM) was about $2.36 trillion in assets and Bank of America Corporation (NYSE: BAC) has $2.2 trillion in assets, with Citigroup Inc. (NYSE: C) behind it at $1.86 trillon and then followed by $1.42 trillion for Wells Fargo & Co. (NYSE: WFC).

These four banks alone have $7.84 trillion in assets. The CIA World Factbook tracks just about all global economies and its final estimate for 2012 GDP was put at $15.66 trillion for 2012. Different regulators have many different means of calculating what they think the capitalization are best and keeping up with the flavor of the day or week is for government accountants and regulators. Still, this asset base for just the four biggest banks is right at half (actually 50.06%) of 2012 GDP on the purchasing power parity calculation preferred by economists.

It is very easy to merely say in a vacuum that the too big to fail banks should just increase their capital to hedge against future bailouts. Various regulators have various means of evaluating capitalization metrics and requirements. The unfortunate outcome is that by forcing banks to hold even more capital will tighten credit even further than it has been. With much of the world back in recession, that puts the U.S. back in recession.

Here is what Mr. Plosser said….”

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At 1370 i wrote a post that said if your short you arer fucking dead. I never expected to see a rise above 1550-1575 S&P.

Now the NY fed expects stocks to rise for another 5 years…..so you might just be fucking dead forever; believe me 5 years is forever in the stock market.

DOW 20k?

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A rumor is floating around that QE off is coming sooner than you think. A fed member is allegedly going to release a paper shortly on the matter…

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“The nation’s biggest banks are going on the offensive to fend off growing efforts in Washington to rein them in.

The banks have hired longtime, influential Washington hands to deflect regulatory and political pressure to strengthen their finances and to sell assets. Regulators and some lawmakers have raised concern that large banks remain “too big to fail” and could require another government bailout in the event of a new financial meltdown.

The effort by banks marks a lobbying turning point for the industry, which adopted a mostly low-profile stance to new regulations in the wake of the financial crisis. It also comes as banks such as Morgan Stanley, MS -0.82%Bank of America Corp. BAC -0.84% andGoldman Sachs Group Inc. GS -1.12%are shedding lucrative assets that would have required them to hold more capital to compensate for their risk.

While the banks are joining forces, much of the work is being coordinated through trade groups.

Several banks and the Financial Services Forum, a top trade association, have hired Tony Fratto, a former Bush administration official, to provide what they call a “rapid response” to criticism that banks remain too large. The too big to fail notion implies that the government would have to step in and provide funding to institutions whose failure could disrupt the financial system, as it did during the 2008 financial crisis….”

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“U.S. wholesale inventories rose in March, fueled by increased stocks of cars and machinery which have provided support for economic growth early in the year, but wholesale sales posted the biggest fall in four years.

The Commerce Department said on Thursday wholesale inventories rose 0.4 percent, just above the median forecast in a Reuters poll for a 0.3 percent gain….”

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“Last Friday’s surprisingly strong April jobs report and today’s unexpected drop in initial unemployment claims were welcome developments in the beleaguered U.S. labor market.

However, the underlying details of the labor market continue to be troubling.

Last week, veteran economist David Rosenberg gave a lengthy 59-slide  presentation on the Federal Reserve’s failed efforts to get the economy on track.

Much of the presentation focused on the dynamics of the U.S. workforce.

Rosenberg argued that despite the high unemployment rates, there’s actually a shortage of qualified labor, which is resulting in labor hoarding….”

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“This extraordinary stock market is driven by characteristics that defy conventional valuation techniques. I receive emails from people who tell me that the market is overextended, overvalued, and trading way above its 50- or 200-day moving average. If you look at the metrics, the market is all of those things.

I receive other emails that talk about the valuation of the market. Is it reasonably “fair?” If you look at earnings expectations and the price of stocks this year and compare them to a metric, you would say the market is reasonably priced.

The math goes something like this. The S&P 500 Index will earn an estimated $105-$110 for 2013. That puts it at a multiple of about 15 times earnings. Those earnings are being reported by companies that have minimal distortions due to inflation or accounting mechanisms. Thus the earnings are of a higher quality in terms of reporting than they have been in the past. They do not reflect the bubble of the 2006 and 2007 financials. And they are more representative of the diversity of American companies. Our metric would say the market is reasonably priced. Not a great market, but certainly not excessive.

The next metric ties the relationship between stocks and interest rates. We use a number of vehicles to make this comparison. I like the calculation of the equity risk premium that says how much you get paid for owning stocks versus riskless debt instruments. If you compute an equity risk premium against an interest rate next to zero, the valuation of stocks could be infinite. Anything compared to near-zero has a huge bulge in its multiplier.

If you compare stock valuations against the 10-year riskless Treasury note, the equity risk premium is still very high by any historical measure. Why? Because the Treasury interest rate is so low.

If you try to compare the equity risk premium against what you believe to be the normalized 10-year Treasury interest rate, you still get a fairly reasonable equity risk premium.

The math is straight forward….”

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“The U.S. dollar just hit the key ¥100 psychological level against the Japanese yen!

The currency pair hasn’t traded north of ¥100 since April 14, 2009.

The chart below shows the big downward move the yen has made…”

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“NEW YORK (Reuters) – Goldman Sachs Group Inc has slashed its capital pledges to investment fundsby nearly half since the Volcker rule was signed into law in 2010, as it prepares its principal investment business for restrictions on investing its own money, according to regulatory filings.

The Wall Street bank has reduced future commitments to hedge funds and funds that invest inprivate equity, credit and real estate, by $5.8 billion since June 2010, the last period before the Volcker rule was included in the Dodd-Frank financial reform act. That represents a reduction of 48 percent, according to data in filings with the U.S. Securities and Exchange Commission.

The Volcker rule – which has not yet been finalized or implemented – will prevent banks from investing more than 3 percent of Tier 1 capital in hedge funds or private equity funds, or from contributing more than 3 percent of capital from those funds.

Goldman’s existing hedge fund and private-equity fund holdings represented 14 percent of its Tier 1 capital as of March 31, according to its most recent filing on Thursday. Including future private-equity fund commitments, that ratio goes up to 17 percent.

It is not clear how the Volcker rule will treat credit funds or real-estate funds, or how much time banks will get to come into compliance with the law. Regulators are expected to release a final rule by the end of this year, after reviewing hundreds of letters from industry groups and the public about a proposal they released in October 2011….”

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Source

“NEW YORK (AP) — A look at the 10 biggest percentage gainers on Nasdaq at 1 p.m.:

Tesla Motors Inc. rose 26.8 percent to $70.72.

Green Mountain Coffee Roasters Inc. rose 24.9 percent to $74.31.

Synta Pharm rose 12.8 percent to $7.74.

CSP Inc. rose 10.7 percent to $8.25.

Parametric Sound Corp. rose 10.6 percent to $20.68.

Syntroleum Corp. rose 9.3 percent to $6.02.

Providence Service Corp. rose 9.3 percent to $20.19.

Sangamo BioSciences Inc. rose 8.5 percent to $8.54.

Groupon Inc. rose 8.4 percent to $6.06.

Cirrus Logic Inc. rose 8.2 percent to $23.40.”

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“Every earnings season, companies share the details of their financial performance.  Additionally, many managers will reveal what they are seeing and what they are expecting for the economy.

The view out of Q1 2013?

Things have turned a corner, but it’s still slow going.

For instance, China is slowing down, but not so much that it will disrupt markets.

North America is looking great, especially in Mexico.

Among regions, it’s really just the European Union that’s really struggling — but even there, we may have bottomed out.

Consumer sentiment remains solid, even in the face of the sequester. And at least one company believes we’d be able to weather a pullback in dovish monetary policy.

Some companies are seeing scattered softness.

But overall, the snapshots indicate strength.

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“……The S&P has been up 56 of the 88 trading sessions so far,” writes Cashin.  “That rate of success is not only extremely rare, it is, borderline, unprecedented.  Fifty years of experience suggests streaks ultimately end – just ask Joe DiMaggio.  For now, enjoy the ride; be wary of rumors; stay very nimble and have a great weekend.”

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“Facebook appears to be close to makinganother billion-dollar acquisition to once again ramp up its mobile efforts: according to three reports in the Israeli press at Calcalist and sister publication Ynet andThe Marker (all in Hebrew), Facebook has approached Waze, the social mapping and traffic app maker, and is now in advanced due dilligence on a deal that Calcalist puts at between $800 million and $1 billion. The negotiations between the social network and crowdsourced mapping app apparently began six months ago.

We have been digging too and have picked up confirmation from a source that both sides have privately confirmed that the deal is happening, and that the pricing reported first by the Calcalist is accurate. The main issue right now, the source said, is whether to keep Waze in Israel or take it to the U.S., as Facebook did with two previous Israel acqusitions. Those were of feature phone interface developer Snaptu (bought for up to $70 million in March 2011) and facial recognition specialistFace.com (bought in June 2012 for $50-60 million).

But! Facebook and Waze have already come back to us with flat non-responses. “We do not comment on rumors or speculation about the business,” a spokesperson at Waze told TechCrunch. The company tells me that it currently has over 47 million active users — more than double what it had in July last year when it reported 20 million.

“We won’t comment on speculation,” a Facebook spokesperson said.

However, if the rumors are true, adding Waze to Facebook makes a lot of sense in some respects: Facebook has been putting a lot of effort into its mobile business, which now has 751 million monthly active users as of March 31, 2013, an increase of 54% year-over-year. That puts mobile on a faster track at the moment than Facebook’s desktop business, which currently has 1.11 billion MAUs, an increase of 23% year-over-year….”

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“Microsoft is offering to pay $1 billion to buy the digital assets of Nook Media LLC, the digital book and college book joint venture with Barnes & Noble and other investors, according to internal documents we’ve obtained. In this plan, Microsoft would redeem preferred units in Nook Media, which also includes a college book division, leaving it with the digital operation — e-books, as well as Nook e-readers and tablets.

The documents also reveal that Nook Media plans to discontinue its Android-based tablet business by the end of its 2014 fiscal year as it transitions to a model where Nook content is distributed through apps on “third-party partner” devices. Speculation about the plan to discontinue the Nook surfaced in February. The documents we have are not clear on whether the third-party tablets would be Microsoft’s own Windows 8 devices, tablets made by others (including competing platforms) or both. Third-party tablets, according to the document, are due to get introduced in 2014.

Nook e-readers, meanwhile, do not appear to fall into the discontinuation pile immediately. Rather, they’re projected to have their own gradual, natural decline — following the general trend of consumers moving to tablets as all-purpose devices.

Microsoft and B&N representatives declined to comment for this story.

A deal to buy the digital assets of Nook Media is the natural next step for Microsoft, which first announced a plan to work with Barnes & Noble on its Nook devices and content in April 2012, ponying up $300 million at the time to help. That plan included an additional $180 million advance to develop content for its Windows 8 devices — which Nook has been doing.

To date, there have been 10 million Nook devices sold, including both tablets and e-readers, with more than 7 million active subscribers. Microsoft has seen limited interested in its Windows 8 devices (although it says it has sold more than 100 million licenses for the OS to date). Currently the Nook app is available on every major platform, including Android, iOS and Windows…..”

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Upgrades – AWK, BBVA, CBI, FLR, GRPN, KBR, MDR, OPTT, RAX, SINA, VSAT,

Downgrades – BLK, CLNE, GES, LPSN, RAX, TSLA, THI, TLP, TUMI,

In Play ,

On the Wires 

“JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) had perfect trading records in the first quarter, making money every day of the period as Morgan Stanley posted losses in eight sessions and Goldman Sachs Group Inc. in two.

One daily gain at JPMorgan exceeded $200 million as the biggest U.S. bank by assets recovered from last year’s London Whale derivatives loss, the New York-based company said yesterday in a regulatory filing. Bank of America, the second-largest lender, generated more than $25 million of revenue on 97 percent of trading days, compared with 76 percent at Morgan Stanley, the firms said in separate filings. Goldman Sachs, which generated about half its revenue from trading last quarter, said its team made more than $100 million on 17 days…..”

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“WASHINGTON (AP) — The number of Americans who applied for unemployment benefits fell by 4,000 last week to a seasonally adjusted 323,000, a fresh five-year low. The decline signals fewer layoffs and possibly more hiring.

The Labor Department said Thursday that the four-week average, a less volatile figure, dropped 6,250 to 336,750. That the fewest since November 2007, before the recession began.

Applications are a proxy for layoffs. Weekly applications have fallen about 9 percent since November and are now at a level consistent with a healthy economy.

The job market has also improved over the past six months. Net job gains have averaged of 208,000 a month from November through April. That’s up from only 138,000 a month in the previous six months.

Still, much of the job growth has come from fewer layoffs — not increased hiring. Layoffs fell in January to the lowest level on records dating back 12 years, though they have risen moderately since then. At the same time, overall hiring remains far below pre-recession levels and unemploymentremains high at 7.5 percent….”

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