Magnitude Of Falsity Is Enormous

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DOW – 36 = 18,068
SPX – 6 = 2099
NAS – 17 = 4976
10 YR YLD – .03 = 2.25%
OIL + 1.50 = 60.75
GOLD + 9.50 = 1194.00
SILV + .21 = 16.58

The Treasury market continued to sell-off this morning, pushing the yield on the benchmark 10-year Treasury up to 2.35% intraday, the highest point since Nov. 21. The selling eased by the afternoon, sending the yield down to 2.25 percent. The intense selling in the Treasury market was fueled by a similar meltdown in the Eurozone’s government bond market which has been going on for more than two weeks. Germany’s 10-year bund yield is 14 times higher than a month ago.  The yield on the 10-year benchmark German bond known as the bund increased 12 basis points to 0.71% intraday and European peripherals, such as Spain, Italy and Portugal, also saw their yields jump between 10 and 13 basis points.

At a panel discussion in Zurich this morning, NY Fed President William Dudley outlined that he does not know when interest rates will rise but repeated recent comments that the policy tightening will depend on the US economy. In other words, the Fed won’t send out engraved invitations and you will need to stay alert but the markets shouldn’t be surprised when the Fed raises rates. Dudley said the conditions that will determine the timing of the Fed raising rates from their current near-zero levels are “well specified” and “market participants should be able to think right along with policymakers, adjusting their views about the prospects for normalization in response to the incoming data.” Dudley went on to say that when the Fed raises rates it “will have implications for global capital flows, foreign exchange valuation and financial asset prices even if it is mostly anticipated when it occurs.”

The National Federation of Independent Business said its small-business optimism index rose 1.7 points to 96.9. It’s the second-worst reading since October. Overall business investment has sagged, with energy companies slashing capital expenditure budgets and laying off thousands of workers as lower energy prices undermine exploration and drilling activity. Nine of the NFIB index’s 10 components rose last month, with the exception of sales. The NFIB said despite the turmoil in the energy sector, “the shale states exhibited stronger capital spending and hiring than the rest.”

Oil production from seven major U.S. shale plays is expected to fall by 86,000 barrels per day in June. According to the latest report from the Energy Information Administration Oil output at the Eagle Ford shale play in South Texas is forecast to see the biggest decline, down 47,000 barrels per day, while production at the Bakken shale play, centered in North Dakota, is expected to drop by 31,000 barrels per day.

Job openings at US workplaces declined to 4.9 million in March from 5.1 million in February. The Labor Department’s JOLT survey measures the number of job openings in the economy, a measure of how aggressively employers are looking to hire, and more job openings indicates a labor market turning in favor of employees over employers. The number of hires in March, however, rose to 5.07 million from 5.01 million in February, while total separations also rose to 4.98 million from 4.79 million in February. The numbers of people quitting their job ticked up slightly in March, to 2.78 million from 2.72 million in February. Quits are seen as a sign of strength in the labor market, as workers wouldn’t be quitting their jobs unless they were reasonably confident they could find another one. It might also signal the possibility of higher wages in the not so distant future.

The US budget surplus in April rose to the highest level since 2008 on record revenue as hiring improved during a month when Americans file tax returns. The Treasury Department reports revenue exceeded spending by $156 billion last month, compared with a $106 billion surplus a year earlier. The April surplus was the fifth-highest on record for any month. So far this fiscal year, which began Oct. 1, the deficit declined to $282 billion compared with $306 billion in the same seven-month period a year earlier. Even though spending increased 6%, more people had jobs (the unemployment rate dropped to 5.4% in April) and that added to the Treasury’s coffers. So, it looks like one of the best ways to cut the deficit is to grow the economy. Who knew?

The Trans-Pacific Partnership faced its first test with a critical vote in the U.S. Senate today. Senate Democrats staged a last-minute rebellion against one of President Barack Obama’s top legislative priorities by blocking a test vote on a trade measure that didn’t include companion measures they sought. The vote, 52-45, effectively delays fast-track legislation Obama wants to expedite approval of trade accords. Supporters needed 60 votes to advance the bill to a final vote. Senate Majority Leader Mitch McConnell said the Democrats’ opposition was “pretty shocking” and vowed to keep working to reach an agreement he could bring back for a vote later. TPP would create a free trade zone covering 40% of the world economy – making it the biggest trade deal since NAFTA.

Verizon is buying AOL for $4.4 billion. The biggest U.S. wireless carrier will gain access to AOL’s mobile video platform and content. AOL bought Time Warner (TWX) for more than $160 billion in 2000 in what turned out to be one of the most disastrous corporate mergers in history. AOL was spun off from Time Warner in 2009 at a value of about $3.4 billion. It’s easy to think of AOL in terms of an epic acquisition failure, or for the catch phrase “you’ve got mail”, or not at all. Actually, AOL has built up a decent infrastructure for the online ad marketplace, particularly for video and mobile platforms. And they have been making money; and they are growing; revenue is up 39% in the past year; profit is up 19%. It even brought in $600 million in revenue last year from 2 million customers dialing in for internet access.

In a separate matter, Sprint and Verizon will pay a total of $158 million to resolve nationwide allegations that they engaged in mobile cramming, a practice in which cell phone providers place unauthorized third-party charges on customers’ bills. Sprint (S) will pay $68 million and Verizon (VZ) will pay $90 million. Of those amounts, $50 million will be refunded to Sprint customers and $70 million will be refunded to Verizon customers. The rest will go to the 50 states that brought suit against the mobile phone carriers. The carriers also agreed to take steps to ensure that they only bill customers for third-party charges that have been authorized by the customers. The carriers have set up phone lines for customer questions about refunds.

Many on Wall Street have long argued that the banks did not generally break the law when they packaged shoddy mortgages and sold them to investors in the lead-up to the financial crisis of 2008. But yesterday a federal judge dealt a strong blow to that version of history. She ruled that two banks misled Fannie Mae and Freddie Mac in selling them mortgage bonds that contained numerous errors and misrepresentations. “The magnitude of falsity…is enormous,” declared U.S. Judge Denise Cote, adding, “The origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factor that defendants say caused the losses, but once that collapse started, improperly underwritten loans were hit hardest and drove the collapse even further.”

The two banks, Nomura (NMR) and RBS (RBS), have been the only ones out of 18 financial firms that took their case to trial, arguing that it was the housing crash, and not deceptive loan documents, that caused the bonds to collapse. The other firms – including Goldman Sachs (GS) and Bank of America (BAC) – settled, together paying nearly $18 billion in penalties.

More than seven years after the financial crisis, Congress is still fretting that some megabanks might be “too big to fail.” Yesterday, the House Financial Services Committee subpoenaed three federal agencies (the Department of Justice, the NY Fed, and the Treasury) citing “extraordinary stonewalling” from the agencies and lingering questions as to whether regulators went easy on banks deemed to be too large to prosecute. One case in particular got the attention of lawmakers; when the DOJ settled with HSBC despite overwhelming evidence the bank laundered money for terrorists and Mexican drug cartels.

Another for-profit college is in trouble. ITT Educational Services was charged with fraud today. The Securities & Exchange Commission said the company’s chief executive and chief financial officer misled investors and auditors with “outright misstatements” and “half-truths” about its student loan program. ITT Educational Services allegedly created a fraudulent scheme to show that it was doing better financially than it really was. Students had been defaulting on their loans in droves, but the SEC claims that CEO Kevin Modany and CFO Daniel Fitzpatrick hid the real cost from investors. More than 51,000 students take online courses or attend the 135 ITT Technical Institute campuses located in 39 states. ITT also runs the Daniel Webster College in New Hampshire.

After the financial crisis, student loans started to dry up.To entice lenders, ITT offered to back the loans if student loan defaults rose over a certain threshold. When defaults started rising in 2012, the company had to pay third party lenders to make good on its guarantees. ITT also started making student loan payments on its own to mask the default rate. Shareholders were kept in the dark about all these payments. The company is also being sued by the Consumer Financial Protection Bureau over alleged predatory student lending. The CFPB has also taken Corinthian College (COCO) to court for the same issue. Corinthian filed for bankruptcy last week and abruptly closed all of its remaining campuses.