German Factory Orders Fall More Than Expected

“German factory orders (GRIORTMM) fell more than economists predicted in April as Europe’s largest economy struggled to gain strength.

Orders, adjusted for seasonal swings and inflation, decreased 2.3 percent from March, when they increased a revised 2.3 percent, the Economy Ministry in Berlin said today. Economists forecast a 1 percent drop, according to the median of 39 estimates in a Bloomberg News survey. In the year, workday-adjusted orders fell 0.4 percent.

The European Central Bank is expected by economists to lower its economic outlook when it meets in Frankfurt today, a month after cutting interest rates to help the euro region out of its longest-ever recession. At the same time, German business confidence rose in May for the first time since February, and consumers’ optimism is set to climb to the highest since 2007 in June, as higher wages boost spending power.

“A decline was to be expected after significant increases in the previous months,” said Gerd Hassel, an economist at BHF-Bank AG in Frankfurt. “Therefore, it’s not a sign of an economic slump but rather of the usual volatility. German growth should pick up in the second quarter.”

The German economy grew only 0.1 percent in the first three months of the year, less than economists anticipated. The Bundesbank will release new forecasts tomorrow. In December, the Frankfurt-based central bank predicted growth of 0.4 percent this year and 1.9 percent for 2014.

Orders Slump…”

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“The European Central Bank kept interest rates unchanged at a record low as improving confidence underscored President Mario Draghi’s timetable for an economic recovery later this year.

Policy makers meeting in Frankfurt today left the main refinancing rate at 0.5 percent after reducing it by a quarter point last month, as predicted by 57 of 59 forecasts in a Bloomberg News survey of economists. Morgan Stanley & Co. and IHS Global Insight were the only institutions to predict a cut. Draghi will hold a press conference at 2:30 p.m.

A month after Draghi left investors to ponder a menu of further measures that the ECB might consider to aid economic growth, he may point to improving sentiment as justification for keeping borrowing costs unchanged. Still, economist say officials probably need to cut their outlook for growth after data showed the euro region’s recession extended through the first quarter and Germany’s economy barely grew.

“Draghi’s rhetoric is poised to remain dovish, confirming that the ECB stands ready to act further if needed,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. Still, “we do not expect any bold announcement on unconventional policy,” he said.

The ECB held its deposit rate at zero and its marginal lending rate at 1 percent. The Bank of England kept its bond-purchase target at 375 billion pounds ($580 billion) and maintained its key rate at 0.5 percent.

Adding Stimulus…”

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“The Australian dollar fell to the lowest level since 2011 as the nation’s shrinking interest-rate advantage over its peers damps the allure of the currency.

Insight Investment Management Ltd., which oversees about $134 billion in fixed income and currencies, has been selling the Aussie as the yield spread between Australia’s sovereign debt and its global peers narrowed by almost half a percentage point since March. The Australian and New Zealand dollars slid against the yen for a third day as Asian stocks extended a global rout, sapping demand for riskier assets.

“The Aussie’s trend is clearly downward,” said Kengo Suzuki, the chief currency strategist at Mizuho Securities Co. in Tokyo, a unit of Japan’s third-biggest financial group by market value. “The Australian dollar remains susceptible to selling when markets are in a risk-off situation.”

Australia’s currency dropped 0.6 percent to 94.81 U.S. cents as of 5:11 p.m. in Sydney after touching 94.35, the weakest since Oct. 4, 2011. New Zealand’s kiwi dollar fell 0.2 percent to 79.53 U.S. cents after reaching 79.03, the lowest since July 26. The Aussie slid to 93.45 yen, a level unseen since Feb. 27, before trading at 94.18, 0.4 percent lower than yesterday. New Zealand’s currency was little changed at 78.99 yen….”

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“Global markets will face increased volatility as central banks bring interest rates back to normal levels, JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said.

“We should all hope for a normalization of interest rates — that’s a good thing,” Dimon said today during a panel discussion at the Fortune Global Forum in Chengdu, China. “As we go back to normal, its going to be scary, and its going to be kind of volatile.”

Investors have been encouraged to buy riskier assets as global central banks unleashed unprecedented monetary stimulus after the financial crisis of 2008. Concern that the policies would be reviewed grew last month following comments from Federal Reserve Chairman Ben S. Bernanke.

Price swings across assets and around the world are holding below historical aver…”ages.

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World Markets

Currencies

Commodities

USD Libor

Euribor

Yields for Japan,  Italy, Spain, France,  and Germany …

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[youtube://http://www.youtube.com/watch?v=RFhyvon9Io0 450 300]

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“It all seems so surreal. After being mesmerized by the Fed’s hallucinogenic “Quantitative Easing,” (QE) drug, and seduced by the Fed’s Zero Interest Rate Policy (ZIRP), and rescued by the Fed’s clandestine intervention in the stock index futures market, for the past 4-½-years, it’s easy to forget that there was once a time when the Fed’s main policy tool was simply adjusting the federal funds rate. It’s even harder to recall that two decades ago, the Fed’s raison d’être was combating inflation, whereas today, the Fed’s main mission is rigging the stock market, and inflating the fortunes of the wealthiest 10% of Americans.

The central bank’s purpose is to get ahead of the inflation curve,” declared Wayne Angell, one of the seven governors of the Federal Reserve on June 1^st, 1993. Angell had a reputation as a Fed hawk, and he was pushing for a tighter monetary policy, even before an uptick in the inflation rate showed-up in the government’s statistics. “If we’re ahead of the curve, our credibility and the value of our money is maintained. Some of my economist friends tell me, ‘We don’t feel much inflation out there, but we feel better knowing that you’re worried about it.” Thus, there was a time when savers received a positive rate of return on their money.

Two decades ago, the Greenspan Fed was stacked with hawkish money men. And because their tenures lasted for 14-years, they felt immune to the winds of politics. Thus, if the Fed governors were to make unpopular decisions to hike interest rates, in order to bring inflation under control, or burst asset bubbles, so be it. Of course, it’s much different today – the Fed is stacked with addicted money printers that are beholden to the demands of their political masters at the Treasury and the White House. How did Fed policy swing so radically from Angell’s day – when Fed tightening meant lifting the federal funds rate and draining excess liquidity, to today’s markets, – where a small reduction in the size of the Fed’s massive QE injections is considered to be a tighter money policy?…”

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“We’re finally starting to see the small investor chase equity returns.  And they’re just in time for it all after a 150% rally.  According to the most recent AAII investor allocation survey individual investors allocated their portfolios towards the highest equity weighting since September 2007.  Meanwhile, bond allocations are close to the post-crisis lows and well off the 2009 highs when fear peaked

Here’s more via AAII…”

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“Over the last few years the Financial Industry Regulatory Authority (Finra), the brokerage business’s industry-financed watchdog, has been formally warning investors and retirement savers about the risks of buying into obscure, privately traded investment products that promise high yields. Soon, according to its chief executive, Finra will issue a similar warning about an investment category that generally enjoys a more distinguished reputation: Hedge funds.

Richard Ketchum, Finra’s chairman and CEO, discussed the issue this week at a conference of Reuters reporters and editors; Reuters has the story here. He noted that savers in general, leery of stocks and frustrated with low interest rates, have gotten  themselves into trouble putting money in products likeprivate real estate investment trusts and business development companies that invest in privately held firms—vehicles that don’t trade on public exchanges, don’t disclose much about their holdings and….”

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“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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