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Saturday, June 18, 2016

FOMC Sees Fed Funds Going To 4% by 2018

Yesterday the FOMC provided a statement about the fed funds rate. The decision: No change.

Janet Yellen gave remarks and answered questions regarding the FOMC's decision to hold rates at this lower bound. Yellen fielded several hard questions from the audience, like "Do you think the Fed overstepped it's bounds in the AIG bailout?" and "Are you aware that housing prices and rents are squeezing the average consumer?" Yellen answered the questions head on, except for a question regarding whether or not the IMF had any business making recommendations about the US Federal Reserve. This question and the subsequent answer were lost.

The main takeaway, the clear message that Yellen was trying to relay, was that any decision to move rates would be "data driven", which is to say that the Fed will base its decision on the data and nothing else. It is a marvel how the Fed can say this and then say that rates will most likely go up before the end of the year. The disconnect is that Q1 data was bad, but the FOMC insists it's transitory, so we'll see.

 Perhaps the most interesting part of the presentation was the dot plot below. It's from a survey of FOMC participants on the timing and amount of rate action over the next 2 years and it's the pace or the trajectory that's fascinating, which is to say that by the end of 2017 the plot shows a fed funds rate hovering around 3-4%, which means at least 3.25 - 4.25 for the IOER. Yellen was surprised by the pace as well and alluded to it in her speech. Whatever the case, if rates do rise at this level banks will have field day.
One interesting note is that the effective fed funds rate is creeping up on its own -- hitting .14% yesterday after hovering around .12% since the beginning of the year.investment kit from Regal Assets.

Friday, June 17, 2016

FOMC Statement Countdown, New Regulatory Rules For Lg/Sm Banks, Construction's Up, Employee Retention's Up & Ohio-based Firm Caught In Ponzi Scheme

  • Waiting on the FOMC to release a Statement about the fed funds rate hike at 2pm today. In the minutes from the last meeting, the Committee alluded to providing more information in the Statement regarding rate hike timing so this could be a very interesting read. The fed funds rate, which has been hovering around .12% - .13% for the past 6 months, popped up to .14% yesterday confirming that banks are easing on lending even without a rate hike.
  • The Federal Reserve Board, FDIC, and OCC finalized revisions to regulatory capital rules adopted in July 2013. The rules apply to bank holding companies with at least $250 billion in total assets and will go into effect on October 1, 2015.  
  • The FDIC approved a proposed rule on risk-based assessments for banks with less than $10 billion in total assets. "In particular, the proposal would base assessments on a model estimating the probability of failure using data from the financial crisis and prior years," said FDIC Chairman Martin J. Gruenberg at an FDIC Board Meeting. "These contemplated improvements would allow assessments to better differentiate riskier banks from safer banks, and allocate the costs of maintaining a strong Deposit Insurance Fund accordingly," he said. It is important to note that the rule appears to be "revenue neutral", but it will add a premium to small banks with riskier profiles which will increase the cost of capital.  
  • The Department of Commerce released the New Residential Construction report for May 2015. Building permits for private owned subdivisions were up 25% over last year, and 2.6% for single family approvals. Housing starts are up over 5% and housing completions are up over 14%. New Residential Construction data for June will be released on Friday, July 17. 
  • The supplemental survey to the June Empire State Manufacturing Survey and Business Leaders Survey was published yesterday and focused on recruitment and retention of workers. ~44% of those surveyed in the service sector and ~34% in the manufacturing sector said that their firms planned on increasing headcount. Only 11% and 13% of manufacturers and service firms reported that they planned on reducing employment. 
  • The SEC announced charges against Ohio-based Equity Trust Company which allowed Ephren Taylor and Randy Poulson to push a Ponzi scheme on more than 100 investors. “We allege that Equity Trust failed to protect the interests of its customers when it acted as more than a passive custodian,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “When custodians like Equity Trust are aware of red flags suggesting an ongoing fraud, they must take action to try to prevent it.” A public hearing will be scheduled before a law judge.  

Thursday, June 16, 2016

Federal Reserve Defends AIG Bailout, Production And Manufacturing Down, SEC Charges Trader $2.8M, And New Investment Alert For Seniors

Did the Fed act beyond it's legal authority when it bailed out #AIG? Maurice R. Greenberg, the former chief executive of the American International Group, argues just that in a class-action lawsuit against the government in which he demanded $40 billion -- Starr International Company, Inc. v. the United States. At first the lawsuit was deemed ridiculous but then it started gaining traction. On Monday, the judge finally made a ruling which agreed that the Fed had overstepped its legal authority, but also said shareholders were better off having had the bailout and so no amount was awarded. This is what the Fed had to say in response
The Federal Reserve strongly believes that its actions in the AIG rescue during the height of the financial crisis in 2008 were legal, proper and effective.  The court's decision today in Starr International Company, Inc. v. the United States recognizes that AIG's shareholders are not entitled to compensation for that decision, and that the Federal Reserve's extension of credit to AIG prevented losses to millions of policyholders, small businesses, and American workers who would have been harmed by AIG's collapse during the financial crisis.  The terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made.
Still, the verdict may set an interesting precedent for those that believe the Fed has gained too much power over the past 5 years with Dodd-Frank and voting power over the IOER. 

Source: Federal Reserve June 2015 Empire State Manufacturing Survey
The Fed released the Industrial Production and Capacity Utilization index (G.17), a measure of capacity utilization for manufacturing, mining, electric and gas utilities. The industrial sector accounts for a large part of national output over the course of the business cycle so G.17 is used as a way to forecast structural changes. Industrial production decreased 0.2 percent in May after falling 0.5 percent in April. I'm confident this trend will reverse soon due to improved labor conditions. The NY Fed released the June 2015 Empire State Manufacturing Survey which showed declining business condition in New York. The index fell five points to -2.0. 

The SEC charged Helmut Anscheringer, a Swiss trader, with trading on insider information ahead of Apple's (Nasdaq: APPL) decision to purchase AuthenTec Inc. Anscheringer purchased stock and call options in AuthenTec Inc. after hearing that Apple wanted to buy the company. A few days after Anscheringer purchased the options and stock, the purchase was announced; Apple would buy AuthenTec Inc. for $355 million in cash which caused the stock price to jump almost 60 percent. Anscheringer made more than $1.8 million on the transaction. He has agreed to pay $2.8 million to settle charges.

The SEC issued an investment alert for seniors. More and more seniors are the target of investment fraud. This alert provides five red flags for seniors when making an investment decision. If you are a senior, or if you care for one, please read this alert.

Finally, GAFI recently published a guest post on SeekingAlpha titled US Bancorp: One Of Buffett's Favorite Banks Still Undervalued By 38%. The post argues that the discount rate for banks and US Bancorp in particular, should be lower than other companies and banks.

Saturday, June 11, 2016

Banks Are Transferring Regulatory Risk to 3rd Parties & Debt Growth Rate Hits 10-Yr Low Due To Government Spending

The Office of Financial Research published a brief titled More Transparency Needed For Bank Capital Relief Trades.  The brief suggests that banks are meeting regulatory capital rules by transferring credit risk to third parties. The paper uses data collected from 18 banks that purchased $38 billion in credit protection. The authors also attempt to estimate the impact of these third party transactions on a banks’ risk-based capital ratios. While this may represent a hole in regulatory policy, its impact is negligible due to the level of capitalization/liquidity in the market.

Source: Federal Reserve, Z.1 Release
The Federal Reserve published a statistical release update for Z.1: Financial Accounts of the United States Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts. As shown to your right, it provides an update on household net worth and non-financial debt at the business, state, and federal level. On an annual basis, the statistic hasn't been lower than 3% for at least the past 10 years, however, Q1 of 2015 showed total growth in debt as 2.8% due primarily to a large drop in federal government spending, which is partially offset by the large increase in the growth of debt at the state and local government level.

Friday, June 10, 2016

Southwest Has Fastest Growing GDP, Nicholas Lattanzio Accused of Operating Phony Hedge Fund

  • The BEA said that GDP increased in 48 states in 2014. The data was made available today and shows that professional, scientific, and technical services were the leading contributors. Real GDP grew 2.2% for the entire US in 2014, and 1.9% in 2013. The fastest growing region was the Southwest region at 4.3% due to contributions from mining in Oklahoma and Texas. Per capital GDP ranged from a low of $35,551 in Mississippi to $66,160 in Alaska. Starting in September the BEA will release quarterly GDP by state.  Tables 1–4 within the release provides greater detail. You can also visit the BEA's Web site at
  • The SEC Charged Nicholas Lattanzio, a phony hedge fund manager in New Jersey, with attempting to defraud small businesses with the Black Diamond Capital Appreciation Fund. According to the press release he defrauded small businesses out of $4 million and used funds to "purchase a million-dollar home in Montclair, N.J., a $124,000 luxury car, and $100,000 worth of merchandise from Tiffany & Co.  He also paid off more than $760,000 in credit card debt, withdrew approximately $570,000 in cash or checks written to himself and his girlfriend, paid more than $30,000 to a yacht broker, and funded his children’s private school tuition and his membership at an exclusive golf club." To read more about this store click here.
  • The FDIC will be meeting on June 16 and the meeting will be available live via the following link:!/channel/1232003497484/Board+Meetings.

Thursday, June 9, 2016

SEC Charges #AZN Inside Traders & 8 Others In Unrelated Securities Fraud Charges Across The Country, #Florida, #NorthDakota, #Kansas, #Nebraska, #Oklahoma, #Arizona, #New York, #Colorado

The SEC charged Michael J. Fefferman, senior director of information technology at Ardea Biosciences Inc, and his brother-in-law Chad E. Wiegand with insider trading. Ardea Biosciences was eventually sold to AstraZeneca PLC (NYSE: AZN). Wiegand, a stockbroker, purchased Ardea and tipped fellow stockbroker Akis C. Eracleous off about the deal.  The alleged insider trading ring amassed $530K in illegal profits. “As a corporate insider, Fefferman breached his duty to Ardea’s shareholders by tipping confidential information about significant corporate events before they were announced,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office. All three have settled with the SEC.

The SEC also charged the following people with various unrelated forms of securities and/or wire fraud:

  • Frederic Elm f/k/a Frederic Elmaleh, 45 resides in Fort Lauderdale, Florida. AKA, Elm Tree Investment Advisors, LLC, 45, Ponzi-like payments. Sanctions have been ordered.
  • Robert H. Medhus is a 67 year old resident of Jamestown, North Dakota - 13 counts of securities fraud, sentenced to serve ten years of incarceration.
  • DeVon J. Carlson, age 55 is a resident of Shawnee, Kansas, two counts of securities fraud, sentenced to serve 32 months of incarceration and ordered to pay restitution in the amount of $231,078.
  • Brian J. Schuster, age 41, is a resident of Ashland, Nebraska, four counts of securities fraud, sentenced to serve between 80 months and 16 years of incarceration.
  • Jason Matthew Pennington age 43, is a resident of El Reno, Oklahoma, charged with wire fraud, sentenced to serve 42 months of incarceration.
  • Rebecca L. Engle, age 61, is a resident of Green Valley, Arizona, Engle pled no contest to two counts of securities fraud, sentenced to serve between three and six years of incarceration.
  • The ELIV Group, LLC and Scott Valente, Valente is 57 years old and is a resident of East Greenbush, New York, fraudulently lured approximately eighty individual investors, sanctions have been imposed.
  • Clinton D. Fraley, age 38 is a resident of CaƱon City, Colorado, one count of securities fraud in violation, sentenced to serve 12 years of incarceration and ordered to pay restitution in the amount of $617,710.

Wednesday, June 8, 2016

Fed Research Shows Drop In Oil Prices Due To Increased Global Supply & Inflation Expectations Were Up 3% in May

  • Liberty Street Economics, the research leg of the NY Federal Reserve published an article titled Is Cheaper Oil Good News or Bad News for U.S. Economy? The authors use correlations of oil price changes with different variables to show that the fall in oil prices is due primary to increased global supply. They also speculate that the effect of the supply shock is expansionary, but will have a "relatively modest stimulative impact on economic activity, which will peak around mid-2015." According to the post, the effects of the price decrease should fall off by early 2016. 
  • The results of the May Survey of Consumer Expectations show that one-year ahead inflation expectations rose to 3.0%. Median household income increased slightly, with more significant increases for lower income households. Household income growth expectations also increased slightly to 2.9%.