Phil Falcone Done: To Pay $18 Million, Admit Guilt, Agree To 5 Year Bar

Once upon a time Harbinger was the most desirable hedge funds to work for. 10 years later, it, and its head Phil Falcone [2], have just been effectively shut down.

• SEC: HARBINGER CAPITAL, FALCONE TO PAY $18M IN SETTLEMENT
• SEC SAYS HARBINGER, FALCONE ADMIT TO CONDUCTING IMPROPER SHORT SQUEEZE IN BONDS ISSUED BY A CANADIAN MANUFACTURING COMPANY
• SEC
  SAYS FALCONE CONSENTS TO BAN FROM ASSOCIATION WITH ANY BROKER, DEALER,
  INVESTMENT ADVISER, OTHER ENTITIES, WITH RIGHT TO REAPPLY AFTER FIVE
  YEARS
• SEC SAYS FALCONE ADMITTED TO IMPROPERLY BORROWING $113.2M
• SEC: FALCONE ADMITTED TO RETALIATTION VS FINL SERVICE FIRM

In other rumored news, Phil's wife Lisa Maria [4]to join cast of the Real (non-prenupped) Ex-Wives of New York (Hedge Funders) in 5...4...3...

So from this...

 [5]

to this [6]?

More from the SEC [7]:

Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:

• Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.
• Falcone and Harbinger granted favorable redemption and liquidity terms to certain large investors in HCP Fund I, and did not disclose certain of these arrangements to the fund’s board of directors and the other fund investors.
• During the summer of 2006, Falcone heard rumors that a Financial Services Firm was shorting the bonds of the Canadian manufacturer, and encouraging its customers to do the same.
• In September and October 2006, Falcone retaliated against the Financial Services Firm for shorting the bonds by causing the Harbinger funds to purchase all of the remaining outstanding bonds in the open market.
• Falcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding transactions in the bonds and deliver the bonds that it owed.  Defendants did not disclose at the time that it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds’ custodial account and the Harbinger funds were not offering them for sale.
• Due to Falcone’s and the other Defendants’ improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.

http://www.zerohedge.com/print/477772

Indian Rupee Collapses - Worst Day In 20 Years

Presented with little comment (over our earlier detail [3]) but just to note that around the world there are significant events occurring (even as the US equity market slumbers). So much for the gold coin ban - gold now trades at 4 month highs in Rupee terms.

Today's 1.46 Rupee slump is the largest in absolute terms since 1993... (the largest single-day percentage depreciation since 9/22/2011)...

 [4]

and the last 4 weeks' move is the largest since 1991...

 [5]

And just for fun, since May 2nd, holders of paper Rupee have lost 18% of their purchasing power while those that held gold instead have seen their 'wealth' appreciate 13% in local purchasing power.

End Of The Great Market Illusion

A series of data which normally would be considered anomalous is growing at such an accelerated rate, it’s no longer ‘black swan’ data; now the flock seems to be all black and it’s flying north for the winter.  Read full article at: http://globalintelhub.com/end-of-the-great-market-illusion/

Why Isn't There A Demonstrably Correct Economic Theory?

Although economics doesn't recognize it, the operative phrase here is systemic injustice.

 

Correspondent C.G.D. recently asked what I consider a very profound question: why isn't there demonstrably correct economic theory?

 

"My wife has asked me a 'simple' question that I can not answer. After 2000 years, why do we not know which economic theory is correct: Keynesian or Hayek-Friedman? Surely, there is a demonstrably, statistically correct answer."

Let's add Marxism to the short list of contenders, and then consider why we have cargo-cult faiths (Keynesianism) instead of demonstrably correct models of economic behavior.

http://globalintelhub.com/why-isnt-there-a-demonstrably-correct-economic-theory/

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Fed Warns Leveraged ETFs Could Trigger 1987-Style "Cascade" In Stocks

In a 43-page research report, the Federal Reserve has authored a rather concerning tome warning that the mechanical positive-feedback rebalancing of Leverage ETFs (LETFs) resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987. The impact of LETFs on broad stock-market indexes become significant during periods of high volatility (shown empirically in 2008/9 and H2 2011) as they show that LETF rebalancing in response to a large market move could amplify the move and force them to further rebalance which may trigger a “cascade” reaction. Furthermore, executing orders within a short period of time, such as the last hour of trading, may cause disproportionate price changes (especially in financial stocks). The Fed warns that a significant price reduction at market close may also impair investor confidence with accelerating depressed prices at the close potentially driving large investor outflows overnight.

ETF-rebalancing implied price effects are most egregious at times of stress...

ETF rebalancing flows have grown dramatically...

BUT - what is most concerning is that LETF rebalancing flows as a fraction of stock volume in the last hour is surging - especially for small-caps...

The frequency of a large price move in the last hour of trading is zero until 2007 when the first financial LETF is launched. Consistent with the implied price impact results, the frequency of a large price move is elevated when the price volatility is high, reaching 0.8 in the 2008-2009 financial crisis and 0.6 in the second half of 2011. These results, combined with the implied price impact estimates, suggest that LETF rebalancing contributed to the stock market volatility in the 2008-2009 financial crisis and in the second half of 2011.

Goldman Admits Payroll Data Is "Economically Meaningless"

As the disconnect between payroll data and GDP grows, [10] and the schrodinger reality of a non-farm-payroll print and JOLTs data increases [11]; it will not come as a total surprise to Zero Hedge readers that Goldman Sachs has finally been forced to admit that investors have been fooled by the relative importance of jobs data. While the payrolls data has the largest financial market effect of all economic indicators (by a large margin), Jan Hatzius finds that neither payrolls (or Advance GDP) provide any incremental information about the broad strength of the economy.

Via Goldman Sachs,

Every investor knows that US economic data releases can trigger large price moves in the Treasury bond market.

Exhibit 1 shows the impact of a 1-standard-deviation (SD) surprise in the most important US economic activity indicators relative to the Bloomberg consensus in the 20 minutes surrounding the release.

Payrolls Have by Far the Biggest Impact on the Bond Market

 [12]
Economic data releases are also important for the equity market, although the relationship is not quite as strong. Exhibit 2 repeats the previous exercise with the price of S&P 500 futures in the 20 minutes surrounding the release.

Payrolls Also Most Powerful for Stocks, But It’s a Closer Call

 [13]

At least in the Treasury market, the payroll release has recently become even more dominant.

 [14]

But - given all this 'efficient' market moving information... the fact is that neither the payrolls nor advance GDP data provide much incremental economic information...

Our most important finding is that the impact of both nonfarm payrolls and advance GDP is small and statistically insignificant, whether we focus on the CAI or the change in the unemployment rate.

 [15]

Thus, neither indicator seems to contain statistically significant information for growth when evaluated on a first-release basis.

Why is it that payrolls and GDP - the two most market-moving releases in the US data calendar - provide so little incremental information about the economy?

First-release data can look very different from fully revised data.

It is difficult to overemphasize the importance of using first-release data for the explanatory variables in our analysis. Payrolls and GDP are subject to heavy revisions between the first release and the fully revised version. Some of these revisions occur in the next monthly or quarterly release, and some occur with much longer lags via the annual revisions. And they are very important; if we re-run our regressions using fully revised data, both payrolls and GDP become statistically significant as predictors of future growth. But revised data are obviously not available in real time.

And as far as the market being efficient?

Some readers will undoubtedly be skeptical of our results on the grounds of market efficiency. How could the financial markets possibly put so much weight on indicators that in reality provide little useful information about the economy? Does this not fly in the face of the idea that financial markets are powerful aggregators of information that will seek out the most accurate possible signals about the future?

First, although market efficiency is a powerful idea, the empirical finance literature of the past three decades has made it clear that financial markets are not always perfectly efficient... Our results suggest that these investors will put too much weight on indicators that tend to get heavily revised and are not very informative in real time. Moreover, many investors seem to look for a simple, high-profile summary of the performance of the economy, rather than piecing together a composite picture from many different reports. And the highest-profile indicators are the monthly employment report and the quarterly GDP report.

Second, part of the market’s outsized sensitivity to payrolls is probably directly due to recent Fed communications. Given the limited usefulness of first-release nonfarm payroll numbers, we believe that the distinction between an initial print of 162,000 and one of 180,000-200,000 is too small to determine whether Fed officials should make a significant policy change. But if the markets have some reason to believe that this distinction will in fact drive Fed policy, the outsized response to relatively small and economically meaningless payroll surprises may not be so irrational.

So, the bottom line is that market moves off the headline data releases of the Payrolls and GDP are inefficient and based on a false belief that this data in some way indicates improving (or deteriorating) economic conditions. Once again, investors have been fooled by an ongoing mythology about the often noisy (and always revised) data and the mainstream media's need for a headline upon which to hang the manipulation-du-jour.

Where The Fed's Excess Reserves Are Going: 51% Foreign Banks; 49% Domestic

As shown [3]here previously [4], there is a direct correlation between the excess reserves created by the Fed, and the cash holdings of domestic and foreign banks (operating in the US) disclosed by the Fed's weekly H.8 statement [5]. So with the Fed's reserves reaching new all time highs with every week courtesy of the $85 billion in monthly flow injected by the Fed...

 [6]

... some wonder where is this cash ending up. The answer: in the week ended July 31, a record $1,157 billion was parked with foreign banks in the US, while "just" $1,112 of the Fed's created reserves was allocated to US banks.

This breakdown is shown in the chart below:

 [7]

 [8]

Or, in short, the Fed's QE-created reserves have gone to:

• Foreign banks: 51%
• Large-domestic banks: 36%
• Small domestic banks: 13%

At least someone is benefiting from the Fed's generosity, in that order.

Source: H.8 [5] [5]

G20 Showdown On Dollar Hegemony

By RUSS WINTER of Winters Actionables

Obama canceled his scheduled meeting with Russian President Vladimir Putin last week. Although Obama didn’t give his reason for the cancellation, the media stoogery speculated it was because of Russia’s protection of whistleblower-patriot Edward Snowden. What is not being reported is that Russia has been warning its citizens and institutions since last March’s Cyprus bail-in to divest assets out of western banks.

Additionally, last week Yao Yudong of the PBoC’s monetary policy committee called for a new Bretton Woods system to strengthen the management of global liquidity. In an article in the China Securities Journal, Yao called for more power to the IMF as international cooperation and supervision are needed.

Because of the U.S. dollar hegemony, the lion’s share of all global dollar-denominated transactions pass through the New York. This includes those that have absolutely nothing to do with the U.S. In turn, these transactions are monitored by the New York State Department of Financial Services, which was created in 2011. This agency plays a special role in the exposure of bank and company wrongdoers, real or imagined.  Around 4,500 organizations, with assets of $6.2 trillion, are under the direct control of this agency.

This circumstance, the unnecessary power and the unlimited surveillance/invasion of privacy are powerful incentives for non-U.S. banks and companies to replace the U.S. dollar with the currencies of other countries when making international payments, while at the same time creating their own regional systems of international payments.

Thus, recent Western self-inflicted wounds have opened the Pandora’s box for China and Russia as well as other BRIC nations to pressure hard for non-dollar settlement of trade, and in particular oil. I submit that this agenda and the G20 meeting Sept. 5-6 is the venue for this to be revealed. THAT should be the real concern for the U.S., and it ties direct into my earlier article, China Maneuvers to take Away US’ Dominant Reserve Currency Status. 

As far as the timing, there are just too many coincidences happening on the gold and other fronts to assume the yellow metal does not play a role here. Is it a coincidence that JP Morgan has literally cornered the gold market [see Banker's Participation Report].

The Shanghai Gold Exchange has had deliveries equal to the world’s production for months straight.

The Comex registered gold is only at a mere 2% of open interest.

Chart source: Garrett Goggin

Is it a coincidence that GOFO has been negative for 25 straight days, and gold in backwardization?

Is it a coincidence that the stock market witnessed four Hindenberg Omens in the last week?

The end of Dollar hegemony is going to be a “gap” game-changer. 

*Gold Forward Offered Rates:

When it is negative, you will receive more interest when you lease your gold than your dollars. Primarily it means that gold leased out today is worth more than the gold delivered at the end of the three months.

The negative GOFO rate means someone wants to get their hands on gold.  There is speculation that the elevated high levels of demand we’re seeing in Asia has emptied the London Market.

Americans Giving Up Passports Jump Sixfold as Tougher Rules Loom

Americans renouncing U.S. citizenship surged sixfold in the second quarter from a year earlier as the government prepares to introduce tougher asset-disclosure rules.

The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside, is searching for tax cheats in offshore centers, including Switzerland, as the government tries to curb thebudget deficit. Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act, more of the estimated 6 million Americans living overseas are weighing the cost of holding a U.S. passport.Expatriates giving up their nationality at U.S. embassies climbed to 1,131 in the three months through June from 189 in the year-earlier period, according to Federal Registerfigures published today. That brought the first-half total to 1,810 compared with 235 for the whole of 2008.

“With the looming deadline for Fatca, more and more U.S. citizens are becoming aware that they have U.S. tax reporting obligations,” said Matthew Ledvina, a U.S. tax lawyer at Anaford AG in Zurich. “Once aware, they decide to renounce their U.S. citizenship.”

Fatca requires foreign financial institutions to report to the Internal Revenue Service information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. It was estimated to generate $8.7 billion over 10 years, according to the congressional Joint Committee on Taxation.

Delaying Implementation

The 2010 Fatca law requires banks to withhold 30 percent from “certain U.S.-connected payments” to some accounts of American clients who don’t disclose enough information to the IRS. While banks can sign agreements to report to the IRS individually, many are precluded from doing so by privacy laws in their jurisdictions.

The Treasury Department last month announced that the IRS will delay the start of Fatca by six months until July 1, 2014, to give foreign banks time to comply with the law. The extension of the act follows a previous one-year delay announced in 2011.

Financial institutions including Canada’s Toronto-Dominion Bank (TD) and Allianz SE ofGermany have expressed concerns that Fatca is too complex.

The latest delay comes after the Swiss government agreed in February to simplifications that will help the country’s banks implement Fatca.

Penalty Threat

“The United States wishes to ensure that all income earned worldwide by U.S. taxpayers on accounts held abroad can be taxed by the United States,” the Swiss government said on April 10.

Since 2011, Americans, who disclose their non-U.S. bank accounts to the IRS, must file the more expansive 8938 form that asks for all foreign financial assets, including insurance contracts, loans and shareholdings in non-U.S. companies.

Failure to file the 8938 form can result in a fine of as much as $50,000. Clients can also be penalized half the amount in an undeclared foreign bank account under the Banks Secrecy Act of 1970.

The implementation of Fatca from July next year comes after UBS, Switzerland’s largest bank, paid a $780 million penalty in 2009 and handed over data on about 4,700 accounts to settle a tax-evasion dispute with the U.S. Whistle-blower Bradley Birkenfeld was sentenced to 40 months in a U.S. prison in 2009 after informing the government and Senate about his American clients at the Geneva branch of Zurich-based UBS AG. (UBSN)

Compliance Costs

The additional compliance costs for companies to ensure that Americans they hire are filing the correct U.S. tax returns and asset-declaration forms are at least $5,000 per person, said Ledvina.

For individuals, the costs are also rising. Getting a mortgage or acquiring life insurance is becoming almost impossible for American citizens living overseas, Ledvina said.

“With increased U.S. tax reporting, U.S. accounting costs alone are around $2,000 per year for a U.S. citizen residing abroad,” the tax lawyer said. “Adding factors, such as difficulty in finding a bank to accept a U.S. citizen as a client, it is difficult to justify keeping the U.S. citizenship for those who reside permanently abroad.”

http://www.bloomberg.com/news/2013-08-09/americans-giving-up-passports-jump-sixfold-as-tougher-rules-loom.html

Stock Market Bubbles And Record Margin Debt: A (Repeating) History Of Ignoring All Warnings

It is well-known that as part of the S&P500's ascent to new records, investor margin debt has also surged to all time highs, surpassing for the past three months previous records set during both prior, the dot com and the housing, stock market bubbles.

And as more attention has shifted to the topic of speculator leverage once more, inquiries into the correlation between bets upon bets and stock performance are popping up once more, in this case in a study by Deutsche Bank titled "Red Flag! - The curious case of NYSE margin debt." Of particular note here is a historical comparison of margin-debt warnings that have recurred throughout history but especially just before major stock bubble crashes, such as in the period 1999/2000, 2007/2008 and of course today, which have time and again been ignored. Here is what was said then, what is being said now, and what is ignored always.

As DB says, "we prepared a collection of press articles which were published around the key events during the past financial crises. Our key finding is straight forward. Irrespective of the publishing date, the articles read alike throughout the two major crisis periods, i.e. the “new technologies market equity bubble” (1999-00) and the “Great/Global Financial Crisis” (2007-08). Most interestingly, literally the same content can be found in todays’ press. Universal phrases include:

• “A rising stock market encouraged more investors to go into debt to buy stocks, sending margin debt levels past their all-time high”.
• “The National Association of Securities Dealers (NASD) has asked members to review their lending requirements in a sign of increasing concern that rising levels of margin debt could exacerbate a stock market plunch.”
• “The Fed is concerned about a sharp rise in margin debt but has been unwilling to attack stock market speculation as high levels of leverage do not necessarily translate into high risk. The last time the Fed adjusted the margin rules was in 1974, when when it reduced the down payment required for stocks to 50 percent of the purchase price, from 65 percent.” […] “The Fed should return to its pre- 1974 policy of actively changing margin requirements in response to stock market speculation”.
• “High margin debts show the effect of over-leveraging and mispricing of risk”.
• “The movements in stocks cause brokerages to stop allowing customers to buy some of the volatile stocks on margin or require clients to put up more cash.”
• “Either the market rises dramatically to make those loans good or in any down move there is tremendous selling pressure”.
• “Until recently, most investors ignored red flags raised by regulators”.

And more detail:

25 May 1999, Event: 1st MoM change in NYSE margin debt > 10%, Reuters News: “Soaring margin debt seen bad for Internet stocks.”

“Soaring margin debt is likely to trigger a debacle in Internet stocks", Charles Biderman, chief executive of TrimTabs.com said Tuesday. "New online investors are buying heavily on margin and it looks like they're buying Internet stocks", Biderman said. TrimTabs.com is a Santa Rosa, Calif.-based firm which collects information on mutual fund flows and other market data. "When people borrow to buy (stocks) that's a very bad sign for the future." Biderman cited figures showing margin debt for customers of New York Stock Exchange (NYSE) member firms at $182 billion at the end of April, up from $156 billion at the end of March and $142 billion at the end of February. He said the nearly 30 percent increase over a two-month span was unprecedented. ” The wild price moves in Internet stocks, which can go up or down tens of dollars a day, have caused brokerages to stop allowing customers to buy some of these volatile stocks on margin or require clients to put up more cash. "Either the market has to rise dramatically to make those loans good or in any down move there's tremendous selling pressure," Biderman said. 

08 December 1999, Event: 2nd MoM change in NYSE margin debt >10%; The Cambridge Reporter: "Margin debt oddly overlooked "

"U.S. Federal Reserve figures show that margin debt has grown tremendously. Since 1993 the rate at which margin debt has grown is three times faster than the growth rate for U.S. household debt and overall debt in credit markets. According to a non-profit think tank, Financial Markets Centre, as a percentage of market capitalization or the total value of stocks, margin debt has reached the highest level since just before the 1987 market crash. Too, as a percentage of gross domestic product, margin debt is at the highest level in 63 years, and now of course the over-valued stock market makes that more worrisome. In Canada for reasons of privacy margin debt figures are not disclosed. The U.S. Federal Reserve has been unwilling to attack stock market speculation. Since January, 1974, the Federal Reserve has left margin requirements at 50 percent, despite the huge rise in the stock market. The unwillingness of monetary authorities to deal with the equity markets is unprecedented and puzzling. The failure to acknowledge the role of debt in the stock market surge, something so massive, is difficult to understand. Now, just sitting with folded hands is a prescription for disaster in thee long run for the U.S. and Canada as well." 

21 December 1999, Event: 3rd MoM change in NYSE margin debt >10%; The Los Angeles Times: "Monthly increase, largest since 1971, adds to fears that level of speculation in stocks may signal near-term peak"

"The Federal Reserve is concerned about a sharp rise in margin debt, or money borrowed from brokers to purchase stocks, in the last two months of 1999, Fed chairman Alan Greenspan said on Wednesday. Greenspan said, however, that the Fed did not consider raising its margin requirements, currently at 50 percent, an effective way to address the problem. At a Senate Banking Committee hearing on his renomination, Greenspan was asked if the Fed was worried about data showing margin debt rose substantially in November and December. "Obviously," he replied. "It is certainly the case that the numbers that you cite, especially for November and December, have caught our attention." While there has been considerable conversation at the Fed about how to address the problem, Greenspan said changing margin requirements was not the solution. "All of the studies have suggested that the level of stock prices have nothing to do with margin requirements," he said. The Fed has been reluctant to adjust requirements that would not affect large investors, who have other sources of financing, he said. "

26 February 2000, Event: (prior to) Margin debt peak; Reuters News: “NYSE, NASD call for review of margin lending rules.”

“The New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) have asked members to review their lending requirements in a sign of increasing concern that rising levels of margin debt could exacerbate a stock market plunge. [...]Some firms add their own requirements to that rule in order to limit risk but the popularity of margin borrowing still causes concern. Indeed, Federal Reserve Chairman Alan Greenspan said recently that the central bank has been paying increasing attention to a surge in margin debt. Last fall, the NYSE said margin debt held by its member firms equalled $182 billion, or 2 percent of the U.S. gross domestic product. That compared with NYSE member firm margin debt of $30 billion at the start of the decade.”

17 May 2000, Event: (post) Margin debt peak, WSJE: "Margin Debt Fell Almost 10% in April - Turbulence in U.S. Market May Have Curbed Borrowing"

"Margin debt, which has been soaring, fell nearly 10%during the month. The drop marks the first time since August that investors pruned their debt loads. Investor borrowing reached record levels in recent months, drawing the scrutiny of securities regulators who viewed it as a sign of the market's peculative fervor. But until recently,most investors ignored red flags raised by regulators. "The bottom line is that investors got their fingers burned during the recent market downdraft," says Morgan Stanley Dean Witter & Co. analyst Henry McVey. The drop isn't all that surprising, however, given last month's sharp fall in stock prices. Many investors were forced to come up with additional cash or stock to meet margin calls; others had their stocks sold without notice as falling share prices eroded the value of their holdings. The decline in investor borrowing was sharp at some online firms. At Datek Online Holdings Corp., margin debt fell about 20% in April and "looks pretty flat in May so far," says spokesman Mike Dunn. Margin debt also fell about 20% in April at Ameritrade Holding Corp. and is up about 1%or 2%so far this month, a spokeswoman says. About 80% of the decline is due to customers voluntarily cutting back on their borrowing, she adds. Some brokerage firms continue to make it tougher for investors to borrow to buy stock. TD Waterhouse Group Inc. plans to increase its base margin-lending rate to 35% from 30% on June 15. "We think the change is prudent and we think it protects customers, in light of the current volatility we're seeing in the marketplace," says TD Waterhouse spokeswoman Melissa Gitter. The online broker now has more than 800 stocks subject to higher margin requirements, up from 443 on April 13."

19 December 2006, Event: 1st MoM change in NYSE margin debt > 10% DJ News Service, "Margin Debt Saw Big Spike In November"

"A rising stock market encouraged more investors to go into debt to buy stocks last month, sending so-called margin debt to a level not seen in more than six years. […] November was the first month since 2000 that margin debt has topped the $270 billion figure. The last time that happened was in March 2000, when margin debt set a record at $278.53 billion as the Nasdaq Composite Index was reaching its all-time peak. Last month's rise, which left margin debt about 3% below its record, came as stocks continued to rise. The Dow Jones Industrial Average and the Standard & Poor's 500-stock index gained 1.2% and 1.6%, respectively, during November, leaving both market barometers with double-digit percentage gains for the first 11 months of the year. That display has helped inspire margin trading, in which investors use funds borrowed from their brokers to help finance their transactions. "This market has been uni-directional" for a while, and "that gets a lot of money chasing performance," said Art Hogan, chief market  analyst at Jefferies. "You're not going to borrow to buy in a market where the trend has been downward."

20 February 2007, Event: All-time high margin debt (Mar-2000) crossed;  Dow Jones Intl News: “Margin Debt Tops All-Time High; Reached $285.6B In January”

“A rising stock market continued to inspire investors to go into debt to buy stocks last month, sending margin-debt figures past their all-time high, which had been set several years ago in the waning days of the technology-stock boom.Margin debt as tracked by the New York Stock Exchange totaled $285.61 billion in January, the NYSE said Tuesday, up from $275.38 billion in December and moving past the previous peak of $278.53 billion. That high was set in March 2000, as the Nasdaq Composite Index was peaking. Margin debt's recent advance has come as stocks moved higher.”

11 April 2007, Event: 2nd MoM change in NYSE margin debt > 10% The Globe and Mail: “Record level of margin debt prompts regulator warning”

"As thousands of homeowners in the United States are realizing it's unwise to borrow more than they can afford, the National Association of Securities Dealers is offering a similar warning to investors: It's risky to invest more than you have. The brokerage regulator said yesterday the amount of debt investors took on to buy securities, known as buying “on margin,” had soared to a record $321.2-billion (U.S.) in February. That topped the previous  record of $299.9-billion in March, 2000, at the peak of the last bull market in stocks. Margin debt has more than doubled from $141.3-billion in January, 2003, the NASD said, three months after the bottom of a bear market in stocks." “When the Internet bubble imploded, many people were shocked to learn that firms can sell their stock, and they have no choice in what can be sold,” John Gannon, an NASD senior vice-president for investor education, said. Regulators, including the Federal Reserve, the New York Stock Exchange and the NASD, set minimum requirements for margin traders. Brokerages are free to set more stringent standards. Under the minimum requirements, before trading on margin, ordinary investors must deposit at least $2,000 or 100 per cent of the purchase price, whichever is less. Fed rules generally let investors borrow up to 50 per cent of the purchase price of securities that can be bought on margin. NYSE and NASD rules then require equity in an account to be at least 25 per cent of the securities' market value in that account, known as a “maintenance margin.” “You can lose your money fast and with no notice,” the Securities and Exchange Commission said.

12 July 2007, Event Margin debt peak; The Wall Street Journal: "On the NYSE, 'Margin Debt' Jumps to Record $353 Billion"

"Investors are borrowing record sums of money to finance trades on the New York Stock Exchange, according to data due out from the Big Board today. NYSE officials attribute the trend to recent regulatory changes effectively allowing both small and big investors to take on more leverage, or borrowed money, from their brokers. So-called margin debt, a broad measure of leverage, jumped 11% to $353 billion at NYSE in May, up from nearly $318 billion in April.Wall Street has had a love affair with leverage in recent years, typified by hedge funds and private-equity firms that make use of it to buy companies and stocks and bonds. Such financing can also amplify losses if investors' bets go the wrong way. But regulators say that doesn't necessarily translate into more risk. "I wouldn't necessarily say that leverage equates to risk," said Grace Vogel, executive vice president for member regulation at NYSE. "We feel that the amount of margin being collected by the firms is appropriate, given the strategies in [their customers'] portfolios." 

27 October 2007, Event: S&P 500 peak, SUNBUS: "Stock market vulnerable to sharp fall as margin debt remains high"

"It has become a source of concern to some investors who worry that it makes the stock market more vulnerable to a nasty tumble, particularly if equities’ resurgence continues. “High margin debts show the effect of over-leveraging and mispricing of risk in our financial system,” says Scott Schermerhorn, chief investment officer for Choate Advisors, which runs about $2.7bn (£1.3bn, e1.9bn). “It indicates that, despite the August runoff, there’s still more problems out there. This will take a long time to work through the system.” Based on historical levels, margin debt makes the market look risky and subject to a sharp downtick right now. It comes to 2.4%of total adjusted-market capitalisation – 3.4 times its 62-year norm of 0.74%. “These are certainly not the kind of numbers you see at the beginning of a bull market,” says Ed Clissold, an analyst for Ned Davis Research. In July,margin debt hit an all-time high of $381bn. But as worries about sub-prime mortgage loans set off a credit crunch in August, more than $50bn of the debt was erased. Almost half of the margin drawdown came from brokerages such as Merrill Lynch, which called loans backing two Bear Stearns hedge funds.What is particularly worrying to some is that margin debt is just one tool available to investors seeking leverage these days. Options and futures make it easier than ever to obtain leverage. So the near-record margin numbers may understate the situation. “As financial markets have grown and become more diversified, margin has become one of many ways to finance securities, so it represents less of a proportion of finance than it used to,” says Henry Kaufman. The one-time chief economist of Salomon Brothers now heads Kaufman & Co, an investment management and financial consulting firm. Granted, recent structural changes that take into account an entire portfolio’s risk have contributed to the gains. If an investor is using options to hedge his risk, new rules give him the ability to borrow more because he has lowered the risk profile of his entire portfolio. But the new rules do nothing to minimise margin lending’s inherent conflicts of interest or its potential to send the market down sharply as it did in August in a cascade of margin calls. Brokers sometimes give investors little or no time to cough up more cash before they liquidate a portfolio at bargain-basement prices. A brokerage firm may force a margin call on the one hand, while helping set the price on the securities sold to meet it on the other." 

09 January 2013, Event: 1st MoM change in margin debt > 10%; DJ Newswire: "Margin Debt Soared in January; Sign of Top Nearing?"

"NYSE says margin debt jumped 10% in January alone to $364 billion, 32% higher than a year earlier and the third-highest ever, trailing just June and July 2007. The previous instances, of course, came just a couple months before US stocks last topped out before the ongoing rally, with margin then peaking at $381 billion. So it's pretty clear where the record January rush of cash into equity products came from. Now, what happens if things get a little frisky and some margin debt turns into margin calls?"

06 May 2013, Event: All-time high margin debt (Jul-2007) crossed (1/2); The Wall Street Journal: “NYSE Margin Debt Raises Eyebrows”

“High levels of margin debt on the New York Stock Exchange are raising concerns about the state of the rally. Stephen Suttmeier, technical research analyst at Bank of America Merrill Lynch, notes leverage, as measured by NYSE margin debt, rose 28% in March from a year ago to $380 billion. That figure is slightly below the July 2007 peak of $381 billion.Market analysts track margin-debt activity as an indication of investors’ appetite for taking on speculative trading. It has been trending higher since bottoming out during the financial crisis and currently is hovering around all-time highs. “Leverage can be used as a sentiment indicator because it is related to investor confidence... Although it should not be used as a market timing tool, the implication is contrarian bearish,” Suttmeier says. ”Peaks in NYSE margin debt preceded peaks in the S&P 500 in both 2007 and 2000.” It's no surprise people have been taking on more risk as the market has moved to record highs. But the question is what happens when the easy ride higher turns south and some of that margin debt turns into margin calls? A potential pitfall for those trading "on margin" is a sharp decline in stock prices, which can expose investors to margin calls, requiring them to post additional collateral lest their brokers sell their securities to cover the debt. A wave of margin calls can worsen selling pressure on stocks and was seen as partly to blame for the market's woes during the financial crisis. "It's rather alarming to see NYSE margin debt just shy of its all-time high as of the March reading," Cullen Roche of Orcam Financial Group wrote on the Pragmatic Capitalism blog (hat tip Business Insider). "My guess is we've actually already surpassed the all-time high though we won't officially know until April data is released. Fun times knowing we live in a world that is built on such a fragile foundation." 

31 May 2013, Event: All-time high margin debt (Jul-2007) crossed (2/2):The New York Times “Shades of 2007 Borrowing”

“AMERICAN investors have taken out more margin loans than ever before. That indicates that speculative investing has grown among retail investors, reaching levels that in the past indicated the market was getting to unsustainable levels and might be in for a fall. [...]It was the first time the total had surpassed the 2007 peak of $381 billion, a peak that was followed by the Great Recession and credit crisis. [...][T]he last time the Fed adjusted the  margin rules was in 1974, when it reduced the down payment required for stocks to 50 percent of the purchase price, from 65 percent.  ...]Nonetheless,margin loans have remained popular among many individual investors, who tend to raise their borrowings during times of market optimism and to reduce them when markets are falling. Thus the margin debt levels now may provide an indication of popular enthusiasm for investments.” 

27 June 2013, Event: All-time high margin debt (Jul-2007) crossed = Did margin debt peak already? (1/2);Reuters: "U.S. stock market margin debt falls in May from record April level"

"The value of U.S. equities investors bought with borrowed money fell 1.7 percent in May from the previous month's record high, marking the first monthly decline in margin debt in nearly a year. Margin debt accounts totaled $401.6 billion in May, down from a record $408.7 billion in April, data from the Financial Industry Regulatory Authority showed on Thursday. The level had increased every month since a 2.3 percent drop between June and July 2012. Margin debt is one way to measure how much risk hedge funds and other large investors are taking to enhance their returns through the use of borrowed cash. Extremely high readings are seen as a gauge of overly bullish sentiment. In April, the New York Stock Exchange reported margin debt hit $384.4 billion, surpassing the previous record of $381.4 billion in July 2007. On Thursday, the NYSE said its share of the May total was $377 billion." 

27 June 2013, Event: All-time high margin debt (Jul-2007) crossed = Did margin debt peak already? (2/2); ARMNET: "Record margin debt points to a far wider Wall Street Crash coming soon"

"Don’t even think about jumping back into US stocks after the recent modest sell-off. If margin debt is any guide, and historically it has been an excellent guide then what we have just seen is just a warning of a much biggerWall Street crash around the corner. The last time margin debt was at present levels was at a previous peak in July 2007 at $381 billion, just before the global financial crisis struck. Yes it is hard to believe that confidence was that high in stocks just at the wrong moment. Record margin debt: It is the same story now. In March 2013 NYSE margin debt totaled $380 billion. You do not need to be much of a financial analyst to spot almost an exact parallel. But what you should also understand is that margin debt works in both directions. It accelerates the upside in stocks by allowing punters to buy with borrowed money but then it accelerates the drop in a stock market by taking it away from them. How does it do that? Well think about it. If you owe money then you will be forced to sell a perfectly good asset in a falling market to pay off your debt, and that sale accelerates the fall in stock prices. Besides with the bond market weakening the cost of margin debt is going up. That will also be triggering liquidation of this debt with an obvious impact on stock prices supported by this borrowing. [...] The current weakness in gold and silver is also a sign of a coming crash in all major financial assets. Once the weaker investment holders of gold and silver have finished selling precious metals they will continue with other assets, and margin account requirements will force them to liquidate US stocks. Stock market crash: We think the sell-off of precious metals is almost done but it has hardly started with the overinflated US stock market. A historically high US price-to-earnings ratio still anticipates an economic recovery that is just not coming through. US GDP growth in the first quarter was revised down from 2.4 to 1.8 per cent, after the negative fourth quarter. The only economic recovery is in house prices and the stock market, both inflated by cheap money courtesy of the Fed. Rising mortgage rates are going to ditch the housing recovery and rising margin costs will do for the US stock market. Welcome to the liquidation sale of the century!"

* * *

This time must be different.

http://www.zerohedge.com/news/2013-08-09/stock-market-bubbles-and-record-margin-debt-repeating-history-ignoring-all-warnings

Thanks to the NSA, the Sky May Be Falling on U.S. Cloud Providers

Revelations of widespread spying by the U.S. government could bring big financial fallout to the cloud-computing industry, according to a Washington-based think tank.

U.S. cloud providers could lose between $21.5 billion and $35 billion in revenue over the next three years because of worries about the National Security Agency's PRISM program, which enables the government to access user data from U.S. Internet companies, according to a report this week by the Information Technology & Innovation Foundation.

The estimate is partly based on market-share projections and a global survey, which found that more than half of respondents, including companies and other industry professionals based outside the U.S., said they would be less likely to use a U.S.-based cloud service in light of Prism. Ten percent said they had already canceled a project with a U.S.-based Internet company as a result, according to the Cloud Security Alliance, the trade group that conducted the survey.

Spying concerns "will likely have an immediate and lasting impact on the competitiveness of the U.S. cloud computing industry if foreign customers decide the risks of storing data with a U.S. company outweigh the benefits," according to the think tank's report. A $21.5 billion or $35 billion loss of revenue would be the equivalent of 10 percent or 20 percent of the estimated market, respectively.

Frank Gillett, an analyst at Forrester Research, said he expects there will be some financial impact as a result of the leaks by NSA contractor Edward Snowden. However, the number of cloud customers that actually jump ship from U.S. providers may be less than the think tank's estimates because relatively few have canceled contracts so far, Gillett said.

"I'd be surprised at anything of that magnitude," Gillett said in an interview. "Those who were already concerned about the U.S. Patriot Act and other types of legal authorities have already avoided the United States, anyway. For them, it wasn't a big surprise."

Companies aren't abandoning U.S. cloud-service providers en masse because there are few other competitive options. Still, the gloomy forecast for American Internet companies could be a ray of sunshine for global competitors.

http://www.bloomberg.com/news/2013-08-08/thanks-to-the-nsa-the-sky-may-be-falling-on-u-s-cloud-providers.html

Go Long Cyber Security Companies

We've seen one of the most groundbreaking intelligence scandals in history. Leaked to sources such as the Guardian, whistleblower Edward Snowden released a trove of files showing the NSA among others is not only spying on Americans, they are also monitoring conferences such as political negotiations, foreign diplomatic offices, and more.

http://seekingalpha.com/article/1618012-go-long-cyber-security-companies

ALERT for all IRA account holders - IRS changing policy on self directed IRAs

Submitted by Simon Black via Sovereign Man blog [7],

I recently received some disturbing news that I felt critical to pass on to you.

As we’ve been writing for over four years now, it’s long been a common approach for government sliding into insolvency to confiscate wealth from their own citizens.

Charles I of England infamously commandeered 200,000 pounds of his own citizens’ gold right before the English Civil War in 1638. Roosevelt confiscated his entire nation’s gold holdings roughly three centuries later.

And of course, Cyprus raided domestic bank accounts earlier this year in a desperate attempt to bail-in the national banking system.

It’s foolish to think that these things cannot happen, especially when you look at the numbers.

The United States government is in debt to the tune of nearly $17 trillion. What’s more, Uncle Sam has to borrow money just to pay interest on the money they’ve already borrowed… and they’re still posting trillion-dollar annual deficits.

The only reason that the US government is still in business is because the Federal Reserve has been buying the vast majority of newly issued US Treasury bonds… in some cases as much as 90%.

The problem with this method, aside from being a completely fraudulent system, is that the Federal Reserve is quickly reaching the point of insolvency itself.

As we’ve explored in recent letters, the Fed’s capital ratio (a significant measure of it’s financial health) is at a laughably small 1.53%. And as the Fed continues to expand its balance sheet buying even more of the Treasury’s debt, its capital ratio gets smaller and smaller.

The government is soon going to be in a position to seek ‘other’ sources of funding, just as we saw in Cyprus earlier this year.

And as we’ve been saying for years, one of the most likely targets is retirement savings.

There are tens of trillions of dollars in the US retirement system, predominantly in 401(k) and IRA accounts managed by big financial institutions.

And it would be quite simple for the government to mandate that a portion of those retirement accounts be invested in the ‘safety and security’ of US Treasuries. The big institutions who manage the accounts would have no choice but to comply.

In fact, it wasn’t too long ago that the new Consumer Financial Protection Bureau began talking about ‘helping’ Americans manage their retirement savings.

Jim Rogers and Ron Paul spoke about this at our event in Santiago, Chile – watch the video below:

One of the best solutions over the past few years, particularly for IRA account holders, was to set up a special type of self-directed IRA.

In this structure, your IRA exclusively owns a domestic LLC, and you as the IRA account holder become the manager of the LLC.

This gives you the authority to directly manage your retirement funds, allowing you a lot of flexibility to ship your savings overseas, invest in foreign real estate, etc. as long as you stay away from a clear set of ‘prohibited transactions’ that the IRS outlines.

These IRA structures are incredibly flexible, and I think one of the best ways for people to safeguard what they’ve worked their entire lives to build.

So here’s the disturbing news… and it’s something you won’t hear about anywhere else.

One of the attorneys that I work with routinely has specialized in setting up these types of structures. He’s an accomplished tax professional with decades of experience under his belt, and he recently told me that the IRS is no longer ‘allowing’ this type of structure.

More specifically, the IRS is refusing to issue tax ID numbers for single-member LLCs that are owned by an IRA… which is the specific structure that US taxpayers need to create in order to ship their retirement savings overseas.

Of course, no LAW has been passed. No vote has been conducted. The IRS simply decided by policy in its sole discretion to stop allowing Americans to create this structure, and hence, force them to keep their retirement savings in the US.

My attorney’s understanding of this policy is that the agency is trying to ‘protect’ taxpayers from potential consequences. But the end result is that US taxpayers now have one fewer option to safeguard their retirement savings abroad to keep from getting Cyprused.

My colleagues and I are working on another solution, and hopefully will receive some clarification on the matter from the IRS.

In the meantime, this underscores a critical point: there is a finite window of opportunity on many of these steps to safeguard your wealth, preserve your freedom, and ensure your family’s future security. And it’s important to take action while the window of opportunity closes.

Because, once it does, there may not be another option.

Greek Youth Unemployment Soars To Record 65%

RIP Greekovery.

What little hope there may have been that bad and/or deteriorating Greek economic data had peaked in the early part of 2013 and the country was set for a long overdue "recovery" was promptly extinguished following today's latest release of the Greek May labor force survey.

The headline news for the broader population was ugly:

• The number of employed was 3,621,153, a decline of 14,889 from April, and down 171,356 from a year earlier
• The number of unemployed was a record high 1,381,088, an increase of 43,467 from April, and up 193,668 from a year earlier
• The unemployment rate was a record high 27.6%, up from 26.9% in April and 23.8% a year earlier

But that was the "good" news.

The bad news? Greek youth (15-24 year old) unemployment halted its decline over the past few months only to explode higher from 57.5% in April to a whopping 64.9% in May! Needless to say this is a record high, and means that two thirds of all eligible for work youths can not find a job. That this is the most combustible combination for social upheaval if not war, is well known to anyone who has opened even one history book.

Source: Elstat