“The world’s largest banks need to shrink or be broken up in order to regain investors’ confidence after four years of scandals, high-profile trading losses and financial crises, according to a Bloomberg poll.

Almost 60 percent of respondents said they were not confident or “just somewhat confident” that banks are taking prudent risks and conforming to the law, and getting smaller was seen as the top fix in the Bloomberg Global Poll, with 29 percent choosing that remedy. Changing the compensation structure was the No. 2 way to improve trust, with 23 percent.

After injecting $600 billion to rescue failing banks during the worst financial crisis since the Great Depression, governments around the world have tried in the last four years to strengthen banking regulations to prevent a similar outcome. Those efforts have been stymied by conflicting laws and increasing complexity, making the changes harder to implement and reducing their effectiveness.

Solutions suggested so far are “a grab bag of minimalist Band-Aids to patch up the self-inflicted wounds” of the financial system, said Lew Coffey, a poll participant and a fixed-income analyst at Windsor Capital Management LLC in Phoenix. “What’s required to re-establish investor confidence is a series of basic measures to simplify the business, isolate different kinds of risks into different boxes and increase transparency to outsiders.”

Plain Vanilla…”

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“Across the way from casino mogul Stanley Ho’s Grand Lisboa in Macau, flashing neon lights lure cash-strapped gamblers to pawn their Rolexes and other trinkets and take another tilt at the gaming tables.

In almost any other city, these “receptacles of misery and distress,” as Charles Dickens termed pawnshops, thrive in times of economic downturn. Not in Macau, where they help fuel a casino market that’s six times the Las Vegas Strip by enabling the mainland Chinese who crowd the gaming tables to sidestep China’s currency controls….”

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The erosion of central bank independence around the world threatens to unleash a round of competitive exchange rate devaluations, which leading economies have so far avoided during the financial crisis, the president of Germany’s Bundesbank warned on Monday.

Jens Weidmann, whose institution’s own fierce independence from political influence was the model for the European Central Bank when it was founded, said Stephen King, the chief economist at HSBC, was “perhaps right” in forecasting an end to the era of central bank independence.

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“It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” Mr Weidmann said in a speech in Frankfurt.

“Whether intended or not, one consequence could be the increased politicisation of the exchange rate,” he said, according to a text of his speech provided by the Bundesbank. “Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way.”

Both the Bundesbank and later the ECB were founded on mandates that gave them wide powers and freedom from political interference in return for focusing solely on keeping inflation in check. Some observers argue that the ECB now faces a challenge if other central banks ditch their own inflation targets and act to lower exchange rates against the euro, making exports from the embattled eurozone economies less competitive.

Asked about the trend for central banks to look less at inflation-targeting and more at policy areas that affect exchange rates, Mario Draghi, president of the European Central Bank, said earlier this month that the exchange rate was very important “as far as growth and stability” were concerned but was not a policy target for the ECB.

He also noted that the Group of 20 leading industrial nations had pledged not to undertake competitive currency devaluations as such action undermines economic and financial stability.

Mr Weidmann said the period in the 1980s and 1990s during which central banks around the world had been made independent had heralded a period of “great moderation” during which inflation fell. But the outbreak of the financial crisis and the growing energy and raw materials demand from fast-growing economies had put rising prices back on the agenda and complicated the job of a central bank….”

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CNBC is reporting that options activity is expecting a 3% move up or down given the number of $195 straddles being placed today…

“SAN FRANCISCO (MarketWatch) — International Business Machines Corp. is expected to post a gain in fourth-quarter earnings despite flat revenues when it reports its results on Tuesday afternoon.

This may help Big Blue gain its way back into investors’ good graces. IBM’sIBM +0.23% shares took a hit in October, after the company reported a rare earnings decline after revenue fell across the company’s key segments. The stock is down about 8% since the last report, having closed at a record high of $211 immediately prior.

Sentiment on Wall Street is mixed on the tech giant, with slightly more than half the covering brokers rating the stock as a neutral.

“Investors have held to the notion that IBM can protect earnings through sluggish times, which was somewhat called into question based on last quarter’s in line earnings,” wrote Joseph Foresi of Janney Capital in a note on Friday.

For the fourth quarter, analysts expect IBM to post earnings of $5.25 per share on revenue of $29.1 billion, according to consensus forecasts from FactSet. That compares with earnings of $4.71 per share on revenue of $29.5 billion for the same period last year….”

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“SAN FRANCISCO (MarketWatch) — Platinum costs more than gold again, a shift that reflects rising confidence in the global economy and investors’ bets the Federal Reserve is closer to ending its massive stimulus efforts.

Platinum prices settled with a premium over gold earlier this week for the first time since March 2012. As of Thursday’s futures settlement, platinum PLJ3 +0.26%  cost $1,700.50 an ounce, almost $10 more than gold GCG3 +0.23%  at $1,690.80 an ounce.

“Platinum’s premium (or discount) to gold offers a measure of economic confidence” because platinum is “so industrially useful, while gold is primarily a store of value,” said Adrian Ash, London-based head of research at BullionVault.

Platinum’s higher cost versus gold is a return to what had been a more normal relationship between the metals from about the mid-1990s until Sept. 2011, when gold prices started to consistently top that of platinum’s.See Commodities Corner from Sept. 2011 on gold, platinum ratio shift.

When the gold-platinum ratio is low, it points to increasing economic uncertainty and weakness worldwide, said Jan Skoyles, head of research at The Real Asset Company, a precious-metals investment platform provider.

“In 2011, we saw both the economy weakening and monetary problems increasing,” she said. “During times such as those, investors take flight into gold as it acts as a safe-haven in such situations.”

Gold is “not an industrial metal — it is money without counterparty risk and therefore is attractive in such times, unlike platinum, which reacts badly to weak economic conditions and currency issues,” said Skoyles.

Differing roles

Platinum and gold are both considered precious metals and prices often move in the same direction, but they also have very different sources of demand….”

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“Well, it depends on which Dow Theorist you ask.

To appreciate the intramural rivalry that currently exists among the Dow Theorists I monitor, consider where the Dow Theory stood a month ago.

The stock market then was at a make-or-break moment: A failure by the Dow Jones Industrial Average DJIA +0.13%   to confirm strength by the Dow Jones Transportation Average DJT +0.86%   could have sent stocks over a fiscal cliff of their own. ( Read my Jan. 21 column, ‘The Dow Theory’s very own fiscal cliff’ )

Since then, of course, not only have the Dow transports risen to a new all-time high, but as of Friday’s close we now have a new bull-market high for the Dow industrials as well.

This constituted an unambiguous Dow Theory bullish signal, according to 2 of the 3 Dow Theorists I monitor.

But Richard Russell is not so sure. Russell, who is editor of Dow Theory Letters, argued over this past weekend that the Dow industrials must close at a new all-time high above 14,164.53 to confirm the Dow transports — not at just a new bull market high.

And a failure on the part of the industrials to eclipse that higher level could set up a non-confirmation, with potentially very bearish implications…”

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“Nebraska Gov. Dave Heineman notified the Obama administration Tuesday that he has approved the controversial Keystone XL Pipeline to traverse his state, marking a significant step toward reviving the project after President Obama and Secretary of State Hillary Clinton sidelined it. 

The governor approved a revised route for the Canada-to-Texas pipeline which his office said would avoid environmentally sensitive areas.

The decision on final approval now rests with the Obama administration.”

“The S&P 500 index closed at 1485.98 on Friday, up 119.6% since the start of the bull market. I’m still targeting 1565 before the middle of the year, matching the record high on October 9, 2007. That would be an increase of 5.3% from Friday’s close. My yearend target is still 1665, which would put the index up 16.7% for the year following last year’s gain of 13.4%

Several other major stock market indexes have gone vertical in recent days to new record highs including the S&P 400 MidCaps (up 165.4% since March 9, 2009), S&P 600 SmallCaps (175.1), S&P 500 Transportation (161.3), and Russell 2000 (160.1). The bull may be getting old, but you have to respect the strength and breadth of its most recent charge.

The bull’s stamina has been based on performance-enhancing earnings….”
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“Fox News anchor Shepard Smith gave a rather stunning rebuke to a suggestion that gun-control measures wouldn’t pass Congress because of non-moving polling on the subject.

“If we stuck with the polls, we’d have had slavery a lot longer than we did,” Smith said.

Smith’s comment came in a back-and-forth with The Hill associate editor A.B. Stoddard during a slow moment in the inaugural parade on Monday, when the two discussed the vision President Barack Obama laid out in a rather progressive inaugural speech.

Congress is scheduled to begin what could be a lengthy debate over new gun-control measures that Obama announced in a White House press conference last week….”

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“David Tepper, who runs $12 billion distressed debt hedge fund Appaloosa Management, is on Bloomberg TV “Market Makers” with Stephanie Ruhle right now.

Tepper, who has one of the best long term track records, tells Bloomberg TV that his fund was up 30% in 2012.  

Tepper says he’s “going to come out of the closet” as being bullish in 2013.  He says there are no major negatives.

“This country is on the verge of an explosion of greatness,” he says, “An explosion of greatness.”

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“Right now, the Street’s consensus is around 48 million units.

But, Topeka Capital analyst Brian White says that if you use Verizon’s just announced iPhone sales as a guide, Apple could demolish expectations.

Verizon sold 6.2 million iPhones last quarter. Historically, Verizon has been about 11% of iPhone sales. If that holds, then Apple will have sold 56 million iPhones, says White. Even if it’s 12% of iPhone sales, Apple could have sold 51 million….”

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“The Chinese yuan is on track to become a global currency and could even displace the U.S. dollar as the world’s reserve currency, experts say.

China is opening its financial markets to foreign investors and encouraging its currency to be used more in international trade, CNBC reports. Countries that have substantial trade with China, such as Australia, are among the first to base their trade settlements on the yuan, also called the renminbi, since it lowers their transaction costs.

International payments in the yuan jumped 24 percent in November from October, reaching a record 0.56 percent of the global total, CNBC reports, citing data from SWIFT, a transactions services organization….”

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“Regulators and banks should develop a system whereby lenders go bust without damaging the world economy to help restore public trust in the industry, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said.

“We’ve got to get rid of too big to fail,” Dimon, 56, told investors during a panel discussion in the German town of Koenigstein, near Frankfurt, Monday.

“We have to ensure big banks can be taken down without harming the public and at no cost to them.”

Governments and central banks propped up banks with trillions of dollars to prevent further shocks to the financial system and ensure the flow of credit to the economy following the collapse of Lehman Brothers Holdings Inc. in 2008.

Regulators are pushing banks to strengthen capital reserves and liquidity to help them weather financial shocks and avoid taxpayer-funded rescues.

“There’s still the presumption that we can’t let some global banks go to the wall,” Deutsche Bank co-CEO Anshu Jain said at the same panel. Some countries such as Spain don’t feel confident enough to allow smaller lenders to fail, he said….”

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NYSE

NASDAQ

AMEX

In Play ,

On the Wires 

“Tired of all this bullishness, and talk about how there’s nothing to worry about anymore?

Don’t worry. That’s why God gave us Nouriel Roubini.

He has a new article at Project Syndicate that could pretty much be titled: Things still suck.

It’s actually titled The Economic Fundamentals of 2013 and, spoiler alert, he says the fundamentals aren’t good.

Roubini identifies four big risks to the global economy.

They are….”

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“With 72 percent of corporate earnings exceeding analysts’ estimates, it may be difficult for U.S. stocks not to reach a record in 2013.

The Standard & Poor’s 500 Index is 5.1 percent below the all-time high in October 2007. Profits in the benchmark gauge are forecast to exceed $1 trillion this year, or 31 percent more than when the gauge peaked, according to more than 11,000 analyst estimates compiled by Bloomberg. Even if the price- earnings ratio, now 9.8 percent below the six-decade mean, doesn’t expand, the S&P 500 is poised to recover fully from the financial crisis that began almost six years ago.

Last week, the S&P 500 hit a five-year high as 48 of the 67 companies that reported results exceeded analyst estimates in the biggest expansion in profits since the technology bubble of the 1990s. While bears say the rally will stall when forecasts prove too high, bulls say U.S. companies generating more income than ever will push stocks to new records.

“Corporate America has done an incredible job post- recession,” Leo Grohowski, BNY Mellon Wealth Management’s New York-based chief investment officer said in a Jan. 16 phone interview. His firm oversees $179 billion. “It’s not going to be a return to the ’80s and ’90s where we had people retiring from their day jobs to become day traders. I wouldn’t revert to the historic P/E ratio kind of environment. But the good news is I don’t think we need that to reach a record….”

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“The world is awash in capital whether you know it or not.

The total value of capital in seen going from $600 trillion in 2010 to over $900 trillion by 2020, which will be here before we know it.  A report released in November by management consulting firm Bain & Company suggests that the era of capital superabundance means a number of things to worry about for corporate and portfolio investors. But one of the biggest risks in a world awash in capital is bubbles.  The world’s bubble economy is going to get even bubblier.

Bubbles are everywhere, and hard to avoid. Take for example, Brazilian government bonds. Currently, one of the big buyers of Brazilian government bonds outside of its own banking sector is Japan.  Japanese investors seeking higher yield trade yens for Brazil reals and get an easy five percent return. Some day in the not-so-distant future, China will do the same thing. Their government will allow for regular investors to put money overseas and when China becomes part of that particular carry-trade it will drive up the price of Brazilian bonds as investors chase yield but end up creating bubbles….”

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“Since the end of last year the bullish optimism for 2013 has risen to an almost fevered pitch.  Concerns of any further disruption from the Eurozone have faded into the mist.  With the“fiscal cliff” issue resolved, and little concern that the “debt ceiling” will not be raised, the worries of a domestic drag have been all but alleviated.  Furthermore, despite slowing earnings and revenue growth, the outlook for 2013 earnings growth is remarkably ebullient.  According to the vast majority of the media, analysts and portfolio managers there is absolutely nothing to be worried about, particularly given the fact that every major central bank is now engaged in some sort of financial easing campaign, and the markets should surge to record highs by year end.

However, maybe it is in this very optimistic outlook that we should find at least the smallest grain of concern.  Bob Farrell once stated: “When all experts and forecasts agree – something else is going to happen.”   As a portfolio manager I am not paid to garner portfolio returns but rather manage the risk of loss.  It is in the risk management, as we discussed previously, that long term returns are achieved.  It isn’t as fun, or as sexy, as driving a Ferrari at top speed but the crashes won’t kill you either.

There are many ways to measure investor optimism.  The chart below is the composite index of bullish sentiment of both individual and institutional investors.  As you can see the index is now at levels normally associated with the beginnings of market peaks.

The next chart is of the Volatility Index.   The volatility index, which is used as a gauge of investor fear, is currently at levels normally associated with extreme complacency.  What is important to note is that the level of complacency is not the concern but rather how quickly such complacency can turn to fear.

The last chart is my composite indicator which….”

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“I like this post from Josh Brown about the inevitability of the market cycle and learning to love it.  If there’s one thing that’s certain in the investment world it’s that markets cycles never really change that much.  The market spends most of its time fooling most of the people most of the time.  Just when you think you’ve got it figured out it does exactly what you wouldn’t expect.  Guys and gals have been trying to figure this puzzle out for centuries.  So, rather than let it eat you apart, learn to love it:

“The next crisis is coming. The seed has already been planted in some remote corner of the financial realm.

That seed is germinating deep beneath an obscuring layer of thick, black soil.

It will sprout and be ignored someday soon, breaking just above the surface while the people walk by obliviously.

Then it will be noticed and denied, dismissed as unimportant….”

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